Good morning, and welcome to the Zurn Elkay Water Solutions Corporation Second Quarter 2023 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 Elkay Water Solutions.

This call is being recorded and will be available for 1 week. The phone numbers for the replay can be found in the earnings release the company filed in an 8-K with SEC yesterday, July 24. At this time, for opening remarks and introduction, I'll turn the call over to Dave Pauli..

Good morning, everyone, and thanks for joining us on the call today. Before we begin, I'd like to remind everyone that this call contains certain forward-looking statements that are subject to the safe harbor language contained in the press release that we issued yesterday afternoon as well as in our filings with 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 Water Solutions..

Good morning, everyone, and thank you for calling in this morning. As Dave said, we released our earnings last night and taken as a whole, they were very much in line with our internal expectations, not only for Q2 but really for the first half.

It's been 12 months since the Elkay transaction and all the work we did to accelerate the integration and simplify the business is essentially behind us, and we're now beginning to see the benefits both from a growth and profitability perspective with the initiatives we've been working on.

Sales in the quarter were ahead of our guidance and orders even more so with high single-digit order rate growth in the quarter. Profitability of 21.6% showed the progression we've been talking about. And then you'll obviously see another step change over the second half that Mark will talk about a little bit later.

With our supply chain and service levels now back to pre-pandemic levels and even better or shorter in many cases, our free cash flow was again very strong, and it enabled us to repurchase 4 million shares in the quarter, bringing our year-to-date repurchases to $87 million as total leverage actually ticked down to 1.5x.

We also expect that to continue to decline over the second half based on a strong free cash flow expectation and end the year right around 1.2x. With that, I'll turn it over to Mark, and he'll take you through the quarter..

Thanks, Todd. Please turn to Slide #4. On a year-over-year basis, our second quarter sales increased 42% and were above the high end of our outlook for the quarter at $403 million. The Elkay merger contributed 47% year-over-year growth, and our core sales decreased 5% from the prior year.

On a pro forma basis, including Elkay in the prior year second quarter and reducing those sales for the $29 million impact from the product line exits that we have outlined, core sales decreased 1% year-over-year.

As we discussed on our call last quarter, our year-over-year second quarter core sales growth was impacted by the timing of orders and shipments in the prior year as we began working down an elevated backlog in the second quarter of 2022.

Breaking down those pro forma core sales, sales to our residential end markets declined in the mid-teens year-over-year as we'd expected, which was substantially offset by a low single-digit increase in core sales to our nonresidential end markets.

While pro forma core sales modestly declined, pro forma core orders increased at a high single-digit rate as we anticipated with drinking water growth outperforming the fleet average. Turning to profitability.

Our adjusted EBITDA was $87 million in the second quarter, and our adjusted EBITDA margin was above the high end of our outlook for the quarter at 21.6%. This compares to $64 million and 22.6% in the prior year first quarter -- second quarter.

The benefits of price realization and our productivity initiatives, inclusive of the cost synergies that are a little over $6 million each quarter in calendar year 2023 was more than offset by the sell-through of higher cost inventory purchased last year, which was complete during the second quarter.

Investments in our growth and supply chain initiatives as well as the impact of the Elkay merger. When looking at our margins sequentially, we stepped up 210 basis points from the first quarter of 2023, and we expect further margin expansion in the second half of the fiscal year.

Please turn to Slide 5, and I'll touch on some of the balance sheet and leverage highlights.

With respect to our net debt leverage, we ended the quarter with leverage at 1.5x, inclusive of deploying $87 million of cash to repurchase common stock in the first half of 2023 and $112 million since we started repurchasing shares in the fourth quarter of 2022. With that, I'll turn the call back to Todd..

Thanks, Mark. We continue to prioritize drinking water and filtration growth based on the massive opportunity we see in the K-12 and higher-ed end markets.

We've been investing in an awareness campaign, adding commercial resources, top grading our product offering for simpler installation and maintenance and also advancing the filtration aspect of drinking water with the addition of a PFAS filter that we expect to begin selling sometime in the fourth quarter.

In the last 90 days, we've spent time doing 3 blitzes across states that have advanced legislation that will require more access, reporting on water quality as well as mandating filtration.

K-12 is a school-by-school or district-by-district game where we're engaging with administrators, faculty teams, educators and parents and we'll continue to do that as -- we'll continue to do that as we continue to work at that.

