Q3 2024 Zurn Elkay Water Solutions Corp Earnings Call
Good morning, and welcome to discern L. D Water Solutions Corporation third quarter 2024 earnings result conference call with Todd Adams, Chairman and Chief Executive Officer, David Polly Chief Financial Officer, and Brian Wendling Director of F. B, a need for a journey L D water solutions.
A replay of this conference call will be available as a webcast on the company's Investor Relations website.
Speaker Change: At this time for opening remarks, and introduction I'll turn the call over to Brian Wendling.
Brian Wendling: Good morning, everyone and thanks for joining the call today before we begin I'd like to remind everyone that this call contains certain forward looking statements that are subject to the safe Harbor language contained in the press release that we issued yesterday afternoon as well as in our filings with.
Speaker Change: Yes.
Speaker Change: In addition, some comparisons of non-GAAP measures.
Speaker Change: Earnings related SEC filings contain additional information.
non-GAAP measures why we use them and why we believe they're helpful to investors and contain reconciliations to the corresponding GAAP information.
Speaker Change: Consistent with prior quarters, we will speak to certain non-GAAP metrics as we feel they provide a better understanding of our operating results.
Speaker Change: These measures are not a substitute for GAAP.
Speaker Change: We encourage you to review the GAAP information in our earnings release and in our SEC filings with that I will.
Speaker Change: I'll turn the call over to Todd Adams, Chairman and CEO of <unk> water solutions.
Todd Adams: Brian and good morning, everyone and thanks for taking the time to call in this morning I'll start on page three.
Todd Adams: The third quarter again slightly exceeded our guidance across the board and we are also raising our outlook again for the full year, we leveraged third quarter core growth of 4%, it's a 9% adjusted EBITDA growth, which drove margins to 25, 6%.
According to 150 basis points of margin expansion year over year.
Todd Adams: Through nine months, our consolidated EBITDA margins stood at 25% and as you have may have seen in the release, we raised our outlook for the year over year margin expansion to 250 to 270 basis points free.
Todd Adams: Free cash flow in the quarter was $87 million and we deployed $50 million of that to repurchase one 6 million shares during the quarter at an average price of under $31 leverage falls to <unk> eight times and as we mentioned in the release, we are raising our outlook for free cash flow and now see the full year around $260 million and finally, we again.
Todd Adams: <unk> raised our dividend this year to nine cents, a quarter, which represents an increase of 12, 5%.
Todd Adams: Later in the call I'll spend some time on the outlook for our end markets heading into 2025, but much like we've said throughout the year. The resilience of our end markets and perhaps our unique exposure to particular verticals give us confidence of an improving backdrop over the course of the next couple of years I'll hand, it over to Dave take you through some more color on the quarter, Dave. Thanks, Todd Please.
Dave: Turn to slide number four our third quarter sales totaled $410 million and grew 4% organically on a pro forma core basis mid single digit core sales growth in our nonresidential end markets was partially offset by flattish year over year sales to our residential end markets in pockets of the commercial segment within nonresidential.
Dave: End market trends continue to align with our expectations and our growth initiatives drove the sales performance to the higher end of the outlook, we provided 90 days ago.
Dave: Turning to profitability, our third quarter, adjusted EBITDA was $105 million and our adjusted EBITDA margin expanded 150 basis points year over year to 25, 6% in the quarter at 25, 6% our third quarter. Adjusted EBIT margin is the highest consolidated margins since the <unk> merger two years.
Dave: [noise] ago, and up 30 basis points sequentially from the second quarter, the strong margin and year over year expansion was driven by the benefits of our productivity initiatives, leveraging our <unk> business system and continuous improvement activities across the organization as well as executing on the <unk> related synergies for.
Dave: For calendar year 2024, we believe our year over year margin expansion will be a bit better and we discussed 90 days ago, and we are again, raising our expectation for full year EBITDA will cover that in a little bit more detail later in the call. Please turn to slide five and I'll touch on some balance sheet and leverage highlights.
Dave: With respect to our net debt leverage we ended the quarter with $308 million of net debt and leverage continued below one at an all time low of <unk> eight times or <unk> eight times leverage is inclusive of the $50 million, we deployed to repurchase shares in the quarter on a year to date basis, we have now deployed $130 million to <unk>.
