Zurn Elkay Water Solutions Corp Q3 FY2023 Earnings Call

Good morning. And welcome to the Zurn Elkay Water Solutions Corporation Third Quarter 2023, Earnings Results Conference Call. Todd Adams, Chairman and Chief Executive Officer; Mark Peterson, Senior Vice President and Chief Financial Officer; and Dave Pauli, Vice President of Investor Relations for Zurn Elkay Water Solutions. This call is being recorded and will be available for one week. The phone numbers for the replay can be found in the earnings release the company filed in an 8-K with the SEC yesterday, October 31. At this time for opening remarks and introduction, I'll turn it over to Dave Pauli.

Good morning, everyone. Thanks for joining us on 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 filings contain additional information about these non-GAAP measures, why we use them and why we believe they're helpful to investors and contain reconciliations to the corresponding GAAP information. Consistent with prior quarters, we will speak to certain non-GAAP metrics as we feel they provide a better understanding of our operating results. These measures are not a substitute for GAAP and we encourage you to review the GAAP information in our earnings release and in our SEC filings. With that I'll turn the call over to Todd Adams, Chairman and CEO of Zurn Elkay.

Thanks, Dave. And good morning, everyone. Thanks for taking the time to join us this morning. To jump right to it, we had a really strong Q3 operating performance, margins improved to 24.1%, up 410 basis points over the prior year. We also delivered record free cash flow in the quarter of almost $100 million, bought back another 445,000 shares and increased our dividend by 14%. As we highlighted in our earnings release and one year into the Zurn Elkay combination, we're really hitting our stride in terms of the benefits from the transaction, both from its energy savings as well as capturing the enormous secular growth opportunity we see in clean filtered drinking water. Over the next 12 months, we will be introducing more new products in the drinking water category than at any point since Elkay developed the category just over a decade ago. This is both on the filter side as well as the filtration side. And all this is happening as we see continued positive momentum on the legislative front, as well as traction from the significant internal investments we've made to drive growth to grow the overall category. One year in we've accelerated the growth rate of drinking water, and now expect mid-teens organic growth for drinking water in 2023. In terms of the underlying market, while we grew in line with our Q3 guidance, we were expecting a little better internally after a pretty good start to July and August, which was offset by a so-so September. I'll dive into what we're seeing from a market perspective a little bit later. But as we look at how the year has unfolded, it's not hard to see from all the external data as well as our internal data that the market has more uncertainty in it than at any point in over the last year. What also makes it clear is that we don't believe that this is some sort of apocalyptic issue for '24 and '25. Now I'll turn it over to Mark.

Thanks, Todd. Please turn to Slide number 4. Our third quarter sales were $398 million and on a pro forma basis increased 100 basis points year-over-year. As we discussed during our last quarter, our year-over-year third quarter core sales growth was impacted by the timing of orders and shipments in the prior year because we were working on an elevated backlog in the third quarter of 2022. Breaking down our pro forma core sales growth percentage a bit, our mid-single digit increase in core sales growth to non-residential end markets was partially offset by a mid-teens decline in sales growth to the residential end market. With respect to orders, our pro forma orders increased high single digits year-over-year, non-residential order growth was above the fleet average with balanced growth across drinking water, low control, water safety and control, and hygienic environmental, while year-over-year order growth in our residential end market was below the fleet average. Turning to profitability, our third quarter adjusted EBITDA increased 15% in the prior year third quarter to $96 million. And our adjusted EBITDA margin expanded 410 basis points year-over-year to 24.1% in the quarter. Looking at our margins sequentially, we set up 250 basis points from the second quarter of 2023. And as we had been discussing all year, the benefits of our price realization and our productivity initiatives inclusive of the cost synergies that are a little over $6 million each quarter in calendar year 2023 fully read through in the third quarter with the impact of the sell-through of higher cost inventory completely behind us. Please turn to Slide 5, and I'll touch on some balance sheet and leverage highlights. With respect to our net debt leverage, we ended the quarter with leverage at 1.2 times, inclusive of deploying $100 million of cash to repurchase common stock during the first nine months of 2023. In early October, we paid down $60 million of our term loan eliminating all future required principal payments, and generating approximately $4.5 million of annual interest expense savings going forward. Given the balance sheet position and our strong free cash flow generation, we have good capital allocation optionality going forward. Turning the call back to Todd.