At the higher-ed level, we're seeing tremendous traction as both public and private universities prioritize sustainably -- sustainability in their master plans. We saw our funnel for higher ed grow by over $20 million in higher ed alone.

And we hope we continue to see that, that will be a significant growth opportunity for us, not only this year but for several years to come. As we continue to keep sustainability in front and center in front of all of our stakeholders, customers, employees, suppliers and shareholders as well as the compounding benefits of all the products.

Sustainalytics just issued a report that rated us in the top 7% of all companies they rate. That's over 15,000 companies and -- in the top 2% within our end markets. As I've said before, this isn't borne out of any target to go through the motions.

It's fundamental to our business, it's integrated into every asset -- every facet of our business and our business system, and we truly believe it's adding a competitive advantage to us in the marketplace. With that, I'll turn it back over to Mark, who will take you through our outlook..

Thanks, Todd. Please turn to Slide 8, and I'll cover the highlights of our outlook for the third quarter. For the third quarter of 2023, we are projecting sales in the range of $390 million to $400 million and our adjusted EBITDA margin to be in the range of 23.5% to 24%.

Like last quarter, to help better understand the growth trends in the business in 2023. On the right side of the chart, we have presented Zurn Elkay pro forma sales for the third quarter of last year, which takes our reported sales for the third quarter of 2022 and plus the year-over-year impact of the 8020 product line exits we have executed.

With respect to the sales outlook, you can see on the page our assumptions for year-over-year pro forma growth in our nonresidential and residential end markets, which is impacted by the timing of orders and shipments last year as we continue to work down an elevated backlog in the third quarter of 2022.

We anticipate pro forma orders in the third quarter to expand in the mid- to high single-digit range year-over-year with nonresidential end market growth above the average and residential end market growth below the average for the quarter. Turning to profitability.

Our third quarter margins are expected to expand 350 to 400 basis points year-over-year and 190 to 240 basis points sequentially from the second quarter of 2023 as we begin to fully benefit from the lower commodity and transportation costs we've been experiencing. Turning to Page 9.

With half of the calendar year behind us, we have adjusted our full year outlook and now expect sales for calendar year 2023 to be in the range of $1.525 billion to $1.55 billion and our consolidated adjusted EBITDA to be in the range of $335 million to $345 million, resulting in a year-over-year margin expansion of at least 140 basis points up to 170 basis points.

Similar to the third quarter outlook. We have provided our expected full year pro forma sales growth for our nonresidential and residential end markets, which is calculated off the prior year reported sales plus Elkay sales for the first half of 2022 less the impact of the 8020 product line exits we have executed.

In addition, we've increased our free cash flow outlook for the calendar year from approximately $200 million to approximately $215 million.

Before we open the call for questions, just a reminder that we have included on Page 8 and 9, our third quarter and full year outlook assumptions, respectively, for interest expense, noncash stock comp expense, depreciation and amortization, our adjusted tax rate and diluted shares outstanding. We'll now open the call up for questions..

[Operator Instructions]. Our first question comes from the line of Bryan Blair from Oppenheimer..

Solid quarter. With regard to your Q3 revenue guidance, I was hoping you could parse that out a little bit more. I know there's a lot of year-on-year noise.

But it seems like there's a fair amount of conservatism baked in if we think about the sequential trend, most difficult stacked comp in Q2, typically some seasonal lift in Q3, you noted solid pro forma order growth.

I know the backlog unwind is a little more challenging year-on-year, but perhaps walk us through how you're thinking about the sequential revenue progress..

Yes. Well, Bryan, I think as we've kind of been all year long, we've been a little more conservative with our outlook going into the next 90 days across the board. So I think that what you said is accurate.

If you look back historically, yes, our third quarter tends to be similar to the second quarter from a revenue standpoint, could be a little bit up, it could be a little bit down, it could be on par. I think as you've seen in the guide, yes, there's a bit of conservatism that's been our practice this year. So nothing different there.

I think you're right on the order trends, we expect those to continue, like we saw in the second quarter or in the third quarter. The revenue growth, as you pointed out, clearly is impacted by the backlog work down that we had last year. So I think the orders are a better proxy of what we're seeing from a demand standpoint.

But yes, I can -- I think the sequential trends that you've laid out of what you historically see and there's not anything that's imminent that we see that would change that. But as you know, we've just taken more of a cautious approach to our outlook this year..