Dave: Repurchases and $41 million to dividends, we continue to have excellent capital allocation Optionality and as we have discussed we will remain focused on a balanced capital allocation strategy going forward.
Speaker Change: Turn the call back to Todd.
Todd Adams: Thanks, Dave I'm back in on page six here you can see our year to date sustainability impact and progress towards our targets the beauty of our sustainability efforts and message.
Todd Adams: An impact is that a compounded each and every day and the benefit accrues not only to the environment, but directly to our customers' benefit.
Todd Adams: You've heard us talk about various states and legislation related to clean drinking water infiltration, the leading edge of that conversation et cetera is centered around the state of Michigan and its filter first regulations, which are now being actively implemented we're delighted to have worked with the state and its partners to develop the ways in which to implement solutions that will ensure that when our K through <unk>.
Todd Adams: Students and the state of Michigan goes to school there'll be drinking clean water.
Todd Adams: Element of our impact is in areas that have disruptions in their water supply places like North Carolina with the recent hurricanes were helping communities and schools with filtration to ensure that P. Fast and other contaminants that are in the water supply as a result of failed water treatment plants and the saturated watershed are filtered out and people are getting safe water and what is a very.
Todd Adams: <unk> situation.
Speaker Change: Now on page seven.
Last quarter, we highlighted our long term growth algorithm of market growth plus price plus breakthroughs and how over the last 15 years. That's resulted in a 6% to 7% compounded topline organic sales growth rate for us. This morning, we'll go with touch deeper on the market part of that equation as we head into 2025 and I'll share the headlines.
Speaker Change: And the data that everyone reads about but also how to get underneath that to see that how that impacts our business just to start with some basic information starting on the left.
Speaker Change: Here's the Dodge momentum index, which measures the value in dollars of all nonresidential building projects in the planning process against the baseline year of 2000.
Speaker Change: The thought is that it is the leading indicator for all future nonresidential construction spending and therefore, it's generally used to monitor the future direction of construction spending I think of it as a nine to 12 months preview preview of what's likely to start.
Speaker Change: But also realize that there is a lot in their price commercial institution governmental buildings.
Speaker Change: So it's a pretty broad view of what could happen.
Speaker Change: In the middle of the next does Abi, which is a sentiment survey the tracks a cohort of partners.
Speaker Change: AIA member owned architectural firms and whether they are billing activity for the previous months grew declined or remained flat to understand just a little bit more a score of 50 indicates a balanced between positive and negative reports, while a score of 100 indicates that all firms reported improvements arising the index.
Speaker Change: Above 50 means that more firms reported an increase in demand for design services.
Speaker Change: <unk> reported a decline in demand. It is important to note that arise in the index above 50 is not a direct measure of ryzen demand because the survey does not as firms reporting stronger demand to quantify the level of increase in demand nor does it provide information on the size of those firms that being said higher readings in the Abi Gen.
Speaker Change: Coincide with some form of growing demand.
Speaker Change: And finally on the far right construction backlog is a measure of the amount of work surveyed contractors, having their current backlog in some ways. It's their lead time to taking on new business and as you might guess is their best estimate assuming no delays and consistent levels of staffing. So when you look at and read the headlines of these they all have a level of <unk>.
Speaker Change: <unk> to them and how to think about the future, but it all varies by region vertical and other than backlog reporting lacks certainty as to what's really going on at the ground level, which you can begin to see in the starts data which is on page eight.
Speaker Change: So here is the Dodge starts data on a square footage basis actuals from 2021 through 2023 with an estimate through August four 2024, and our projection for 2025.
Speaker Change: Here, we've split the data between institutional and commercial and again measured in millions of square feet.
Speaker Change: First a couple of very simple observations and square feet commercial is two and a half to three times the size of institutional largely as a function of the massive impact of warehouses, which represent roughly 55% of the entire commercial starts data second institutional starts just doesn't bounce around.
Speaker Change: And with that much.
Speaker Change: And education, which would be everything from an elementary school to a new research building at a university represents consistently 40% plus or minus of the entire institutional market.
Speaker Change: After the right Youll see the Dodge breakdown amongst the rest of the verticals between institutional and commercial and for institutional healthcare and recreation buildings, which includes things like stadiums parks public and private entertainment venues as well as churches dorms government and municipal buildings, the common thread being highly spec.