Thanks, Mark. Our ability to produce significant environmental results is growing as we implement our core business strategy, which aligns well with our customers' objectives regarding environmental responsibility and human health. For instance, we've avoided the use of 14 billion single-use plastic water bottles thanks to our Elkay bottle fillers, marking an 8% increase over the last year, with expectations of double-digit growth next year. Our Zurn products have saved around 23 billion gallons of water through low-flow faucets, fixtures, and sensors. Rating agencies focused on sustainability have recognized our improvements, as reflected in their latest evaluations. Sustainalytics has placed the Zurn Elkay sustainability program in the top 3% within our industry and the top 7% among over 15,000 companies they assess annually. Our MSCI rating is AA, putting us in the top 10% of our industry, while S&P Global ranks us in the top 8%. It's important to note that a significant portion of our total revenues, 84%, focuses on addressing water scarcity and climate risks through our products designed to protect, conserve, and manage water resources. The world is facing numerous climate-related issues such as flooding and drought exacerbated by climate change, water pollution affecting biodiversity and health, and aging infrastructure risking contamination of water supplies. Our ongoing investment in engineering and research and development is key to tackling these crises, which are vital for sustainability and integral to our business strategy. We are also experiencing strong growth in the filtration segment, as more customers are moving towards filtered solutions and filter replacement rates are increasing in light of awareness regarding lead and other harmful contaminants in drinking water. Legislative changes, like those in Michigan favoring filter-first solutions, are further driving this shift. We're excited to introduce our first PFAS filter, which is now part of our bottle fillers and drinking water dispensers. This new filter not only maintains our current filtration capabilities but also specifically targets two commonly found PFAS contaminants. Given the health risks associated with PFAS, our market introduction of this technology is significant. Our solution uses advanced activated carbon to capture these contaminants in what is the most water-efficient filter on the market. It meets rigorous standards, reducing PFAS chemicals to levels much lower than those for lead. We anticipate that regulations will continue to adapt as public awareness grows regarding PFAS, reinforcing our commitment to providing cleaner and safer drinking water solutions for schools, universities, and households. Our Elkay filtration products lead the market, featuring the longest-lasting lead filter certified for 6,000 gallons and offering the broadest claims regarding contaminants. The growth potential in our filtration business is substantial as we expand our installed base and increase replacement rates. I’ll now address the non-residential construction market. There's been considerable discussion about its potential downturn, which I'll approach with some lightheartedness, but understanding the broader context is important. Our chart outlines the actual and forecasted institutional construction starts in terms of square footage, highlighting that about 50% of our business relies on institutional sectors, especially education and healthcare. Historically, institutional starts range between 80 to 90 million square feet per quarter over the past five years and have shown less sensitivity to interest rates. The commercial sector, which is much larger in potential square footage yet represents only about 30% of our business, is currently facing challenges, primarily due to extensive warehouse builds and automotive expansions impacting projected starts in 2023 and 2024. It's worth noting that our estimated sales related to warehouses are minimal, meaning we aren't heavily affected by those fluctuations, and our outlook remains positive with plenty of growth opportunities. The average non-residential construction backlog for commercial and institutional markets has remained steady at around nine months, while the Dodge Momentum Index serves as a leading indicator for future construction spending. This context is vital to understanding the nuanced state of the non-residential construction market in the U.S. Additionally, we leverage internal bidding and coded information across our own portfolio and major wholesale partners to gain insights into this industry. The market's dynamics can vary greatly from region to region, and new construction constitutes about 55% of our business, with 35% stemming from retrofit and replacement services. While market prospects have been a common inquiry this year, we're not issuing guidance for 2024 yet, but we want to provide clarity on how we perceive the economic landscape. Moving on to our 10-year core growth trajectory, which averages a 6% compound rate. Over the last 51 quarters, we've seen only four negative growth quarters, the most significant being in June 2020, with a decline of 5%. The historical growth patterns we’ve experienced, in conjunction with the current market realities, suggest a more resilient outlook than might be assumed at first. While today's interest rate environment poses distinct challenges, our growth algorithm has evolved to encompass market dynamics, pricing, market share, and the growth potential in drinking water and filtration, as evidenced by our aggressive approach within Elkay. Finally, from a business perspective, we have a promising outlook. We anticipate $25 million in synergies throughout 2024, alongside growing momentum around advances in filtered drinking water, providing us with new avenues for growth. Our ongoing focus on simplification and continuous improvement reinforces our confidence in generating margins and cash flow that can be reinvested in growth. Our business model is agile, equipped with a flexible cost structure and low capital expenditures, yielding consistent high free cash flow annually. This strength, coupled with a robust balance sheet, positions us well to enhance shareholder value in the coming years. Now, I’ll turn it back to Mark.

