Zurn Elkay Water Solutions Corp Q3 FY2025 Earnings Call

Good morning, and welcome to the Zurn Elkay Water Solutions Corporation Third Quarter 2025 Earnings Results Conference Call, with Todd Adams, Chairman and Chief Executive Officer; David Pauli, Chief Financial Officer; and Bryan Wendlandt, Director of FP&A for Zurn Elkay Water Solutions. A replay of the conference call will be available as a webcast on the company's Investor Relations website. At this time, for opening remarks and introduction, I'll turn the call over to Bryan Wendlandt.

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, which are subject to the safe harbor language outlined in our press release issued yesterday afternoon and 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. 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 Water Solutions.

Thanks, Bryan, and good morning, everyone. I'll get right to it on Page 3. In aggregate, we had a decent third quarter. Our sales grew 11% organically year-over-year and EBITDA grew 16% to $122 million as margins expanded 120 basis points to 26.8%. We leveraged our free cash flow of $94 million in the quarter to repurchase about 600,000 shares, bringing our year-to-date repurchases to $135 million or about 3.8% of total shares outstanding, and all this while leverage declined to 0.6x. As you may have seen in the release, we also raised our dividend 22% and our Board has refreshed our share buyback program to $500 million. Dave will highlight it more in his comments, but we also completed our U.S. pension plan termination in the quarter, which is really just a nice thing to have behind us. This morning, as we've done in prior years, we'll take everyone through all the market data we have on the U.S. nonresidential construction market and dissect it in ways we believe makes the most sense to understand how the macro data flows through to our end markets and ultimately into our business, setting the stage for what we think the market grows over the coming years. To cut to the chase, we think our markets in 2026 look a lot like they did in 2025. Last year this time, the data showed an acceleration into 2026 that, with some of the uncertainty around tariffs and really the lack of interest rate reductions throughout '25 relative to what was projected a year ago, pushes that acceleration to 2027. The market outlook being relatively stable over the past few years, we've been much more focused on what we can control, which is leveraging our internal growth initiatives, which are amplified by the competitive advantages we've cultivated around our product portfolio breadth, high levels of specification and our unique go-to-market positioning. As we discussed last quarter, we feel like we continue to demonstrate that our teams have got a really good handle on the tariff, supply chain and pricing dynamics. And Dave will update you on all the numbers in a bit, but overall, relatively consistent with what we communicated in the second quarter. All year, our approach to outlook has been to take things a quarter at a time because there's been several scenarios as to how all this change could have played out. But with only 1 quarter to go and basically only 2 months left in 2025, we are again raising our full year estimates for growth, profitability and cash flow. Now I'll turn it over to Dave, and he'll take you through some more color on the quarter.

Thanks, Todd. Good morning, everyone. Please turn to Slide #4. Our third quarter sales totaled $455 million as we continue to have solid execution on our growth initiatives. $455 million of sales represents 11% core growth year-over-year. In the third quarter, we generally saw our end markets perform in line with our expectations as the nonresidential market remains positive while the residential market continues to experience softness. Core growth reflects both a full quarter of impact and higher realization of the tariff-related price increase that we put into the market in April. We also saw about $8 million of incremental demand shipped in the quarter as a result of customers ordering ahead of a discrete pricing action we put in place in mid-September within our water safety and control products. The discrete pricing action was primarily to reflect incremental tariffs on copper-related goods and the updating of country-specific tariff rates. Turning to profitability. Our second quarter adjusted EBITDA was $122 million and our adjusted EBITDA margin expanded 120 basis points year-over-year to 26.8% in the quarter. This strong margin and year-over-year expansion was driven by volume leverage, productivity initiatives, leveraging our Zurn Elkay Business System and continuous improvement activities across the organization. 26.8% consolidated EBITDA margins are the highest quarterly margins we've had since the Elkay merger. Year-to-date, our sales and EBITDA have increased $93 million and $39 million, respectively, which represents a 42% drop-through on the year-over-year volume increase. Our year-to-date EBITDA margin improved 120 basis points year-over-year as our core sales grew by 8%. Please turn to Slide 5, and I'll touch on some leverage and free cash flow highlights. With respect to our net debt leverage, we ended the quarter with leverage at 0.6x, the lowest leverage we've had as a public company. We continue to repurchase shares, and in the quarter, we deployed $25 million to repurchases. That puts our year-to-date repurchases at $135 million. Free cash flow again finished strong at $94 million in the quarter. We continue to cultivate and evaluate our funnel of M&A opportunities, and our combination of management team capability, low leverage and cash flow generation all support our ability to execute on the right M&A opportunity while at the same time entering adjacencies through investment and internal development. Todd mentioned it in his opening remarks, we exited the U.S. pension plan in the quarter. That eliminates an approximately $200 million liability and the related assets, and also eliminates the need for cash payments to support the pension plan on a go-forward basis. So a nice win for the team to remove that and exit the plan in the quarter. I'll turn the call back over to Todd.