Speaker Change: Slide dense complex buildings built to last for decades, and not particularly sensitive to interest rates.
Speaker Change: And content rich from a reserve perspective, and commercial the remainder of the verticals are parking garages office retail and hotel with office retail and hotel being the most relevant to our business again because of the incrementally complex nature of those types of buildings and environments relative to warehouses and parking garage.
Speaker Change: If you move to page nine the only thing we've done here is further segment that data from page eight down to our key verticals on the left this graph is just the education and healthcare vertical starts information again, actuals through 2023, and estimates and projections for 2024.
Speaker Change: <unk> in 2025.
Speaker Change: These two verticals represent 60% of the entire institutional index and 80% of our exposure to the institutional nonresidential construction market simply said, we're materially over indexed to the strong stable parts of institutional within nonresidential construction.
Speaker Change: On the bottom left this is the graph again, just for office retail and hospitality verticals. The same periods as before with the conclusion being those verticals represent only 30% of the overall commercial starts information yet represent 75% of our exposure to commercial.
Speaker Change: So when you look at this and break it all down it's certainly one reason why our business has been so resilient over the past 20 years. The other thing is that when you look at the projection for starts in 2025 within our most critical verticals, it's better than at any point in time over the last number of years. So certainly a good signal for us, but we're not.
Speaker Change: Popping champagne, yet because those starts number one actually has to happen and two we will see it when we start to see the bid quotes turn into <unk>, which brings me to the last one for me, which is on page 10.
I'll start by saying nonresidential construction and all that goes into it is a very complex industry. If you visited a job site or even built a home. This will resonate with you. When you think about all the coordination amongst the trades staffing levels regional migration supply chain challenges permitting expansions and on top of that weather and just the reality of the.
Speaker Change: A different seasons in which work can be done in various parts of the country. It's complex in.
Speaker Change: In general the way to think about our business is that the average length of time to construct the nonresidential buildings approximately 18 months some shorter some longer.
Speaker Change: With our portfolio, which is by far the broadest and most expansive in the industry, we participate across the entirety of those approximately 18 months with flow systems early in the process water safety and control in the middle and towards the end of the process with hygienic and environmental and drinking water.
Speaker Change: This is the chart on the left.
Speaker Change: Think about how that manifests itself within our business need to understand that the lag effect simply said in any given year.
Speaker Change: Only about 20% of our new construction sales will come from starts activity within that calendar year and roughly 80%.
Speaker Change: It will come from the start activity in prior years to the right. We've tried to illustrate that over a given year by quarter think about it. This way in Q1 of 2025 virtually all of our new construction sales will come from starts in 2024.
Speaker Change: And before and by the time, we get to Q4 current year 2025 starts we'll have about 40% contribution to our sales.
Speaker Change: I think the way to conclude all of this is to say on top of all the market data. We just went through we've got our own more detailed views of specific regions channels and customers and is ultimately how we manage the business. We also have things like drinking water infiltration, which can drive outsized growth that isn't really dependent on anything we've looked at this morning, the net of all of that.
Speaker Change: That is it gives us high confidence in our core growth outlook will continue to improve over the next couple of years and with that I'll turn it over to Dave on Slide 11. Thanks.
Dave: Thanks Todd.
Dave: While the market has had its ups and downs over a longer period of time, we have demonstrated an ability to deliver core growth through a number of different market dynamics over the last 55 quarters. We have had positive core growth 51 times and our long term core sales CAGR back 10 years at 6% we are focused on.
Dave: Single geography in North America that is highly leveraged to the stable education and health care end markets within institutional are.
Dave: Our retrofit exposure has increased over the years to 45% and we are deploying resources at the local regional levels, where we win everyday there is not a single contiguous non res market here in the U S and the U S. This is a hyper local hyper regional business.
Dave: Our track record of sales growth has allowed us to deliver excellent profitability and cash flow year to date, our consolidated EBIT margins are 25% and our expectation is 30% to 35% incremental margins as we move forward our margin strength has come from leveraging our variable cost model and relentless continuous improvement.
Dave: Through the deployment of the <unk> business system.
Dave: Capex light model, coupled with our disciplined working capital management has led to a robust cash flow.