Okay. Understood.

And perhaps provide a little more color on what your team is seeing in your key institutional verticals and your current pace of activity, how the project pipeline has developed year-to-date and specific to Zurn Elkay, how your commercial drinking water platform has influenced the pipeline and your forward opportunity?.

Yes, Bryan. So institutional is notionally half of our total revenues, split primarily between education and health care. So I think from a current state perspective, backlogs really across the country in those 2 verticals continue to be very high.

And if you follow some of the leading indicators in that -- in the institutional end market, they've been quite positive.

So obviously, we continue to think that the diversity of the business, adding drinking water, specifically, adding filtration into the educational vertical provides us I think, a lot of comfort that this is something that we can grow sustainably for a pretty long time. There's pockets of strength when you go throughout the country, obviously.

And then there's pockets of where there is just less activity, but it's nothing unusual in that institutional end market really since the beginning of the year. So very much on track.

Drinking water is certainly helping our value proposition when we're talking to K-12 schools and colleges and universities because as I said in my comments, sustainability at the university level is increasingly important K-12, we're getting solid traction with a combination of legislation and then really just going out school by school and district by district and communicating what we're doing, which is essentially, we can provide clean drinking water to students for $1 per student per year, which is an amazing value prop that we think is going to resonate for a really long time..

Absolutely. One last one. I know you're not providing 2024 guidance, but you had put out the $25 million in incremental synergy guide before.

Is there any shift to that at this point?.

No, I think it's very much on track. I think the majority of the work is behind us. There are some things that we're wrapping up over the course of the next 2 to 3 months, we have obviously announced the closure of one of our facilities and consolidation of that into 2 different Elkay facilities. That's primarily around sink manufacturing.

So that work is underway. And so we'll hit the ground running on 1/1/24 with another $25 million into our earnings run rate..

Our next question comes from the line of Jeff Hammond from KeyBanc..

So it sounds like the order rates were maybe a little bit better than you expected.

Can you just speak to what's coming in better? And then just within the different product categories, is it pretty broad-based? Or are there outliers, good or bad?.

Yes, I think that the two sort of out performance areas for us were a combination of residential improving. We started to see resi deteriorate a little bit in the third quarter and more into the fourth quarter. We've seen that begin to snap back. I think as housing starts begin to stabilize and improve, we're seeing a little bit of traction there.

And then obviously, drinking water. The comparable is easy given the backlog reduction, but we're seeing significant order growth in both the bottle filling units as well as filtration. So those are the 2 outliers. Everything else is sort of around sort of the fleet average.

We saw some strength in our in our flow systems business, which is very encouraging. And then we continue to do just a great job in water safety and control. So it was relatively broad-based, but a combination of residential and then drinking water were the areas of sort of outperformance..

Okay. Just on the clean water kind of initiative, can you just talk about momentum versus expectation? And just what you typically see from a sales cycle given it seems very kind of local regional..

It is, particularly on the K-12 side of life. Obviously, our specification share across the country is significant. And so as schools get built or retrofit, we start the game in a really good place.

I think what we're trying to do is drive more access points inside of these particular schools, obviously, getting them to understand the benefits of locking in a filtration solution over a period of time. But you are correct. I mean, it is a school by school, district by district.

There's not an overarching sort of mandate of when to do it and how to do it.

And so that's where -- partnering with the commercial resources we've added internally along with our third-party reps, we're able to go out and really understand where are the big school districts, what are the influencers, what's our competitive position and then how do we sort of get that work done for them over the time period that works for them.

I think that is the one thing in K-12, that's a little bit unique relative to higher ed, which is students are not there in the summer. So the vast majority of the work gets planned, I would say, late winter, into spring, so that it's done over the summer. And then it gets a little bit quiet as kids are back in school.

I think universities that's obviously sort of a living, breathing thing almost every day of the year. So that work gets done over time.

So I think from a school perspective, particularly on K-12, I think the momentum that we're building this year will benefit us even greater into next year, right, as they begin to do some more long-range planning on what they're doing.

I'd also say, Jeff, that in a case where a school district may have 500 units, they're not going to replace or upgrade these all at one time. They're going to do school A, B and C, and then they're going to do the remainder over time.