Thanks, David. And I'm back on Page 6. We continue to make solid progress this quarter toward our sustainability goals, advancing initiatives that support long-term value creation really for our customers. You can see some of the highlights here. Beyond delivering 1.8 billion gallons of safer, cleaner filtered drinking water so far this year through our commercial bottle filling stations, and eliminating the need for 14.6 billion single-use plastic bottles, we're continuing to find new ways to bring our commercial-grade filtration to even more people. Many people assume their water is safe because it tastes fine or it comes from a trusted municipal source. But the reality is our senses can't detect contaminants like lead, forever chemicals, and microplastics. And while the refrigerator or pitcher filters are convenient, most are only certified to improve taste and odor, not remove harmful contaminants. At Zurn Elkay, we've been tackling these challenges for years, protecting kids in schools, travelers in airports and employees in offices with our commercial-grade filtered bottle filling stations. Now we're bringing that same trusted technology into the home with our Elkay Liv built-in filtered bottle fillers. These sleek modern units complement any home design and deliver filtered water to every room, from home gyms and mud rooms to primary suites. Our newest Liv EZ models bring convenience anywhere there's a water line. No electricity, no drain needed. Just a wall, a water line and a couple of batteries. We're supporting this launch with a robust marketing effort, including influencer partnerships focused on families, health, and DIY audiences, helping more people experience the benefits of cleaner, safer water right at home.

Thanks, Todd. I'm on Slide 7. And similar to the data we've shared in the past, I'll provide an update on the market. As we look ahead to 2026, it's helpful to revisit some of the key indicators that shape our view of how the market will perform and what that means for our business. On the top of the page are 3 macro indicators that we track: the Dodge Momentum Index, Architectural Billing Index and construction backlogs. I'll talk through each of these. The Dodge Momentum Index measures the value in dollars of nonresidential building projects in the planning process against a baseline year of 2000. The index is meant to be a leading indicator for all future nonresidential construction spending, and therefore, it's generally used to monitor the future direction of construction spending. Think of the Dodge Momentum Index as a 9 to 12-month preview of what's likely to start. But also recognize that there's a lot in there: price, various end markets and geographies. Next is the ABI, which is a sentiment survey that tracks a cohort of partners of AIA member-owned architectural firms, whether their billing activity for the previous month grew, declined or remained flat. The way to interpret ABI is a score of 50 indicates a balance between positive and negative reports, while a score of 100 indicates all firms reported improvements. A rise in the index above 50 means that more firms reported an increase in demand for design services than reported a decline in demand. It's important to note that a rise in the index above 50 is not a direct measure of the rise in demand because the survey does not ask firms reporting stronger demand to quantify the level of increase in demand, nor does it provide information on the size of those firms. That being said, higher readings in the ABI generally coincide with growing demand. Finally, on the right, construction backlog, which measures the amount of work surveyed contractors have in their current backlog. In some ways, it's their lead time to taking on new business. And as you might expect, it's their best estimate, assuming no delays and consistent levels of staffing. All 3 of these metrics have a level of validity in them on how we think about the future. But as you know, our business is hyper-local, hyper-regional and it all varies by region, vertical. And other than the backlog reporting, there's limited certainty as to what's really going on in the ground level where the projects are actually happening every day. While the 3 macro indicators we just walked through on the top of the page were third-party data, the bottom section is specific to our business. On the bottom left, you can see how our portfolio of products participates across the full construction cycle, from the start of the job all the way through to finishing front-of-the-wall product 18 or so months later. Nonresidential construction is a complex ecosystem, coordinating multiple trades, supply chains, permitting and weather impacts. On average, projects take about 18 months from start to finish. And our portfolio is uniquely positioned across that timeline. From flow systems early in the build, to water safety and control mid-cycle, and hygienic and environmental solutions and drinking water at the completion. With an understanding of how our products participate across the construction cycle, the other item to factor in is the lag effect. And this concept is illustrated in the chart on the bottom right. The lag effect shows how Dodge starts ultimately translate into Zurn Elkay sales. In a typical year, roughly 20% of our new construction revenue is tied to projects that started in that same year, while the other 80% reflects work initiated in prior years. I'll talk through this more a bit. Start with Q1 of 2026. Virtually all of our new construction sales come from starts that happened in 2025 and before. And by the time you get to Q4, current year 2026 starts will have about a 40% contribution to our sales. This lag effect, combined with the breadth of our portfolio, gives us visibility in the demand and confidence in the durability of our growth as we look into 2026.