Thanks, Todd. Please turn to Slide number 10, I'll cover the highlights of our outlook for the fourth quarter. The fourth quarter of 2023, we were projecting sales to be around $351 million, which gets you to the endpoint of our initial outlook for the year at $1.5 to $1.55 billion. We anticipate our adjusted EBITDA margin to be in the range of 23% to 23.5% for the quarter, which translates to approximately $336 million to $338 million for the year. For the effective free cash flow, we're increasing our full-year outlook to approximately $230 million and the $250 million we highlighted 90 days ago. A few highlights led to our outlook. First, our fourth-quarter outlook reflects our best cut of the market based on what we saw later in the third quarter and into October, as well as the traditional seasonal decline in sales in the fourth quarter and the fewer shipping days in the fourth quarter compared to the third quarter. Next, we recently completed a product line review with a residential sink customer, after extensive negotiations, the level of profitability was not going to be acceptable to us. So we decided to phase out our supply to this customer. As a result, our fourth-quarter sales will be impacted by approximately $3 million to $4 million with really no impact on our earnings. Finally, given the momentum we have with our Filter drinking water growth initiative, coupled with the launch of our new PFAS filter and the recent passing of the Michigan filter first legislation, which requires all K-12 schools and childcare facilities in Michigan to provide filtered drinking water to students, we have accelerated a few million dollars of drinking water growth investments into our fourth quarter. Before we open the call for questions, just a reminder that we have included on page 10, our fourth-quarter outlook assumptions for sales growth for non-residential and residential product categories, interest expense, non-cash stock compensation expense, depreciation and amortization, adjusted tax rate, and diluted shares outstanding. We'll now open the call up for questions.

Our first question comes from Bryan Blair at Oppenheimer. Your line is open.

Thank you. Good morning, guys. It's encouraging to hear about the mid-teens core growth in drinking water for the year. As we look to '24, the less certain market environment overall, is there anything you're seeing that would prevent continued growth there? And given the growth that you have achieved this year, I assume momentum into next year, more favorable cost position? What is the run rate margin for drinking water? And as we look forward and include the ramp of filtration sales, which I assume will be marked and created in time, where should that margin profile be over the coming years?

Yes, I mean, to sort of take it piece by piece. I don't think that there is anything that we see that would restrict or slow down the growth in drinking water. In fact, you know, I think that all the work we've done and the investments we're making give us high confidence that we can continue to grow at a very high clip in drinking water next year. Obviously, the algorithm around more units, higher attachment rate, that's all beneficial and compounds over time, Bryan, so that is one that we feel really good about. As it relates to the margins, obviously above the fleet average, we're not going to decipher exactly what that is, but above the fleet average. And I don't think that we see any challenge or risk to that either. So I think we feel really good about the last 12 months. As I mentioned, we've got a pipeline of new products over the next 12 months. That is going to dwarf anything that we've ever done from an introduction standpoint. So that's where we've spent the last year and I think it's reading out in the first year nicely, and I think we have strong momentum heading into '24 and beyond.

That's helpful. Thank you. I mean you walked through your portfolio exposures and the resilience you've had historically, confidence looking forward. I was hoping you could offer a little more detail some finer points on how your team is thinking about the puts and takes of new institutional versus commercial non-res exposures ready positioning price cost, follow-on synergies. As we think about 2024, in the prospects for earnings growth?

Yes, I mean, we've highlighted, I think, a compelling case around the drinking water growth for next year at very high margins. We have $25 million of synergies that will read through. I think in terms of commercial, I think it's clear to us that it's going to be down a little bit. We don't think that it's huge, but it'll be down. That's on the new construction side. Break fix, we think is sort of plus or minus a little bit, because a lot of that is actually planned retrofit, replace, and or just simply break fix. And then, I'm guessing we probably thought that residential was going to inflect a little bit earlier this year than it has, it's not getting worse, but it hasn't improved a whole lot. So I think we probably transition to flattish into next year. And then we'll see around waterworks, which is only 7% or 8%. But, I think there is a path to growth for sure, and a path for significant margin expansion, again, as we look at '24. But, I think, as we look at the market, September, while still growing was less than what we thought, October was probably a bit ahead of what we baked into our quarter. But I think there's room for some uncertainty as you head into November, December, and January. So I think we're trying to be cautious with the way we're providing the outlook. But I think the profitability and the cash flows are going to be exceptional. And I think the resilience of the portfolio has proven itself over time. And we just have to continue to invest in our key breakthroughs. I mean, that's really the game. So I think we feel pretty good about where we're at, one year into the combination. And we'll see what '24 looks like when we get there. But taken as a whole, I think we feel pretty good about where we're at.