So it's really one of those things where the business and the opportunity, given the 131,000 schools is just it's just huge. And when you get to the end, we'll be ready to retrofit and replace the others. So it's a longer process, but one that I think has far more durability over a really, really long period of time..

Okay. Great. Last one on buyback. You guys seem to be running ahead kind of the pace for the $100 million.

Just wondering if you're thinking same or different around buyback, just given the stock move?.

Yes, I think we're sticking to that at least $100 million. We're not going to put a new number on it at this point in time. But I think it's been for us -- the time was really positive for us with the first half and the opportunity to buy the stock at the prices that we did.

We'll continue to keep a balanced capital allocation strategy in place over not just this year, but going into next year as well..

Our next question comes from the line of Andrew Krill from Deutsche Bank..

I wanted to ask on free cash flow. I think it was nicely above what we were expecting this quarter.

I want to see, I guess, any of like the big drivers of that strong free cash flow, it seems like inventories helped and maybe just how you're thinking about that for the rest of the year?.

Yes. I think for us, free cash flow has been a positive this year. The team has done a really nice job with managing the trade working capital in the business this year, working down the inventories from the elevated levels last year.

So I think as we look at the balance of the year, I think from a timing standpoint, it will probably reduce a bit in the third quarter and then uptick again in the fourth quarter from a phasing standpoint. Based on the timing of some payments. But at the end of the day, as you know, we took our outlook up from $200 million to $215 million.

So good momentum. It will be a strong year of cash flow, and we see a lot of good momentum going into next year as well..

Andrew, I think the one point to make is our overall lead times in our supply chain are roughly half of what they were a year ago. So obviously, we've had a view on demand and a view on that we were going to be able to get back to that.

And obviously, a function of that is then selling through that high-cost inventory that you saw us do in the first half. So it all sort of works together in terms of the demand that we are seeing sort of broadly in line with what we're expecting, maybe a little bit better.

Our supply chain is back to prepandemic levels, notionally half of what it was 12 months ago. and then where our service levels are high. So the net effect of that is the margin progression that we communicated tracks very nicely with the cash flow.

So from an accounting basis, our margins were, I would say, understated relative to the current purchases that we were making. So you'll see that, as Mark pointed out in the outlook, that drives the vast majority of that margin step up in the second half..

Okay. Great. All makes sense. And for my follow-up, just on the guidance and maybe more for the 2023 guide.

What is something like the major puts and takes that would push you to like the low versus higher end of the range?.

Well, I mean I'll let Mark comment as well, but I think it's really 5 months left in the year. There is always going to be a range of outcomes I don't think there's anything specific that would push us one way or another.

I think the order trends that we've seen through July here would definitely give us confidence that the range is appropriate given the length of time left in the year..

Yes, I would agree. We just -- earlier, just accommodating a broader range of outcomes into the outlook. So we're staying consistent with what we've been doing for several quarters. But as Todd pointed out, order rates remain in a good spot early in July. That is the case and we'll be back in October report..

Our next question comes from the line of Joe Ritchie from Goldman Sachs..

My first question, maybe just on that backlog comp issue that you guys referenced last quarter.

I'm just curious like what kind of impact do you have baked in for the rest of the year on just tougher comps in the backlog and what you experienced from a growth standpoint last year?.

Yes. So if you went back and looked at our 10-Qs last year, the backlog reduction in the core business was over $20 million in the third quarter. I think I'll call it close to $25 million and another $20 million in the fourth quarter. So from a sales standpoint, that's the kind of backlog reduction that we were working through last year..

I think, Joe, to answer maybe the question, I think our order book-to-bill, if you will, over the next 6 months is always going to be somewhere around 1. I think we saw, as lead times extended through a couple of years post pandemic, that forced different order behavior.

I think when you get to where we are today, the backlog sort of sits at the traditional sort of relatively low levels. And the second half would imply a book-to-bill right around 1, maybe just a touch better..

Okay. Great. That's helpful. And then I heard your comments earlier around margins accelerating into the back half of the year. I was really curious around 4Q specifically because historically, what we've experienced is a sequential downtick in margins in 4Q versus 3Q, but it seems like the guidance implies something better at this point.

So just maybe some thoughts around that, the margin kind of exiting the year.

And what's driving that?.

Yes, Joe, I would say, I think we would still expect a modest margin decline in the fourth quarter versus the third. Just to your point, as those -- seasonally as those sales sequentially decline that will put a little bit of pressure on the margin.