Moving to Slide 8. We have Dodge starts on a square foot basis, with actual starts data from 2023 and 2024 and then Dodge's projections out to 2028. The Dodge data in this slide and the next slide is the most recent report published by Dodge as of August 2025. We like to look at square footage because it strips out pricing, renovations, and alterations, providing a clear view of the market-driven growth that underpins the roughly 55% of our business that comes from new construction. A couple of things I'll point out with the data. The Dodge data is separated between institutional and commercial end markets. For us, it's the majority of our revenue. The pie charts on the right-hand side shows the 2026 square footage starts by building type. And you can see that within institutional, education dominates the square footage at 40% of the total. And within commercial, warehouses are the largest building type at roughly 50% of the square feet starts. And the last item is just a caution, that focusing only on the headline Dodge starts growth for these categories can be misleading since the mix of education and health care within institutional, and warehouse within commercial, affects growth differently than how these segments are weighted within our own portfolio. Turn to Page 9. This is the same Dodge data in square foot terms now further broken down by our key verticals. As we highlighted last year, when reviewing the Dodge data, the resilience of our business over the past 20 years reflects in part our significant overweighting to the strong, stable segments within nonresidential construction. On the top left, the graph shows the education and health care vertical starts information for the same time period as the page before. These 2 verticals represent 60% of the entire institutional index within Dodge and 80% of our exposure to the institutional nonresidential construction market. Simply said, we're materially over-indexed to the strong, stable parts of the institutional nonresidential construction market. On the bottom left, this graph is for office, retail and hospitality verticals, again, same periods as the page before. With the conclusion being that these verticals represent only 30% of the overall commercial starts within Dodge, yet represent 75% of our exposure. When we focus on the building types that are critical to our sales, we see that both health care and education and retail office and hotel starts are projected to continue to increase in terms of square footage each year, with growth rates generally accelerating in the out years. While the starts data has evolved this year as events like tariffs have come into play and the projections around interest rates have continued to change, the level of construction starts remains strong. Ultimately, the Dodge data supports that our pure end market growth in 2026 should look a lot like what we just experienced in 2025, a low market growth environment. As you know though, beyond end market, we have other factors when we consider our outlook: growth within drinking water, our other key initiatives as well as price. We've shared this stat in the past, but as of this quarter, we have had year-over-year quarterly growth 55 out of the last 59 quarters. That's a 15-year track record of consistent growth. I'll turn the call back over to Todd. Okay. Last one for me is on Page 10. And hopefully, most of you have seen this page before. But if not, it's been our simple and, we believe, effective way to depict how we think about and manage our business, leverage our operating philosophy and ultimately how we measure ourselves. And honestly, it's more than just a chart; it's exactly how we operate the company day in, day out. And even more importantly, inside the company, everyone can see how and where their impact is expected, creating great accountability and alignment throughout the organization. Beginning on the left, it starts with a relentless focus on the game we want to play. The choices here require discipline, and we've been very intentional and, I'll say, picky about getting this piece right. Because it's easy to drift and convince yourself that it's close enough to make sense, but having this filter, if you will, provides perfect clarity and avoids distractions or any strategic drift. It guides how we drive our strategy, beginning with our end markets, what we look for in terms of what geographies, competitive dynamics and characteristics, approach around our portfolio, and most importantly, our relentless focus on being a premier pure-play water business in North America. In the middle, we highlight that the glue to all of this is the Zurn Elkay Business System. It's our common language and deep culture of continuous improvement. It drives the manner in which we operate every day, everywhere and defines the capabilities we can leverage or, in some cases, need to build, while aligning all of our resources to drive organic growth, profitability and free cash flow. Finally, on the right, measuring our performance across all of our stakeholders: customers, shareholders, associates, and the impact we can have on a much broader scale through sustainability. At the end of the day, if we get all these facets within our business model, I'll say, right, or close to right, we end up building sustainable, competitive advantages, which we feel over time drive superior outcomes for all stakeholders. As we sit here near the end of 2025 and begin thinking about 2026, one thing I would call out or emphasize is that over the coming years, we intend to further sharpen our focus capabilities and resource investment on driving even more organic growth into adjacent categories. We feel more confident than ever that we're in a position to exploit our competitive advantage around driving specification, establishing robust supply chains and leveraging best-in-class go-to-market capabilities into adjacent markets with new, innovative products that we have a long track record of introducing into our core markets, which has led to the kind of organic growth record that Dave just talked about. So more to come on that in the coming quarters and years, but now I'll turn it back to Dave for the outlook.