Very helpful color. I will leave it there, guys. Thanks.

And the next question comes from the line of Jeffrey Hammond, with KeyBanc Capital Market. Your line is open.

Good morning, everyone. Just maybe on September, coming in below where maybe unpack that a little more, and where you're seeing maybe some softness relative to what you thought?

Yes, I think we look at it in a number of different ways, Jeff. But I think if I had to distill it down, it was probably more of the flow business, sort of the retrofit, replace, ordinary course, brake-fix stuff, specifically in the Northwest, and a little bit across New England. And I think when we look at that, in aggregate, it was probably $3 million to $5 million bucks, less than maybe what we had targeted heading into the quarter. And obviously, I think we had a view that we started to see residential deteriorate towards the end of last year, and we sort of had to assume that would begin to inflect up a little bit. It really hasn't inflected up maybe to the degree that we had thought given how sharply it fell last year. But I would say that, I think taken as a whole none of these things are falling knives by any stretch of the imagination. And the reality is when you look at our Q4, we're seeing 6% pro forma core organic growth. So maybe just a little bit less than what we were assuming, but taken as a whole still pretty good.

Okay, that's great color. Just on the puts and takes on the profit side into '24 I guess, you feel pretty good about the '25 incremental synergies, I think you got $10 to $15 million absences, kind of higher cost inventory. Other tailwinds or headwinds to think about as you think about that profit bridge, obviously, outside of what the growth might be?

I think that, if you take a look at the overall model, it's highly variable, so we're capturing all the benefit of lower input costs. We only have 2,441 employees, so from a wage inflation perspective, we are well insulated. And so I think that we're in a great place, we'll capture any sort of deflation. We think that there are some modest price opportunities in certain categories, specifically in and around drinking water. And so nothing big moving parts in '24 as it relates to our cost structure. I think that one that is emerging is we see some significant supply chain opportunities that we'll be working on over the course of '24 that are probably worth in excess of $10 million into '25. So I think that we've got a good path for margin expansion in '24. And we've got some follow-on that gives us a little more tailwind into '25. So, nothing unusual in terms of tailwinds or headwinds beyond what we've talked about.

Okay, last one, cash flow has been great. I know it was supply chain kind of working capital was a big use, it's kind of through that supply chain tightness, and it seems to be coming back in balance. But I'm just wondering, kind of where you think working capital is in terms of quote normal, and whether you see that as another big tailwind into '24 back to neutral.

I don't know that it's a big tailwind into '24, I just think that our working capital will continue to be very efficient. I think that some of the cost savings that I highlight in '25 come with incremental benefits of working capital, by collapsing the length of the overall supply chain. So, I think we'll continue to be efficient users there. But again, I think that from where lead times are, where service levels are, where cost is, where freight and transportation costs are, I think we're really well positioned to turn in another really, really strong cash flow year in '24. And, frankly, sort of like we always do. I mean, I think when you look over time, the cash flow year in and year out sort of always shows up, just primarily because of the business model we have. So, there's one number we're not particularly concerned about is our ability to generate really, really good free cash flow in whatever the environment.

Great, appreciate the color. Thanks, Todd.

And the next question comes from the line of Andrew Krill, with Deutsche Bank. Your line is open.

Hey, thanks. Good morning, everyone. Wonder, I circle back to like all the new products. I just like, can you quantify it all maybe like how much of a tailwind you think that might be for 2024? Or just in kind of a medium term and how that compares to the prior run rate? And then if you're measuring it with things like your new product vitality index?

Yes, I mean, I think the way to think about it, Andrew, is we've gone out over the course of the last year and done a ton of work on understanding what are the unmet needs of our customers, and done an enormous amount of voice of the customer. And that's, at a lot of levels, what our elementary schools are looking for, or what's higher Ed looking for. And in all those cases, it's leading us to a lot of ideas that will only enhance the penetration rate and increase the points of use, we hope. And so I don't know that we can quantify it exactly other than to say, these new product launches are going to be really spot on from what the market is wanting. It's a category that's really developed over the past 10 years. But I think the next evolution of this is going to be very much targeted at what people have learned, how the adoption of point of use, and bottle fillers is really going to be evolving based on the needs of what customers want. So I don't know that we're going to quantify for you; I think it's embedded in this notion of having a very high share and a category that's growing, and we're going to continue to create opportunities for ourselves to grow that installed base. And when you do that, obviously, the filtration comes right behind it. And it's also things like improving the access and the ability to change filters and change filters more frequently. So those are all things that are part of the overall trajectory and growth that we see going forward.