Dave: And finally on capital allocation the balance sheet has never been in a better spot. We currently have the lowest leverage we have had as a public company with a flexible balance sheet, allowing us to increase our return of capital to shareholders via dividend and share repurchases, while in the background cultivating M&A.
Speaker Change: Please turn to slide 12, and I'll cover our outlook for the fourth quarter and for calendar year 2024 for the fourth quarter of 2024, we are projecting year over year core sales growth to be in the low single digits and are anticipating our adjusted EBIT margin or excuse me, our adjusted EBITDA to be between $88 million to $90 million for the quarter.
Speaker Change: For the full year, we expect to see low single digit pro forma core sales growth year over year with respect to our adjusted EBITDA margin. We are again, raising our outlook and now expect adjusted EBIT margin expansion to be between 250, and approximately 270 basis points year over year or.
Speaker Change: Free cash flow expectation has also improved as we are now expecting cash flow to be approximately $260 million before.
Speaker Change: Before we open the call for questions. Just a reminder, that we've included on page 12, our fourth quarter assumptions for interest expense noncash stock compensation expense depreciation and amortization adjusted tax rate and diluted shares outstanding as a reminder, the year over year sales comparison in the fourth quarter is complete.
Speaker Change: Comparable as the last impact from product line exits occurred in last year's third quarter. We will now open up the call for questions. Thank you.
Speaker Change: Thank you we will now begin the question and answer session. If you have dialed in and we would like to ask a question. Please press star one telephone keypad to raise your hand and trying to queue. If you would like to withdraw your question. Thank you Press Star. One again, if you are called upon to ask your question and are listening the speaker phone.
Speaker Change: Please pick up your handset to ensure that your phone is not on mute and asking a question again breast <unk> wanted to join the queue.
Speaker Change: Your first question comes from the line of Bryan Blair with Oppenheimer. Your line is open.
Bryan Blair: Thank you good morning, guys.
Bryan Blair: Morning.
Bryan Blair: Another solid quarter.
Bryan Blair: Noted.
Bryan Blair: Growth in all product categories for Q3, I guess to level set was there a meaningful delta in growth rates.
Bryan Blair: In the quarter and then for Q4, what are you contemplating by major product category.
Speaker Change: Low single digit guidance Mark.
Speaker Change: Yes, Brian this is Dave nothing.
Speaker Change: Okay.
Speaker Change: Different between the different product categories, obviously drinking water continues to perform very well we saw it.
Speaker Change: Double digit growth in the installed base of filtered bottle fillers in the quarter.
Speaker Change: We continue to focus on.
Speaker Change: Just expanding the installed base of filtered bottle fillers as well as the attachment rate of those filters Todd talked about.
Speaker Change: Some of the events in Michigan this quarter and I think that will help.
Speaker Change: Both of those factors that our team are focused on so we'll now have a nice installed base of filtered bottle fillers in Michigan with a pretty high attachment rate on a go forward basis as the state looks to comply with that legislation.
Speaker Change: And then I would say very similar for the fourth quarter in terms of.
Speaker Change: Breaking down between the four product categories, how the sales lift in the third quarter I would expect something similar in the fourth quarter.
Speaker Change: Okay understood.
Speaker Change: Kind of offered a segue there with.
Speaker Change: Drinking water.
Speaker Change: So still growing double digits looking into 2025 is there any reason to.
Speaker Change: Do you expect that growth rate to moderate.
Speaker Change: And to what extent if you can quantify it.
Speaker Change: Could Michigan filter first.
Speaker Change: Implementation of our other states falling soon.
Speaker Change: Benefit your teams over time.
Speaker Change: Yes.
Speaker Change: Think in terms of next year nothing would suggest that.
Speaker Change: It would slow down just in terms of trying to size, Michigan.
Speaker Change: You look at the state the legislation that was passed requires one bottle filler one filtered bottle filler per 100 students in the state.
Speaker Change: So if you look at the state of Michigan. There is just about $1 5 million occupants within K through 12 schools. So you can do the math on how many vital fillers would be required in the state.
Speaker Change: Just as a proxy and average bottle filler might sell for 12 months to $1300 and then there is also <unk>.
Speaker Change: Regulation around just faucets within classrooms, and things like that so there's a number of filtered faucets that will will also sell into the state of Michigan and the other thing to keep in mind that with the legislation in Michigan is that it's a two year adoption. So the law was passed in October of last year. The state just.