For the fourth quarter of 2025, we are projecting year-over-year core sales growth to be in the high single digits, and we anticipate our adjusted EBITDA to be between $99 million and $102 million. As a result, we are raising our full year outlook for core sales growth, adjusted EBITDA, and free cash flow. We now expect core sales growth of approximately 8% for the full year, adjusted EBITDA in the range of $437 million to $440 million, and free cash flow greater than $300 million. We have included our fourth quarter and full year outlook assumptions for interest expense, noncash stock compensation expense, depreciation and amortization, adjusted tax rate, and diluted shares outstanding. I also wanted to provide an update on total tariff costs for the year. Last quarter, we expected our tariff costs before any offsetting price for 2025 to be between $35 million and $45 million. However, with updated country-specific tariff rates and new tariffs on copper coming into effect during the third quarter, we now believe our tariff cost impact for 2025 will be modestly higher, approximately $50 million for the year. While the environment surrounding tariffs continues to change, our team is confident that we can maintain a favorable price/cost position in both the short and long term. Thank you, everyone. We'll now open the call for questions.

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

Another very solid quarter. The Q3 market updates and outlook and framing of ZWS participation across the build cycle is helpful. With that in mind, has there been any meaningful divergence in the growth rates across legacy Zurn product categories over Q3 or into Q4? And then given the run rate market reads and the lag effect detail on the new construction side, can you offer any finer points on how your team is thinking about momentum into the first half of 2026?

Yes, Bryan. First of all, I think we'll talk about 2026 in 2026. When you look at almost all of our core categories, they are experiencing solid unit growth along with some market and price increases. I wouldn't say there has been any significant change since the second quarter, and I don't see any reason for that momentum to shift as we approach the fourth quarter.

Okay. Understood. I caught a bit of a play in words with the filter afforded by the Zurn Elkay Business System. With that said, maybe you can offer a little if there's an update on the reception of Elkay Pro Filtration, whether there'd been any surprises positive or otherwise in the early going? And then it would be great to hear more about the market opportunity with the Liv EZ line, and how impactful that launch might be to growth going forward?

Sure. As we mentioned last quarter, the launch of the Pro Filtration was significant because it addressed market feedback regarding ease of installation and increased filter capacity, along with pre-sediment filters. We've seen a strong initial response and anticipate that it will continue. The ability to change it in 30 seconds or less, essentially once a year, aligns with the feedback we received during product development. It's a solid start, but just the beginning. Regarding the Liv unit, it requires more installation capability due to its design with a drain. This product was created to be user-friendly for do-it-yourself installation, and we're excited about its potential. It offers a chance to enter a market that isn't huge, as not everyone will install it in their homes for various reasons. Nonetheless, we see it as a valuable addition to our offerings, allowing individuals to enjoy the benefits of these filters in various settings such as schools, offices, and airports, now at home. I expect it to grow well, but we don't see it as the cornerstone of our commercial drinking water portfolio. We're enthusiastic about it and believe the uptake will be positive.

Your next question comes from the line of Nathan Jones with Stifel.

This is Adam Farley on for Nathan. My first question is going to be around growth, and specifically volume expectations. So it sounds like there's a little bit of volume may be pulled forward into the third quarter. But you're guiding strong high single digits for the fourth quarter. So how should I think about volume in the back half?

Well, Dave, maybe you can clarify, but we saw good volume growth absent even this modest pull-forward in Q3. And we expect sort of the same as we go into Q4. I will tell you that I think that some of the pull-forward is essentially offset by, I would say, a little bit of incremental weakness in the residential market. And so when you look at it all the way through, I think the growth in Q3 is relatively high quality. And I think the way we're guiding Q4 is equal to that kind of momentum that we saw in really Q3 and for the second half.