Okay, great. And then my follow-up just on the investments called out for the fourth quarter. Just, can you give a little more detail on what those were, just can you like confirm are they confined to the fourth quarter? And then like any benefits you'd expect from them? Thanks.

Yes, I think when you looked at what we were going to invest in, whether that's personnel channel, some of the marketing work, some of the Intel over the next year, we just took a look at it and said, well, let's pull some of it forward. We really are growing at the rate we are and believe we can continue to expand upon that. Let's pull some of that into the fourth quarter, so that we get the benefit sooner. The order of magnitude is plus or minus $3 million. So not crazy, but it's really more of a pull forward than it is anything else. So, we would expect to perhaps spend $3 million less next year, but over the 15 months, roughly the same amount of money.

And your next question comes from the line of Mike Halloran, with Baird, your line is open.

Good morning, everyone. Thanks for the time. So, a couple of questions here. First time on slide 8, I really appreciate the context and the color there. Could you put in context, what the typical lag is for you, both on the institutional side and the commercial side versus those start numbers? In other words, how far out does it take for your content to get in? And then you look back historically, what's the risk profile been for cancellations? I'm guessing not that high on the institutional side and maybe a little more vulnerable on the commercial side. But any help would be great.

That's a great question, Mike. When considering what's involved in an institutional start, think about schools, university buildings, hospitals, and health care facilities. The construction cycle usually takes between 12 to 18 months from beginning to end. While more complex hospitals or universities might take a bit longer, the general timeframe is 12 to 18 months. Our content distribution is nearly equally divided, so we participate in that 12-month build cycle in a balanced manner. For example, if we allocate $100 of content, approximately one-third is provided in the first three to four months, another third in the next three to four months, and the remainder towards the end. This distribution is consistent throughout the 12 to 18-month build cycle.

The cancellation risk is quite low. For institutions, it's less so.

Yes. I mean, again, when you think about these things, particularly in education is a perfect example. That's usually some sort of referendum that virtually never gains. Same as whoop, same is true with healthcare, healthcare facilities, hospitals, and things like that. So, I'd be lying to say that I can recall a scenario where something like that has been canceled once it's sort of worked its way through the restart process.

As Jeff said, good cash flow, obviously, strong balance sheet. How are you thinking about your willingness to be more aggressive there? You've got a large authorization on the buyback side. What are your thoughts on leaning in on that a little bit more resulting in next year? And then any thoughts on how you look at the M&A funnel and how actionable it is?

Yes, I mean, I'll hit M&A first. Obviously, we're continuing to cultivate proprietary ideas. We continue to think that we'll see some conversion over the course of the next 12 months, and some things in categories that we're very close to. And as it relates to buyback, look, I think we take a pretty pragmatic approach, we take a look at what we think the intrinsic value of our projections are and look at where the stock price is, and we'll be more aggressive if we think that there's any sort of dislocation that we want to take advantage of, and obviously, we have this cash flow, and the confidence in the cash flow to do that, as well as the balance sheet. So, we'll see. I think we've been, if you look at pattern recognition, when the stock was 21 to 22, we bought a lot. When it was 29 or 30, we bought some, but we bought a little bit less. And so I think we absolutely will continue to follow that philosophy going forward.

Thank you. Really appreciate the context.

And your next question comes from the line of Nathan Jones with Stifle. Your line is open.

Good morning, everyone. I'd like to talk a little bit more about the business model and how that's likely to protect the margins. I think most of us are probably used to more heavy manufacturing companies, and your business model is a fair bit different here with the design source kind of business model. So could you talk about in the potential for a downturn, let's say revenue is down more than expected in 2024? What kind of variable margins what kind of detrimental margins we should expect on that, just given that that business model is more flexible for you?

Yes, I think. So in terms of as you point out, our model is highly variable. From an employee standpoint, we have 2,441 employees, which is about, I think, $625,000 per employee, plus or minus, so very productive and efficient. We go to market through third-party reps that are 100% commission based. So to the degree we see a sales decline the flex on our selling expense is perfect. And obviously, I think when we see capacity requirements on the growth side, we're not spending a penny on capital. And the same is true on the downside; we're not having to flex out a whole bunch of fixed costs. So I think by design, the agility that we've created and cultivated in the business model is built for a little bit of uncertainty on the upside and the downside, so I think our detrimental margins. And again, they'll depend on the product category. We'll be very, let's just say efficient on the downside; we obviously have high margins, so that's not something that we can avoid. But I think it'll be very efficient in the scenario where we see declines. And that's without question.

Yes, I think that's an important point to make. And then I'd like to follow up on the comment you made about supply chain savings of up to $10 million into 2025. Maybe there's some move to Mexico, some reshoring a supply chain. If you could provide some color on what you're looking at doing there, and how those savings are to be generated?

Yes, and we've been working at it now for probably six to nine months. And we're in a position today to see the benefit in excess of $10 million from a runway perspective, beginning in '25. That's a combination of some incremental level of outsourcing and categories that we currently are more vertically integrated in, as well as some repositioning of certain suppliers, to regions that perhaps are a little bit closer from a lead time perspective, as well as favorable from a tariff perspective. So those are, I think, relatively large digital things that we see. But again, just go into building more resilience into our business model. So those are things that we are well underway on; there's a chance we get some of it at the end of '24. But I think the way to think about it is we've got $25 million of synergies rolling through in 2024. And we've got an incremental $10 plus coming from this supply chain activity in 2025.

Great, thanks for taking my questions.

And your next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is open.

Thanks. Good morning, everyone. Can we maybe just touch on the SKU rationalization for a second, so it looks like it's going to be about a 3 to 4-point impact in the fourth quarter? As you kind of think about 2024, what's kind of the right framework for that piece impacting your potential organic growth in 2024?

Yes, Joe, it's Mark. I think that the impact in next year will be modest. We said three to four this quarter, think about next year, it's in that $9 to $12 million range next year. So think about it as sort of a quarter of it hitting this year and three-quarters of a next year. So, overall about under a point of growth impact next year.

Thank you. I have a quick follow-up question. It seems that the water business has been experiencing significant growth. You appear to be pleased with the Elkay integration at this time. Can you clarify the current status of Elkay? What is the revenue baseline as we close out 2023? Additionally, how do you envision the growth framework for Elkay in 2024?

Yes, I mean, we're obviously well past the point of being able, or frankly, wanting to discreetly identify what was Elkay and what was legacy, in part because we've already done a ton of integration, particularly around the commercial sync business going forward. But suffice it to say that the margins of the Elkay piece on a standalone basis are at or above that fleet average today, on the backs of a highly profitable drinking water business, which is a massive change from the roughly 13% business that it was in '21. So, when you think about in essentially 12 months of owning the business, we've taken a business that was running somewhere in the 13% range on a true organic basis, and turn it into something as 24 plus, with, I would say, an even better growth profile as a result of the exits, and the investments we've made in drinking water and the benefit of all the synergy work that we've been doing. So, I don't think I should be lost on anybody that the acquisition at the time, or the merger at the time was good. But it's for environments like this, when you have the drinking water franchise that we have, and the opportunity for secular growth and category growth, that's going to protect the overall top line in a way that I don't think people fully realize at this point. And that's why we've been so aggressive in getting out of the things that we don't want to invest in and investing in things that can grow this category and grow our business in a meaningful way over time. So didn't answer your question specifically. But I think we feel really good about it.

Okay, no, that's super helpful. If you don't mind, I'm going to try to sneak one more in here. Just in the context of what can be a bit of a slower growth environment. One of the questions we get a lot on potentially negative volume environment, like, what does pricing do for your business next year, given what you already know and where your raw material costs are today, would you expect to get some pricing in 2024?

I think that there are opportunities that we will see some price. Particularly, we have strong specifications, leading shares, innovation, new products, things like that. I don't know, there'll be a ton, there'll be some, and I don't see a scenario where we are giving back price. I think that when you look at the overall increases that we passed along, over time, they were relatively small in the grand scheme of things. And so if anything, our pricing from a market standpoint is in a good place. We obviously have leadership positions and high specifications and some unique value props that are going to allow us to take some modest price. But I don't see a scenario where we're giving back price. So, I think it's a unique environment, for sure, but I think we feel good about where we are with some incremental opportunity in 2024.

Got it. Thank you.

There are no further questions at this time. Dave Pauli, I'll turn the call back over to you.

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

And this concludes today's conference call. You may now disconnect.