Speaker Change: Put out applications for schools within the last month month, and a half schools will start to get approval for spending and then they'll likely spend in 'twenty five and 26. So a lot of the legislation stuff that is either in play or past like in the state of Michigan tends to have a fairly a fairly long period of adoption.
Speaker Change: Understood I appreciate that detail.
Speaker Change: One more quick one if I may you mentioned that normalized 30% to 35% incremental.
Speaker Change: We expect to drive going forward.
Speaker Change: You are also underway with some supply chain repositioning that should benefit.
Speaker Change: EBITDA growth next year can you remind us of the.
Speaker Change: The benefits that should drop through and perhaps the same thing or the timing of that.
Todd Adams: Yes, Brian it's Todd.
We've sized that somewhere in the neighborhood of $5 million to $10 million.
Todd Adams: At full run rate.
Todd Adams: <unk> will be in a position to articulate that perfectly when we get to February but I think you can you can for sure count on five next year and then it's just a matter of how fast is this at all ramp and can we get.
Todd Adams: All of the benefit.
Todd Adams: In the year, just based on current inventory levels and sell through and all that kind of stuff, but it's.
Todd Adams: Something we've been working on for a number of years I think it's a.
Todd Adams: Really helpful hedge against the backdrop of a potential tariff environment and.
But we've been working at it for a number of years and so it'll begin to read through next year, and then full run rate into 2026.
Speaker Change: Got it I appreciate the color. Thanks again.
Speaker Change: Our next question comes from the line of Andrew Buscaglia with BNP Paribas. Your line is open.
Speaker Change: Hey, good morning, guys. Good morning, good morning.
Andrew Buscaglia: So sorry, all year has been really strong margins in this quarter and back gross margins I thought were exceptional.
And I'm wondering if you.
I could talk a little bit more about gross margin.
Andrew Buscaglia: What's driving that how sustainable are the current level and then what's the long term goal from here on gross margins is there a really a feeling or an back just keep going higher.
Speaker Change: Well I think it's.
Speaker Change: Testament to a number of things one the.
Speaker Change: The foundational <unk> business system work that happens day in day out.
Speaker Change: That wind its way into gross margin through productivity waste elimination improvements in quality waste elimination around freight and things like that so the short answer is it's incredibly sustainable.
Speaker Change: And then I think the other thing to.
Speaker Change: To point out is that.
Speaker Change: Our fastest growing product category is mix favorable and so I think it's our view that it's very sustainable.
Speaker Change: At the levels, it's at subject to the usual seasonality that we see but in general.
Speaker Change: We think it can continue to March higher I don't know that there is a number that I'm going to give you but.
Speaker Change: From where we are I think targeting overtime.
Speaker Change: 50% gross margin is realistic for our product portfolio and it sits today.
Speaker Change: Okay.
Speaker Change: Thats helpful.
Speaker Change: Another question I had on the margin line.
Speaker Change: On Slide 10, you talk about that.
Speaker Change: How you work through that process is there a margin differential as you work through the.
Speaker Change: Month, one through 2018.
Speaker Change: Not particularly.
Speaker Change: I think when you get to the end our drinking water margins are better than our hygienic, but when you aggregate the three across.
Speaker Change: They're pretty similar at the end of the day, that's slide obviously, Andrew assumes that all jobs start at the same time it and at the same time, which isn't necessarily the case you've got jobs in process.
Speaker Change: Different stages of the process at any given point in the quarter.
Speaker Change: Alright, okay.
Speaker Change: Okay. Thank you guys.
Speaker Change: Yes.
Speaker Change: Next question comes from the line of Andrew <unk> with Deutsche Bank. Your line is open.
Andrew Buscaglia: Hi, Thanks, Good morning, everyone and thanks for all that color in the slide was very helpful.
Andrew Buscaglia: On the <unk> and all of that the information on Dodge Star. So you mentioned more encouraging.
Andrew Buscaglia: Jackson was looking into next year, but that you need to see internationally.
Andrew Buscaglia: So I'm just wondering have you seen kind of any increase in I pose as our hydrogen customers and Alex I'd like ask a question about project softer finish line right now.
Speaker Change: Not in any not in any pronounced way.