Yes. I would like to add that we had a price increase in late September, which led customers to place orders in advance. As a result, approximately $8 million was moved from Q4 to Q3. If you exclude that amount from Q3 and consider our guidance for Q4, it remains consistent. The unit volumes continue to show healthy growth.

Yes. We don't communicate order rates. But if you go to the first 9 months of the year, the order rates in aggregate are a touch above 1. And I think we're sort of guiding to book-to-bill of about 1 in Q4. So nothing crazy. A little bit of choppiness from Q1 to Q2, Q2 to Q3, but I think when you get to the Q4 numbers, it sort of plains out and we're delivering to real live demand.

That's great to hear. Thanks for that additional detail. My second question is going to be around capital allocation. So increased the dividend, increased the share repurchase authorization. So what are the priorities going forward? Has anything changed? Should we maybe expect a little more share repurchase going forward? Any color there?

Yes. As we've done for a long time, we obviously generate significant amount of free cash flow. If you go way back, the objective initially was to reduce our leverage to a very comfortable zone, continue to invest in our core business, cultivate proprietary M&A opportunities, establish a dividend and then look at the value of our stock relative to what we think the intrinsic value of the company is. None of those things have changed. And so I think that we continue to generate significant amount of free cash flow. Our dividend yield, we've tried to leverage that cash flow to keep the dividend yield right around 1. We're in the process of looking at the next 3 years and determining what we think we can do and how that translates to where the current stock price is. I think we will be sort of steady repurchasers. And obviously, this gives us just incremental flexibility to the extent there's a larger dislocation for whatever the reason. So I don't think we're signaling anything new, just that over the last 3 years we've generated a ton of cash, we've increased the dividend, we bought back some shares and cultivated M&A. And I think that's what you should expect going forward.

Your next question comes from the line of Mike Halloran with Baird.

This is Pez on for Mike. Maybe following up on Adam's question here, Todd. Maybe if you could provide a little bit more color on the M&A funnel. How has it changed over the last 12 months in terms of actionability, the pricing expectations? And then maybe if you would comment a little bit on the mix of hygienic and environmental versus drinking water. If we could just get a little bit more color on what you're seeing in the funnel and how that's evolved over the last 12 months.

The funnel hasn't changed much near the bottom. At the top, however, we've seen some incremental additions, and we are actively nurturing those. Regarding valuations and actionability, it really depends on the fit and where people's thoughts are. I don't think we'll discuss valuation much because we evaluate M&A through the lens of potential returns on invested capital at a specific value and the synergies we can offer. Overall, not much has changed. There are a few opportunities in an auction process, some of which are mildly interesting while others are not. We are continuing our efforts, and I wouldn't say our funnel is limited to drinking water; our flow systems and valving funnels are also crucial. So, it's quite broad. Overall, not much has changed in the middle to the bottom, but I would say that the top of the funnel has become slightly larger over the past 12 months.

Got it. That's super helpful. And then maybe just on a more philosophical question, obviously, moving into residential drinking water with the Liv EZ product. Maybe could you tell us a little bit about how you think about your aspirations for drinking water on the residential application? Is there broader aspirations to get into residential drinking water? And is that something that can be developed internally? Is there something externally that might be interesting? Maybe just a little bit of thoughts on how you think about the opportunity within residential drinking water beyond maybe the Liv EZ product.

I wouldn't say we have a strong interest in entering the residential filtration market. It feels more like a small extension of our current efforts. The technology allows us to experiment with design and innovation quickly, but I don’t anticipate us making a significant push into residential filtration. Instead, this serves as a way to build on what we’re already doing in the commercial and institutional sectors while gaining insights and testing new ideas in a limited market.

Your next question comes from the line of Andrew Buscaglia with BNP Paribas.

This is Ed on for Andrew. Another very strong margin quarter with high incrementals. Just wondering if you could speak to the consistent strong margin results and how to think where we can go from here off of these record levels?

Yes. I mean I would say we've had consistent margin expansion. If you go back to when we merged with Elkay and just look at the quarterly progression each year, we've seen nice margin expansion. So started with delivering on the synergies, leveraging our Zurn Elkay Business System, the #CI improvements. So I think we're confident that the level that you're seeing is a new baseline in terms of where Zurn Elkay margins can be. I would just think about a more long-term view as 30% to 35% incrementals on volume.

That's helpful. I have a follow-up. You have effectively managed the tariff environment in terms of both revenue and expenses. Can you discuss the Zurn Elkay Business System and explain why you believe you are in a stronger position to handle the tariff environment compared to your competitors? I'll stop there.

Yes. I won't really speak to comparisons because I wouldn't want people speaking about us. I think what we did going on 5 years ago is think through the risks to our business and how we protect our service levels over a long period of time and developed a plan to primarily move our manufacturing supply chain partners out of China to other regions, including the U.S. And so over 50% of our COGS comes from the U.S. today, and by the end of next year, only about 2% to 3% will come from China. And so I think it speaks to that front end of what are we trying to do, what game are we trying to play, getting in front of it, doing the hard, long work to position ourselves. And as it turns out, no one, including us, would have predicted the kind of tariff environment that we saw beginning in April, but by starting well in advance, doing the long, hard work, I think it's positioned us really well, not only this year, but really for the long term.

Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

This is David Tarantino on for Jeff. Maybe could you give us what price versus volume was in the quarter? And then maybe could you give us what you think the carryover pricing into next year will be based on the increases you've already taken to date? I think you highlighted another increase in 3Q. So do you think this supports another year of above-average price realization in 2026?

Yes. To begin, in the quarter we experienced about 5 points of price realization. We will hold off on providing 2026 pricing guidance for now. It's important to note that our pricing actions have been intentional and aligned with our costs. As we faced rising tariff costs, we adjusted our prices to ensure a positive price-to-cost dynamic in the market. Looking ahead to next year, it's useful to compare the first half of this year, where we had minimal price adjustments, to the expected ramp-up in pricing for the third and fourth quarters. We anticipate more pricing in the first half of next year than in the second half. We will assess whether a price increase for 2026 is needed as we progress.

Okay. Great. And then maybe just to put a finer point on the 2026 commentary around the end market. It seems like this points to market growth in the low single-digit range. So any more color there would be helpful. And then how should we think about the outgrowth levers into next year between the key product lines both in and outside of drinking water?

Yes. So our read of the Dodge data that we presented is really, from a pure market perspective, 2025 and 2026 looks a lot alike. And so that's a low-growth environment. If you look at where we think some of the levers are going on a forward basis, I would think about things like we've continued to see outperformance in drinking water. We've continued to see some of the other sales initiatives, whether that's in product categories like our water safety and control have outperformance, the new products that we've talked about, adjacent markets. And so there's a number of things as we look forward that we feel like we have the opportunity to outgrow the market. And so when we think about growth, it's market, price and then our initiatives. And if you put those together, that's how we think about our ability to grow.

Your next question comes from the line of Brett Linzey with Mizuho.

This is Brett Linzey on for Brett Linzey. Just wanted to come back to the Filter First and really wondering if you had a post-mortem assessment on year 1 of that program specific to Michigan. Are you able to quantify the contribution from those installments thus far? And any color on some of the share capture as part of that program?

Yes. I would say we've done a really nice job in Michigan. There's about 1.5 million students in Michigan, and the law requires 1 bottle filler per 100 occupants. And so you can do some math on that, Brett, just to see how much the opportunity is. But I would say our team has done a nice job of capturing what we expected in terms of the Michigan opportunity, and it's still ongoing. And so this was the first year that schools actually were able to access the money from the state. The state set aside $50 million to accomplish Filter First, and it will continue into next year. And so while we saw a lot of schools comply with the law this year, there's still a series of schools that need to comply next year. I'd say also on the Filter First front, while not a Filter First fill, we did see New Jersey enact some legislation and release some funding that will help accomplish the same thing: allow schools to purchase filtered bottle fillers to eliminate lead and other harmful contaminants for students. So we spent some time in New Jersey over the last 90 days helping schools work through what their drinking water plans are and really just helping keep students safe in New Jersey and Michigan.

Okay. Great. And then just back to Slide #8 and specific to the project cycle that you laid out, you illustrated the flow systems tends to lead. I guess has there been any discernable increase or inflection in those categories or that product segmentation that maybe informs you some of these areas like commercial are beginning to show some improvement?

Taken as a whole, our flow systems business has grown at or above the fleet average the entire year. So I think that portends I think the kind of market that we're talking about, which is relatively stable to low growth, at least for the near term, with the opportunity to accelerate moving forward. So I think from a leading indicator perspective, our flow system business has done well really over the course of the last 24 months. So I think we're monitoring all these things, but recognizing that we're sort of in a unique environment, to say the least. But we do find that that leading indicator is relatively encouraging for us.

Congrats on the quarter.

That concludes our question-and-answer session. I will now turn the call back over to Bryan Wendlandt for closing remarks.

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

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.