But I think you'd expect to see a decremental margin or an earnings fall that would be generally better than what you would normally see because of the cost environment we're guiding.

But I think from a modeling standpoint, I would still anticipate a modest step down in that margin from where we'll see the based upon the decline in sales that we always traditionally see seasonally..

Got it. Yes, that makes sense. Maybe if I could squeeze in one more just on Elkay. So it seems like clearly, you guys are going through some product line simplification on that business.

I'm just curious, just as you kind of now look at the -- what's left in Elkay and the margin profile of that business, maybe just kind of some thoughts around that org profile and how that's changing with the product line exits that you guys are doing..

Well, I think if you -- I think the cleanest way to observe it is really look at the gross profit margins year-to-year and then obviously, with what our guidance implies. And so in aggregate, we're approaching 46%, somewhere in that range over the back half. And obviously, we've got synergies into next year.

And so I think obviously, the business has improved materially from a profitability standpoint from 12 months ago. And the simplification is driving that gross profit improvement across the existing and remaining part of Elkay, which we went to great lengths to try to communicate over the course of the last year.

But obviously, when you look at that overall company gross profit margin at that sort of level. I think it speaks to the simplification work that was done is having quite a dramatic impact..

Our next question comes from the line of Mike Halloran from Baird..

Just a couple of questions here. First, how are you guys thinking about the M&A funnel pipeline. Obviously, you feel very comfortable with where the Elkay business is from an integration perspective or at least given the simplification efforts well underway. I'm guessing there's a lot of willingness to bring smaller things in.

Just curious how that pipeline looks and how you think actionability looks..

Yes. I think, Mike, like always, I think we take the long view on M&A and spend a great deal of time cultivating things over years. And so I think that from a funnel standpoint, I don't think that there's anything materially new in. I don't think anything has changed from transactions that have occurred that would have taken things off the board.

And so I think it's just a matter of continuing to develop those relationships, I think, over the course of the next 12 months, which is probably a better horizon than the last -- the remainder of the year to think about.

We certainly think that we're going to have several opportunities to bring things in that are complementary to what we do, fill some product areas and maybe strengthen us in some of our existing categories..

Makes sense. And then in the prepared remarks, you briefly mentioned a PFAS filter. Just a little bit more context that it seems a little bit more, I don't know, manageable relative to a lot of the remediation efforts in product categories and services we've seen for PFAS so far. So just some thoughts there, please..

Yes. I think we've been working internally and then some with some third-party partners to develop the kind of filter that can be integrated into a bottle filler that will eliminate PFAS. We've been through the pilots. We're sort of ramping production and something we'll be getting in the market in the fourth quarter.

And so I think it's just one of those things where for a relatively low amount of money if you can eliminate lead and PFAS in the drinking water for kids at school, it seems like a pretty good idea.

So I think our team is, I would say, making great strides on the filtration side of things, and we're seeing it resonate when you actually sit in front of administrators, facilities, people and all the things we're also doing with the product to make it easier and quicker to install.

Gain an understanding of the life of the filter and ensure that it's done on time, all things that are incremental value add to these schools that have a million and one things going on every day.

And if you can ensure that the water that the kids are drinking is lead-free and PFAS free, it's a pretty good value proposition and one we're excited to bring to the market..

Our next question comes from the line of Brett Linzey from Mizuho Americas..

Just want to come back to price.

Curious what your assessment is on the state of pricing or your competitors taking actions this year, are you on hold? Just curious what you're expecting and seeing out there in terms of price and the contribution for this year?.

Yes, I'd say the price compartment has been very stable this year. There's been some modest pricing actions taken in certain pockets across the industry, but nothing remotely close to what we've seen over the past several years. So I would characterize it as a very stable environment back to sort of normal.

I think the pricing environment has continued to stick. There's not been price giveback in this environment.

So I think I'd call it stable going into next year and beyond that kind of looks like it's getting back from a normal range where -- we've always historically generated 1.5 to 2.5 points of price in a given year, we think it feels like it's back to normal trends on a go-forward basis, Brett..

Okay. Yes. And maybe just shifting to the synergy cost actions. I believe originally, you were looking to achieve the $50 million over a 2-year period. But just curious how the integration has progressed relative to the original time frame.

