Good morning. Welcome to the Zurn Water Solutions Corporation Third Quarter 2021 Earnings Results Conference Call with Todd Adams, Chairman and Chief Executive Officer; Mark Peterson, Senior Vice President and Chief Financial Officer; and Dave Pauli, Vice President of Investor Relations for Zurn Water Solutions.

This call is being recorded and will be available on replay for a period of 2 weeks. 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 26. At this time, for opening remarks and introduction, I'll turn the call over to Mark Peterson. .

Thank you. Good morning, everyone. Before we get started today, we're pleased to announce that Dave Pauli will be assuming the day-to-day Investor Relations responsibilities as of this earnings call.

Many of you have already had a chance to work with Dave over the past 6 months as he's been instrumental in assisting us with the Investor Relations during that time. .

Dave has been with the company for the past 9 years working in several financial roles and has been our Corporate Controller for the past 4.5 years. So before I turn the call over to Dave for some opening comments, I just want to touch on the RMT transaction that closed on October 4.

Given the timing of the close, our third quarter results include the PMC segment. Starting with the fourth quarter of 2021, the PMC segment will be reported as discontinued operations.

We will provide high-level comments on PMC's financial results this quarter, but we ask that you hold any questions you may have on the PMC segment for Regal Rexnord's earnings call next week on Tuesday, November 2. .

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

Thanks, Mark. Good morning, everyone. I'd like to remind you that this call contains certain forward-looking statements that are subject to the safe harbor language contained in the press release that we issued yesterday afternoon as well as in our SEC filings. In addition, some comparisons will refer to non-GAAP measures.

Our earnings release and SEC filings contain additional information about these non-GAAP measures why we use them and why we believe they're helpful to investors and contain certain reconciliations to the corresponding GAAP data.

Consistent with prior quarters, we will speak to certain non-GAAP metrics as we feel they provide a better understanding of our operating results. These measures are not a substitute for GAAP, and we encourage you to review the GAAP information in our earnings release and in our SEC filings. .

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

Thanks, Dave. Congratulations, and good morning, everyone..

Hopefully, you all had a chance to read through the release last night and see the consolidated Rexnord numbers for the last time. And as Mark covered in his comments, we'll use this call to essentially just cover Zurn Water Solutions results and leave the PMC results to the Regal Rexnord team when they report next week. .

First of all, this is truly a milestone quarter for us. We got the RMT transaction done with the new Regal Rexnord in only about 7.5 months, a testament to the collaboration between the 2 companies and simply outstanding effort by everyone and our advisers on both sides.

I want to thank our team, in particular, for everything they've done to facilitate the separation. .

When you go through one of these things, it obviously touches a lot of things that need to get sorted pretty quickly. antitrust, the SEC, the IRS contracts, licenses, IT, tax benefits, you name it. And from our side, it's really gratifying to go through all of that and not miss a beat.

Getting everything done for Day 1 stand-alone while continuing to execute at a high level is really a testament to the team and talent we've assembled here. .

What's even more important is that we started October 1 with all of that behind us and focused on the future.

The transaction is a terrific outcome for both companies and shareholders, and we're excited about what it means for Zurn Water Solutions to be stand-alone and obviously rooting for the new Regal Rexnord team's success and believe they have a really bright future moving forward. .

So we'll get on to the ZWS part of the program. From a top line perspective, we grew 15% in the quarter, 5% on a core basis, and that's on top of the 5% core growth we delivered last year. And frankly, it should have been a little bit more.

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

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

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

A handful of those were delayed by COVID shutdowns at ports leaving China and other parts of Southeast Asia, another 25 were late because of delays getting picked up at our suppliers through either a shortage of trailers or drivers.

And the rest were a function of using a break bulk transport solution that simply got delayed at various ports in the U.S. .

That's the bad news. If half of these break our way, we're looking at core growth of 9% to 10%. The good news is it's not a labor shortage at Zurn. It's not a product supply-based performance issue. It's not a component availability issue. It's a lot like we talked about last quarter.

It's the compounding impact of a whole bunch of things colliding, creating a topic that will be the most talked about thing on earnings calls this season, supply chain challenges. But in our case, it's really a few, discrete transportation delays.

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

And as we start our fourth quarter, it feels like we're in great shape. Essentially, everything that needed to leave a port at this point has left. Everything that's here is winding its way out of the various ports and warehouses. And with 1 month of the fourth quarter in the bank, we're off to a good start. .

And as we said in the release, taken as a whole, the second half will end up sort of as we had expected 90 days ago. As it relates to ZWS profitability, we delivered margins of 26.5% at the high end of our expectations despite the lower shipments. Hopefully, it's pretty clear that we continue to execute well on the price cost equation.

But I want to make a comment or 2 to give you a better feel on why our margin profile is so strong and sustainable. And it's actually a whole lot more than just pushing price increases through to the marketplace. .

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

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

and even more so as we continue to expand our portfolio. .

And second, while we typically lead the market with respect to price, it's also about continually doing a better job on product design and innovation. I won't get too specific, but there's a particular category where we designed and developed a patented product that weighs 1/4 of the weight of our competitors. Suffice it to say, it's a brass valve.

So we not only have an advantage because of our portfolio. But imagine an example, we're selling a product at a market price, but our material cost on the product is 75% less. Not to mention our freight costs are lower. .

So when you understand these types of examples, it becomes clear as to why our margins are so superior to our competitors. If we can move to Page 4. The future for ZWS on a stand-alone basis is exciting. That's a big part of the reason why we decided to separate PMC when we did.

The incubation time for a number of breakthroughs were really beginning to take root. .

And as we take a step back and look at the next 3 to 5 years, we see incredible runway for growth, both organically and also from an M&A perspective. The idea of being a stand-alone pure-play water business levered to a number of water and sustainability megatrends is something we've been laser-focused on for a while.

And we feel like we're very early in the journey of capitalizing opportunities here. And that's before we dial in what an infrastructure bill might do for our business. .

Sitting here today, I would say we've never had the number of organic opportunities in front of us that we see today. The one we've discussed for the last year has been the touchless hygienic opportunity that we branded BrightShield.

This continues to have an enormous medium- to long-term upside, not just for new construction, but the massive available retrofit market that we've really only entered in the last year. But it's not just that.

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

We're also leading the industry in developing products that can be used for prefabrication or offsite construction that the industry is leveraging to combat lower levels of skilled labor required to meet the strong demand for new construction.

We've leveraged our product portfolio to enter the adjacent fire protection market, site works market and pretreatment markets. These are all share gain opportunities for us that we weren't even participating in just 3 years ago. .

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

And finally, it's not just only about extracting the cost synergies from acquisitions we've made, but capitalizing on the growth from acquisitions that -- capitalizing on the growth from acquisitions under the Zurn leadership positions around specification, content per square foot and lean construction trends.

The bottom line is we see a clear path to double-digit growth next year and are also optimistic that we'll see some M&A opportunities convert, setting up strong growth into 2023 and beyond. .

We're not going to get ahead of ourselves at this point, but it's clear to me that ZWS can be a much larger company with a consistent financial profile while continuing to build out our business, very much focused on the types of things we do today. If we can get to Page 5.

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

We believe that as we move forward, it won't just be about providing products that save the world billions of gallons of water or keep the potable water supply safe inside buildings or creating safe and hygienic spaces inside public and private spaces, it will also be about doing it the right way in an inclusive way, and we're up for the challenges of taking a leadership role demand.

.

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

Before I turn it over to Mark, if you can just turn to Page 6. As some of you on this call may remember a couple of years ago, we laid out a relatively comprehensive capital allocation strategy for Rexnord that was grounded in the reality of a relatively undervalued, multi-industry business with strong deleveraging characteristics.

But it becomes public from a private equity-led IPO that left us with leverage north of 4x. We had finally achieved the financial profile to begin to return money to shareholders in the form of a reasonable dividend, a regular share purchase -- repurchase program and a priority around water-related acquisitions. .

In the case of ZWS, while it's a very different dynamic, our capital allocation strategy is something we wanted to clearly communicate to investors as we start stand-alone. First, ZWS is a differentiated growth company.

With a mid-single-digit core growth rate over a decade, an exceptional margin profile, equally strong deleveraging characteristics as the old Rexnord. One really good example of this is over the past 15 years, CapEx has been about 1% of sales.

Next, we're starting life with leverage of only 2 times and would expect to maintain a modest leverage profile between 2x and 3x. It could drift lower at times, but in general, expect that to be our targeted range. You may have also seen that last week, our Board declared an initial dividend of $0.03 a quarter or $0.12 annually. .

And while it's modest to start, it's something we think we can selectively and comfortably increase over time as we grow.

And finally, with respect to acquisitions, we believe we have a deep funnel of opportunities that fit our return criteria that we can do with our cash flow that only enhance our long-term growth rates and returns, while also leaving the optionality for larger, more transformative opportunities should they become actionable from our proprietary funnel.

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

Thanks, Todd. Please turn to Slide #7. On a year-over-year basis, our third quarter consolidated sales increased 13% to $557 million.

The growth was driven by a 100 basis point benefit from foreign currency translation, a 400 basis point positive contribution from our Hadrian acquisition in our Water Management platform, partially offset by a small divestiture in the PMC platform that reduced our total sales by approximately 100 basis points and finally, core sales growth of 9%. .

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

The incremental sales volume and the realization of our SCOFR 3 and other productivity actions drove the year-over-year improvement in our margin this quarter despite the headwinds we faced from the temporary cost reduction actions we took last year due to the COVID-19 pandemic. .

Please turn to Slide 8, and we'll review our platform results. At the platform level, Water Management sales were up 15% from the prior year September quarter as the Hadrian acquisition contributed 9 points of growth, positive foreign currency translation contributed 1 point and the core business increased 5%.

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

With respect to profitability, our Water Management platform delivered a 9% increase in adjusted EBITDA over the prior year as margins were in line with our expectations of 26.5% in the quarter, inclusive of our continued investment in growth.

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

Excluding those 2 items, margins in the core business expanded year-over-year. Turning to PMC. Sales increased 11% and includes a 100 basis point benefit from foreign currency translation, a 200 basis point reduction from the small 2024 core divestiture in China and a core sales increase of 12%.

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

Demand trends remain solid as core orders in non-aerospace end markets increased nearly 30% from the prior year and year-over-year orders grew over 100% in aerospace end markets, and the book-to-bill ratio was above 1 for the quarter. .

PMC's adjusted EBITDA margin [ ended ] 260 basis points year-over-year to 23.5% as the benefits from the sales growth, SCOFR actions and other structural cost reduction initiatives more than offset the year-over-year margin headwinds and the temporary cost reduction actions we took last year due to the COVID-19 pandemic.

So please turn to Slide 9, and I'll touch on some of the cash flow and balance sheet highlights. With a strong free cash flow generation in the quarter and growth in adjusted EBITDA, our net debt leverage was reduced to 1.5x at the end of the September quarter from 2.1x at the start of the calendar year. .

In conjunction with the close of the RMT transaction, we paid off the $500 million notes, including the make-whole fee and the $625 million term loan, both of which are on our balance sheet as of September 30.

Our new capital structure that went into place with the close of the transaction includes a $550 million term loan B with a $200 million revolver that is currently undrawn. .

Our new 7-year term loan has an interest rate of 2.25% with a 50 basis point LIBOR floor and pushes any debt maturities out to 2028. With respect to our cash balances, we anticipate ending our fiscal year 2021 with approximately $125 million to $130 million of cash on the balance sheet. .

Please turn to Slide 10 and I'll make a few comments on our outlook for the fourth quarter as well as some items that will help with fiscal year '22 modeling. For the fourth quarter of 2021, we are projecting total sales to increase year-over-year by a high teens percentage.

With respect to margins, we expect our adjusted EBITDA margin to be between 24% and 24.5%, which excludes what we've historically referred to as corporate segment costs. .

We anticipate corporate costs in terms of adjusted EBITDA to be approximately $10 million in the quarter. We remain on track to reduce our corporate expenses to approximately $20 million on an annualized basis, again in terms of adjusted EBITDA during the first quarter of 2022. .

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

We anticipate our interest expense for the December quarter to be approximately $5 million.

Our noncash stock compensation expense should be about $16 million, inclusive of a nonrecurring accounting adjustment for the conversion of Rexnord equity grants to Zurn equity grants as a result of the RMT transaction, and we anticipate our depreciation and amortization to come in around $8 million. .

Our tax rate on adjusted pretax earnings in the December quarter will be approximately 30%. And our diluted shares outstanding, again, updated to reflect the conversion of Rexnord equity grants to Zurn equity grants as a result of the RMT transaction will be approximately 129 million shares in the quarter. .

Looking ahead to calendar year '22, we wanted to provide an update on several expenses, now that the RMT transaction is complete. We expect calendar year '22 annual interest expense to be approximately $20 million, annual stock comp expense to be about $17 million, annual depreciation and amortization to come in around $18 million.

We anticipate a tax rate on adjusted pretax earnings in the 26.5% to 27.5% range. .

Diluted shares outstanding, again, updated to reflect the conversion of the Rexnord equity grants to Zurn equity grants as a result of the RMT transaction will be approximately 130 million to 131 million shares. We will provide additional guidance for fiscal year '22 on our next earnings call in February of 2022. .

With that, I'll open the call up for your questions. .

[Operator Instructions] And our first question is from Bryan Blair with Oppenheimer. .

To quickly level set on Q4 core growth expectations. Is low to mid-teens the right range if we account for 2-months-or-so incremental Hadrian contribution than kind of high single-digit range accounting for the delayed shipments from Q3. .

Well, yes, we talked about we said high teens all-in. So think about the core and [ better that ] number is going to be yet, as you said in the low teens from a core growth standpoint in the fourth quarter, Bryan.

And there is a bit of a spillover as we mentioned earlier from some of the growth that we did [indiscernible] picking up in the early innings of the fourth quarter. .

Okay. Makes sense. And more importantly, I was hoping you could offer a little more color on your team's confidence in double-digit core growth in 2022. Any insight on volume versus price contribution? We suspect there will be quite a bit of carryover with the latter.

Relative growth rates of your major product categories or any callouts by key end markets would be very helpful. .

It's an incredibly balanced view going forward. I mean the combination of a reasonable market price actions that we've got in place already and then the contribution from some breakthroughs that I sort of tried to run through, give us, I think, both confidence and some headroom to get to that double-digit core growth rate for 2022.

And it's been a while since I think we had sort of -- that sort of confidence in a forward look. We're not going to -- we've got a few months to refine it and get to that point. But at this point, I think it's a pretty balanced view between market organic growth initiatives and price that's already sort of behind us that will just carry over.

And the combination of those 3 get us north of that 10%. .

All good to hear. And maybe provide a little more detail on Hadrian integration. We know there were some constraints earlier this year that were outside your control that -- have efforts reaccelerated there? What are our run rate margins. We know that there's still a meaningful degree of dilution versus the core, which you said was up year-on-year.

Any shift in -- and any confidence in terms of getting towards 20% over time. .

It's incrementally better, Bryan. I think the reality is the COVID shutdown impact to that business probably far more than many others. So the volume ramp is probably 9 months behind what we would have anticipated. That is the beginning. We're starting to see that happen in the quarter.

And I think we're making good headway on the actions required to get the margins toward that fleet average or at least something with a 2 in front of it. I think '22 is going to be the big year for margin expansion for Hadrian. I think from a competitive standpoint, we feel really good about the progress we've made.

We're starting to get traction with specifications and conversions. And so I would anticipate, along with a better environment plus the opportunity to really dig in and get at it, '22 will be the big year from a margin expansion at Hadrian. .

Our next question is from Jeff Hammond with KeyBanc. .

So just maybe on -- you've talked about the business unit safety flow and hygienics. Maybe just speak how those are trending either in the order rates or in the revenues this quarter. .

I would tell you that I think Water Safety and Control grew the most, Flow Systems grew the next and hygienic environmental finished third in the quarter. I think as my comments alluded, we still believe in the medium- to long-term growth. I can tell you as a category, it's been slower this year than we would have anticipated.

I think we're hearing that both from the wholesale community as well as some of the competitive intelligence we've picked up, but we are starting to see it pick back up here in September and October. .

And so I think you had a rush, if you will, to get ready for some sort of reopening. And now that people are back in, we're getting back to more of that steady conversion as opposed to this wave. .

And so I guess the good news is the opportunity is there. And I think we've outlined it is massive. I think the things we've put in place around the Jan-San channel, e-commerce, and BrightShield give us a lot of confidence that it's on the come, we're seeing traction with a number of opportunities.

But in the meantime, Water Safety Control continues to take market share. And I think my comments on the drain line being reinvented are giving us great growth and a nice trajectory. So that's how it would sort of shake out in the 1, 2, 3 for the quarter. .

Okay. And then just on the hygienics, I know there's this kind of COVID-related opportunity with the education channel, where they're getting allocated dollars.

What are you seeing on that end in terms of capturing some of that federal money?.

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

And so I think from an opportunity set, we know regionally, who's got what. And then it's really about calling on them and helping with the conversion and then the priority towards providing a hygienic space inside of a school.

But I think the way we've contemplated that growth is it probably comes a lot more in '22, and I think we're well positioned to capture a bunch of it. .

Okay. Great. And then just last one. You guys certainly have had a lot of balls up in the air and maybe been internally focused.

Maybe just speak to M&A pipeline valuations, your thoughts on getting something done into '22?.

Well, I think as you know, everything we've done has sort of been on a proprietary basis. And so we're going to stick with that for the time being because it's worked. I think we feel good about some things converting between now and the first half of '22. Valuations, I think deliver the kind of returns that we expect and anticipate.

So without getting overly specific, I think I'm pretty confident that we're going to have some things convert here and the right down the middle in terms of what we've been doing. .

And if you think about StainlessDrains, when you think about World Dryer, when you think about Hadrian, when you think about Just, these were all sort of competitive forays into other people's pockets.

And when you -- when we integrate them, take in the market, leverage the spec, leverage the pull-through, leverage the go-to-market, all of a sudden, you begin to get people's attention on what we've been doing.

And so it's really along those lines that I think we'll continue to do some M&A that will be impactful and I won't comment on timing, but I think from a valuation standpoint, it seems pretty reasonable, and I'm confident we'll get some things done. .

Our next question is from Joe Ritchie with Goldman Sachs. .

Congrats. For what it's worth, I mean, I think if the supply chain issues continue into next quarter, opening up the earnings call with the harmonica would be kind of awesome. So, just my 2 cents. .

It was contemplated, Joe. We decided against it. .

So maybe getting back to the task at hand you guys mentioned that being a Water Management business that this quarter, margins would have been up, the core business would have been up if not for some of these issues and obviously the dilution associated with Hadrian.

I'm just curious, just from like a pricing standpoint, are you guys running ahead of cost at this point? And when you contemplate 2022, do you expect to stay -- do you expect to be above price/cost to be a positive contributor to margin in 2022?.

Yes. I think I would tell you at this point with what we've put in place today. We are running ahead. And I think the way we've thought about '22 is we continue to run modestly ahead, which is entirely consistent with the last 14 years of my experience with Zurn. So I don't see a reason why we would fall behind. .

Okay. That's great to hear. And then, Todd, can you maybe elaborate a little bit more on the Jan-San opportunity? Is this gaining greater share of wallet in some of the larger kind of like industrial distributors? Or how should we think about the opportunity and exactly what you're doing from a channel perspective to gain traction. .

Yes. I mean there's a whole adjacent channel of people that go into commercial buildings and clean them and do various maintenance activities. We were basically -- we never touched it.

And so what we've done over the course of the last 6 months is sign up some partnerships to establish some reps that are out there calling on these and then partnering with local wholesalers to pull that through. And it's still early days, but the number of $100 million Jan-San companies that are out there servicing all these local areas is huge. .

And so our ability to connect provide what the opportunity of BrightShield is, get them to go out and begin to call and sell on with their customers, with our support and then pulling it through by having local stocking positions in their local trade area.

And frankly, also being able to help them schedule an install, if in fact, they want some outside help. We've got a partnership network of mechanical contractors that are doing that work for us. So it's early days. I think we started talking about it maybe 6 months ago.

But I think it provides ballast to new construction, it's untapped because we've really never been in there. And I think the BrightShield offering about creating a completely hygienic space inside of a commercial building is a powerful value proposition and one that has got a long tail. .

Yes. That makes sense. One last one for you guys. And Dave, congrats on the removing the interim title. But there's been a lot of discussion from the investor base on when you guys would have potentially an Investor Day. .

And so I'm curious to hear any thoughts around timing with the new business. .

Joe, we're going to use the fourth quarter to start doing some targeted marketing during this quarter. And I think we're looking to the first half of next year from Investor Day where we would like to do something like that in person. I know kind of the situation we're all in right now, it doesn't like that was going to happen this calendar year.

So we're looking at the first half of next year, when we have guidance out for '22 to have a full blown Investor Day. But this quarter, we will be doing a lot of target marketing with the new business. .

The next question is from Mig Dobre with Baird. .

Congrats on completing the RMT transaction, guys. .

Thank you, Mig. .

Thanks, Mig. .

So maybe we can talk a little bit about serving supply chain. I know you have a design and assembly business, but most of your revenues are in North America, as the vast majority of it. I'm sort of curious how your supply chain sets up relative to that.

How much would you say of your components are imported? And where are they normally imported from what sort of region?.

Well, for a whole bunch of competitive reasons, Mig, I don't think it makes a lot of sense to talk through that. But suffice it to say, a significant portion of our COGS is imported from places outside the United States.

I will tell you that it's less than it was 5 years ago as we've done some level of onshoring to collapse lead times to deal with the tariff issues. And so this balanced supply chain that we have today looks a whole lot different than it did 3 or 4 years ago.

Because we made a conscious decision to eliminate supply chain risk in having too much in places like China and others. So I think it would look a lot different 3 years ago. It's much more balanced globally than it is today.

But all in, I would tell you that -- and you know this, it's very much a design, procure assemble test model where we leverage third parties to manufacture some of the goods, and we do the late point [ assembly ] modification as needed. But it's not as overweight China as you may infer or expect. .

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

As we're thinking longer term here though, given the learnings over the last couple of years, is it fair to say that you're going to continue to work towards localizing the supply chain presuming that, again, your geographic revenue mix remains as it is today?.

I wouldn't say that. I think what we've done is really set up a global network of finding the highest quality suppliers at the best cost with the best lead times and done that with redundant suppliers usually in different geographies to avoid some sort of event, whether that be environmental or geopolitical or whatever the case would be.

And so I think we've got a relatively dispersed supply chain with redundant capabilities. And obviously, some of that has included domestic suppliers, suppliers in Wisconsin, suppliers in Texas, you pick it. I don't think you're going to see a sea change in that approach. I think we've steadily tried to create a redundant capacity for our supply base.

And I think we'll continue to do that. .

So I don't think there's anything materially different. I don't think we're going to start buying suppliers or things like that. I think we're going to continue to do what we do.

And if we see an area where we're not pleased with the quality or the performance where we see an opportunity to improve our competitive position and lead times, we can do that. So I think we're really happy with how our supply chain has performed for a very, very long time.

I think this logistics sort of, I think I'd call it, a [ nod ], is somewhat unfortunate. But I don't think it changes our view on how we're going to invest and grow our business. .

Okay. Appreciate that. On this logistics issue that you talked about the track record here for you is pretty clear that you've been very successful at pushing through raw material cost increases through pricing and offsetting that. But I'm kind of curious as to how these transportation or logistics cost work.

Are you -- do you have pricing flexibility of any sort to be able to offset that? Or should we look at your margin performance in the quarter -- in the fourth quarter as sort of being inclusive of this headwind, meaning as things hopefully get better in 2022 that becomes accretive to incremental margin?.

Look, I think when we issue a price increase or take a price increase, it's -- we contemplate all sorts of inflation. And well, I would tell you that it's hard to say that because containers went from $5,000 to $20,000, we've perfectly dialed in a price increase to cover that. I think we've got some of it, Mig, probably not all of it.

So a nice way of saying I think you got to look at the margins and just say sort of is what it is. Maybe we're a little bit short, maybe we're a little bit ahead. .

But in general, I think our price increases are offsetting our cost inflation. And I think the other point is the things that I tried to talk about when we're actually designing, developing and selling a product that weighs 75% less than our competitors, that's a big deal. And that's something that we can keep for a long period of time.

And so we're pretty happy with our overall performance here, disappointed that a few didn't show up on time. But nonetheless, it's not just about covering all the cost inflations, it's about finding ways to work around that and control your destiny a little bit as opposed to just pass price on to the market. .

I appreciate that. Then lastly for me, maybe just a reminder in terms of what the normal incremental margins for the water business would look like.

And again, you talked about the fact that the margin expansion at Hadrian is really going to kick into 2022 -- not to pin you to guidance, but how that might potentially help boost these incrementals as we look into next year?.

Yes, Mig. Historically, in this platform, we've always targeted incrementals [ to be around ] that 30% range. In some quarters, it's going to be a little bit higher, a little bit lower. But we kind of dial in on average in that 30% range has been what we historically will look at. And that really shouldn't change going forward. .

Hadrian, as Todd mentioned, next year is the year we will see margin expansion Hadrian for sure. We've seen it sequentially as the year has progressed. Small acquisitions will be a contributor, not a huge, huge margin needle mover for us, but overall, a contributor.

I think of course, next year, we'll -- we have some growth investments teed up as well to push the share capture side of the equation. But all in kind of just to go back and answer some questions. If you think about this platform in that 30% range over an extended period of time is a very reasonable spot to be.

And that's with the growth investments that we need in the business to continue to take the share in our end markets. .

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

Thanks for joining us on the call today, everyone. We appreciate your interest in Zurn and look forward to providing our next update when we announce our December quarter results in February of 2022. Have a good day. .

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