Andrew Buscaglia: Andrew I think.
Speaker Change: You said the magic statement, which is they actually have to happen and so when you look at the 24 information that's actuals and projections through August.
Speaker Change: Not seeing on the ground anything moving around over the last quarter and then obviously as they get into 2025.
There is usually some wiggle in the beginning of the year based on the weather patterns in the U S.
Speaker Change: But taken as a whole the Dodge starts information usually is pretty reliable and gets I would say retroactively updated every time, it's issued each month and the bias is usually again to the increase.
Speaker Change: To increase it so we've got to see it happen, but nothing pronounced or anything of any significance on delays or push outs from our vantage point.
Speaker Change: Okay great.
Speaker Change: Normalized Incrementals should we think of the supply chain savings over the next year or two as contributing to that 30% to 35% incremental or additional to that 30% to 35% incremental.
Speaker Change: Yeah, Nathan it's Dave I wouldn't think about it as additional so 30% to 35% normalized incremental margins and then we will have a step up benefit from that supply chain action.
Awesome.
Speaker Change: But when you guys acquired Okay. You gave some data around the number of water fountains in the U S. It was like 8 million in the penetration of bottle pillars on those was like I think it was a million shakes.
Speaker Change: Is there an update you have to that I'm, just interested to see kind of how the penetration of those has evolved over the last couple of years to get kind of a better idea of how long the runway as fair penetration a bottle of pills.
Speaker Change: Yeah. So if you look at the call it million 5 million six two years ago. Nathan I'd say, there is an incremental 200 to 300000 bottle fillers over the last I guess since July of 2022.
So just one last one on that.
Speaker Change: Yeah. So there is still a fairly massive installed base of non bottle fillers and nonfiltered bottle fillers here in the U S.
Speaker Change: What's your budget opinion on what the saturation of that is like it is $8 million of water fountains out there, they're not all going to have bought a village eventually there's going to be a top number to that I imagine, it's still far far above priorities today, but do you have any kind of.
Speaker Change: Guesstimate of what Max penetration might be.
Speaker Change: Yeah.
Speaker Change: You know Nathan.
Speaker Change: Don't know that.
Speaker Change: I don't know that we do but I think you know I think you can rely on when we think about that installed base growing.
Speaker Change: And a couple hundred thousand to potentially 300000 over the coming years.
Speaker Change:
Speaker Change: So I think Chuck back check back with us when we feel like it's more appropriate but at the present I think it's very very early days I mean, the categories I think 11 years old right and.
Speaker Change: I think in general looks if if the starts turn out to occur.
Speaker Change: As projected in the verticals, particularly on the institutional side, the vast majority of that benefit accrues to 2026.
Speaker Change: And just as a.
Speaker Change: <unk>.
Speaker Change: A point to make this represents just our new construction sales right and so we have 40% to 45% of the remainder of the business is retrofit replace break fix.
Speaker Change: Which occurs in a relatively orderly.
Speaker Change: 2% to 3% growth per annum and then it doesn't include our residential exposure. So this is.
Speaker Change: Just new construction in institutional and commercial but your thesis around when does it show up yes, It will show up.
Speaker Change: A little bit towards the end of 2025, but in a more pronounced way throughout 2006 provided these things happen as is their projected today.
Speaker Change: Yes, it makes sense I was going to ask about the other piece, but you got to it. So how do you think about the balance sheet usage from here with the dividend.
Speaker Change: Balance sheet is in great shape, obviously, how's that funnel from an M&A perspective look at this point and how do you think about action ability.
Speaker Change: I think Dave covered a lot of that in his comments, obviously, we think we can.
Speaker Change: It continued to grow the dividend at a double digit rate for the foreseeable future, we're going to continue to invest in ourselves by buying back stock below.
Speaker Change: See the intrinsic value being based on our view of the outlook.
Speaker Change: And to get to the root of your question the.
Speaker Change: The cultivation activity is picking up and so I think we're going to have.
Speaker Change: Opportunities.
Speaker Change: To convert things that we've cultivated on a proprietary basis.
Sometime in 2005, I think that the nature of the conversations gives me some element of confidence that.
Speaker Change: There will be some things that are actionable and we will be able to convert.
Speaker Change: But in the meantime, I think we're going to reliably invest in what we believe is a great investment ourselves.
Speaker Change: And continue to watch and.
Speaker Change: Be in a position to execute on some M&A sometime in 'twenty five.
Speaker Change: Thanks, Scott I appreciate it.
Speaker Change: Next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is open.
Joe Ritchie: Hey, good morning, guys how are you.
Speaker Change: Good morning.
Joe Ritchie: Good so I wanted to follow up on that question. It was really helpful to get some of this macro data and any kind of like the initial framework for next year.
Joe Ritchie: Just wanted to maybe understand that education, and healthcare piece, a little bit better because for the last few years, we've seen a bunch of essar funding come through on the education side and so I don't know is there any is there maybe a little bit more color on what's driving that expected increase in 2025 on the starts data.
Speaker Change: Dave can probably quote the numbers.
Speaker Change: More efficiently than I can but when you look at the vast majority of that funding.
Virtually none of it.
Speaker Change: Two building any form of new schools.
It was all everything from.
Speaker Change: Salaries to safety to technology, and so the demand for new schools and frankly, the age of schools did.
Speaker Change: It did not benefit in any way from from that asset funding and so I think when you look around the country and you see population migration use.
See the age of those.
Speaker Change: Those K through 12 schools throughout the country.
Speaker Change: And the requirements today to make them.
Speaker Change: Safe buildings sustainable buildings, I think that's simply what's driving the expected outlook.
Speaker Change: Dave can probably caught the essar numbers more efficiently that I can yeah, I think Joe when you look at it I think Todd hit it.
Dave: Essar numbers for massive in terms of the amount of money that was provided to K through 12 schools in the U S. I think you're unfortunate thing is or what this graph is illustrating is that it wasn't spent on new construction I think that's the point there was.
Dave: Certainly some upgrades that were made but not even in a material way and so in terms of our numbers, we haven't seen a massive influx or a significant influx from essar funds going towards drinking water updates and so I think as the as the U S School infrastructure continues to age you start to see new construction come out here.
Dave: In 2025.
Dave: Got it okay understood.
Dave: Good distinction appreciate that and then I guess.
Speaker Change: My follow on question look it's great to see the balance sheet position, where it is today.
Speaker Change: I'm sitting at.
Speaker Change: One times leverage at this point, just just give us an update if you can.
Speaker Change: Your M&A pipeline priorities.
For the excess liquidity that you have today and any thoughts around that would be helpful.
Speaker Change: Yes.
Speaker Change: Much like we said just a question ago. The idea would be to continue to stick to what it is we do I would not see us.
Speaker Change: Doing anything outside of the U S. I think it would be a combination of things within categories.
Speaker Change: As well as some adjacencies that fit nicely between some of our existing.
Speaker Change: Product lines.
Speaker Change: <unk> very much sticking to our knitting.
Speaker Change: In our core market that give us incremental content per square foot that we can leverage through.
Speaker Change: The way, we go to market today and obviously.
<unk> migrate to the model that we've leveraged as Dave pointed out cap.
Speaker Change: Capex light.
Speaker Change: Specifies those types of things so that's the pattern of things that we're shooting at and.
Speaker Change: Cultivating so I think it will look a lot like things we do today.
In our core market here in North America.
Yes, and I said, it probably clarify the question a little bit just maybe just on the Adjacencies Todd can you elaborate on that like what.
Speaker Change: What are the types of different opt.
Speaker Change: Opportunities that are out there that could fit with the portfolio today.
Speaker Change: When you go inside each of our four significant categories Theres, a bunch and so I'm not going to get into each and every detail of the pockets of opt.
Speaker Change: Opportunity that we see but suffice it to say they will all fit really nicely within one of the four.
Speaker Change: Product segments that we talk about today.
Speaker Change: Okay. Thank you guys.
Speaker Change: Yes.
Speaker Change: And our next question comes from the line of Brett Linzey with Mizuho. Your line is open.
Speaker Change: Hey, good morning, all good morning, good morning, Hey.
Speaker Change: Hey, just wanted to come back to the construction cycle illustration very very helpful. I was wondering if you might be able to drill down on the groupings and a little more detail. So if you look at the flow systems, which does lead or are you seeing any early signs of improvement on the rate of change that might might inform that things are good.
Speaker Change: Better there.
Speaker Change: Any granular color on some of those.
Speaker Change: Those rates of change.
Speaker Change: Yes, I mean qualitatively I would say if you had to force rank.
Speaker Change: Yeah.
Speaker Change: What's growing the fastest.
Speaker Change: That might be our fastest growing at the present again excludes.
Speaker Change: Excluding drinking water and so what we're seeing is.
Speaker Change: We're seeing flow systems activity.
Speaker Change: A pretty decent clip.
Speaker Change: And so that's where.
Speaker Change: If we werent seeing that as a backdrop to some of the stability and maybe early innings of growth in the Dodge starts it would be a little bit worrisome, but we are seeing flow systems.
Speaker Change: <unk>.
Speaker Change: In line with what we would expect and sort of at the trajectory that I think the starts data would indicate.
Speaker Change:
Speaker Change: That's just qualitatively obviously that as.
Speaker Change: <unk>.
Speaker Change: Has some level of seasonality to it because of the number of starts obviously.
Speaker Change: Beginning in the late fall and through winter.
Speaker Change: Certain parts of the country decline. So we're seeing we've seen that throughout the year. So I think it's a good sign.
Speaker Change: We're not trying to declare victory on 2025 yet.
Speaker Change: Because a lot can happen between now and then but.
Speaker Change: They are performing in line with the trajectory that the starts data.
Speaker Change: Indicated.
Speaker Change: Okay, Great and then just a follow up on some of the growth. So you noted the high end of the growth achievement was driven by growth initiatives, but you didn't go as far as saying.
Speaker Change: Anything was related to share gain do you think you picked up a little bit of share in the quarter and I guess is there any way to parse out what growth initiatives bridge you to the to the upper end versus more market related activity.
Speaker Change: Yes, I think measuring share in a quarter is extraordinarily difficult.
Speaker Change: The way to think about it as are we are we growing our specification share.
Speaker Change: Reliably over time and I think the answer to that question is unquestionably.
Speaker Change: Unquestionably yes.
Speaker Change: And so rather than.
Speaker Change: Rather than try to measure.
Speaker Change: Discrete set of opportunities that may have started as long as 18 months ago, and say did you capture share.
Speaker Change: The North Star for US is did we grow our specification share.
Speaker Change: Throughout the year and specifically in the quarter and the answer to that is absolutely and so that will manifest itself and long term share gains.
Speaker Change: Versus trying to measure it in any specific quarter with a unique set of opportunities against the competitive set.
Speaker Change: Okay great.
Speaker Change: Maybe just one last one because im last but back to the EBITDA margin progression. So it's just been really really strong you noted the ongoing productivity.
Speaker Change: When you think about the efforts in terms of structural versus discretionary is there any variable discretionary costs that would maybe need to come back next year, and then thinking about the mix complexion institutional versus commercial if commercial does get get better.
Speaker Change: Next year and maybe there is some moderation in some of the pockets of institutional or is there any mix dynamics to think about.
Speaker Change: Thank you I'll try to remember the whole question, but I think that.
Speaker Change: I don't see anything from a variable basis that needs to come back beyond the stuff that you would ordinarily think of like Rep commissions.
Speaker Change: And freight and things of that nature, but all all at a ratable level, so inside that 30% to 35% incremental envelope.
Speaker Change: And then as it relates to the categories.
Speaker Change: Institutional I would say, it's not a secret it's our most profitable vertical commercial next.
Speaker Change: Followed by residential and so as we see institutional chug, along and as we see commercial begin to recover.
Commercial is probably much more in line with the fleet average so I would say it's good.
Speaker Change: But nothing nothing outside of that so again I think when you look back over time, those incrementals are pretty reliable.
Speaker Change: Institutional is clearly our most profitable vertical and residential was our least profitable. So I think taken as a whole, we're pretty comfortable with that 30%, 35% incremental going forward.
Speaker Change: I appreciate the extra and say best of luck.
Speaker Change: Yeah.
Speaker Change: That concludes the question and answer session, Mr. Brian rent Lance I'll turn the call back over to you.
Brian Wendling: 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 fourth quarter results in early February.
Speaker Change: Good day.
Speaker Change: Ladies and gentlemen. This concludes today's conference call you may now disconnect.
Speaker Change: [music].