It does sound like the consolidation efforts or at least versus my expectation or a little ahead of schedule, but curious your thoughts there..

I think in aggregate, Brett, when we announced the transaction a year ago, we outlined $50 million. We obviously got a running start over the back half of last year. We got $25 million plus this year, and we're targeting another $25 million.

So in aggregate, it will probably end up being a little bit more than the $50 million that we originally contemplated, but it's essentially on the same timeline.

I think the only acceleration was some of the simplification work that we did really from July through December because we just felt like getting that piece behind us quicker, sooner would aid everything else, whether that was supply chain, whether that was organization, whatever it might be, we sort of got ahead of it early but since then, we've been hitting our marks on whether it be an announcement or internal work that needed to get done to facilitate a next set of moves.

So very much on track, taken as a whole probably a little bit ahead early the last 6 months of last year..

Our final question comes from the line of Nathan Jones from Stifel..

A follow-up question on margins here. Guidance for the back half of the year, 23.5% plus. Obviously, there's been a lot of disruptions over the last 12 months with supply chain and high-priced inventory and freight and logistics and integrating Elkay and all that kind of stuff.

Are we through all of those meaningful hits to cost? Are we looking at what is basically a normalized environment in the back half of the year or are there transient costs or benefits in the back half of 2023 still there that we should be thinking about going away in 2024?.

I don't know, Nathan, there really is nothing that's a material transient cost. I think you are starting to see margins getting into that normalized run rate in the back half of the year.

As you go into next year, obviously, there's always investment in our business and things that we're doing to grow the business and invest in our supply chain initiatives as well as growth initiatives.

But there's nothing to point to in the back half of our year is an outsized unusual cost that would go away next year or an outsized benefit that doesn't repeat. We talked about the synergies we have next year, going into the $25 million. So I'd say nothing unusual nonrecurring in the back half that would impact the next year..

I mean, Nathan, the only thing I would say is based on what we know today, obviously, nobody envisioned container costs going from a couple thousand bucks to $22,000 and now round tripped. So I think given what we see and assuming no event specific challenges, I think Mark's comments are right. I think the run rate is sort of the run rate.

And we've got synergies that we have a high degree of confidence in. And obviously, it assumes sort of a muted inflationary environment, which is also reflected in a relatively muted pricing environment. So all things considered. I think if we can deliver the second half like we were projecting, I think it bodes well heading into 2024..

And I guess the follow-on to that question for 2024 then is if we were expecting another $25 million of synergies next year, which is about 150 basis points on a 23.5% plus.

Is there any reason why we should not be expecting 2024 margins to be 25% plus?.

Well, we will talk about 2024 in 2024. But I think your thesis of should we continue to see margin growth into the future? I think the answer is yes. We're obviously going to continue to make growth investments. But taken as a whole, that is the right sort of algorithm with obvious puts and takes given comparables and whatnot and the environment.

So we're not going to guide for 2024. We're going to deliver Q3 and we'll come back and talk about Q4 in October..

Fair enough. Final one, a follow-up on one of Bryan's questions. He asked about institutional backlogs and the market conditions you're seeing there. I just wonder if you could comment on the commercial side..

I think it's been an interesting year. We started the year, and the world was falling apart as a function of the regional banking crisis and the downstream or collateral impact on the commercial market. So I would tell you that the commercial -- the specific commercial office end market is a very, very small percentage of our business.

Embedded in there are things like retail, amusement, hospitality and other things. And so I wouldn't say it's an outsized drag by any stretch of the imagination. Obviously, it's something that we continue to watch. But I think the hyper local nature of what we're doing sort of absorbs a lot of that risk because there are pockets of activity.

There are always going to be pockets of activity across the country. So we're not particularly worried about office vacancies in Chicago as a specific example. So it's really spreading the risk across the country across a whole bunch of different verticals and then there's always the MRO aspect of what it is we're doing.

And so nothing specific to really call out there other than I think there's now a better appreciation that our business is not particularly exposed to commercial office. And therefore, we'll look for the next opportunity to fill the divot if that happens..

I would now like to turn the call over to Dave Pauli for closing remarks..

Thanks, everyone, for joining us on the call today. We appreciate your interest in Zurn Elkay Water Solutions and look forward to providing our next update when we announce our September quarter results in October. Thanks, everyone..

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect..