Q4 2023 Zurn Elkay Water Solutions Corp Earnings Call

Participants

David Pauli; VP of IR; Zurn Elkay Water Solutions Corporation

Todd A. Adams; CEO & Chairman; Zurn Elkay Water Solutions Corporation

Mark W. Peterson; SVP & CFO; Zurn Elkay Water Solutions Corporation

Bryan Francis Blair; Anlayst; Oppenheimer & Co. Inc.

Michael Patrick Halloran; Analyst; Robert W. Baird & Co.

Jeffrey David Hammond; Analyst; KeyBanc Capital Markets Inc.

Joseph Alfred Ritchie; Analyst; Goldman Sachs Group, Inc.

Brett Logan Linzey; Analyst; Mizuho Securities USA LLC,

Nathan Hardie Jones; Analyst; Stifel, Nicolaus & Company

Presentation

Operator

Good morning and welcome to Zurn Elkay Water Solutions Corporation fourth quarter 2020 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 one week. Phone numbers for the replay can be found in the earnings release. The company filed in an 8-K with the SEC yesterday February 6. At this time for opening remarks and introduction, I'll turn the call over to Dave Pauli.

David Pauli

Good morning, everyone, and thanks for joining us today. Before we begin, I would like to remind everyone that this call contains certain forward-looking statements that are subject to the Safe Harbor language contained in the press release that we issued yesterday afternoon as well as in our filings with the SEC.
In addition, some comparisons will refer to non-GAAP measures. Our earnings release and SEC filings contain additional information about these non-GAAP measures why we use them and why we believe they're helpful to investors and contain reconciliations to the corresponding GAAP information.
Consistent with prior quarters, we will speak to certain non-GAAP metrics as we feel they provide a better understanding of our operating results. These measures are not a substitute for GAAP, and we encourage you to review the GAAP information in our earnings release and in our SEC filings.
With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zurn Elkay Water Solutions.

Todd A. Adams

Thanks, Dave, and good morning and thanks for joining us again this morning for our fourth quarter call on the fourth quarter ended on a strong note with sales, EBITDA and free cash flow above the outlook we provided at the end of Q3. Mark will go through the specific numbers for the quarter and the year with everyone in just a minute, but perhaps the most important thing to highlight right away this morning, is that the end market view we laid out last quarter as it relates to 2024 is unchanged. Steady strength in institutional, some pockets of weakness in commercial residential, flattish essentially with share gains, initiative growth and a little piece of price driving what we expect to be our growth over the course of the coming year. Specifically, we see the opportunity to deliver positive organic sales growth, robust profitability and significant free cash flow through 2024. And as you'll see in a few minutes, our outlook for the first quarter puts us off to a good start in accomplishing those objectives. And while there's still a lot of road to go, I think it's entirely reasonable to begin to think about an improving end-market outlook into 2025 and 2026, coupled with accelerated momentum around our strategic breakthroughs, things like drinking water and filtration growth, profit realization for supply chain actions we've been working on over the past year.
Both of those should enable us to drive solid growth, profit and cash flow improvements from 2024 levels as it relates to 2023 performance, we grew the top line 3% on a pro forma core basis amidst the market that we would say is flat to down a touch. We leverage that growth into a 320 basis point EBITDA margin expansion driven by synergy benefits and normalizing supply chain and the continuous improvement benefits we get from the Zurn Alcoa business system year-in and year-out, we turned that profitability into a record free cash flow of $233 million and throughout the year we leveraged that to repurchase 5.3 million shares or about 3% of our outstandings raised the dividend 14% and de-lever the balance sheet only 1.1 times at the end of the year. But as you may have also seen we completed a transaction in the fourth quarter where we essentially divested the entirety of our legacy asbestos liability to a third party, along with the related insurance assets and $12 million of cash to effectively remove any future risk related to asbestos. It was something that we had managed very effectively for the past 17 years, but we also feel it's a really good use of some cash and the overall benefit to shareholders and having that behind us, I think, is an important milestone.
So with that, I'll turn it over to Mark.

Mark W. Peterson

Thanks, Todd.
Please turn to slide number four. Our fourth quarter sales totaled $357 million and on a pro forma core basis, increased 900 basis points year over year. Low double-digit core sales growth in our nonresidential end markets was partially offset by a low single-digit sales decline in our residential end markets.
The growth in the quarter was also impacted by the benefit from the prior year comparable as our channel partners order patterns were impacted by our improving lead times from the prior year fourth quarter for the expected demand in the quarter, pro forma orders expanded double digits on a year-over-year basis to nonresidential growth above the fleet average earnings with solid growth across all of our sectors led by drinking water, partially offset by softer demand in our residential end markets that was in line with our expectations for the quarter. Order growth also benefited from the prior year comparable I just discussed.
Turning to profitability. Our fourth quarter adjusted EBITDA increased 30% from the prior year fourth quarter to $84 million, and our adjusted EBITDA margin expanded 460 basis points year-over-year to 23.6% in the quarter. Strong margin expansion was driven by the benefits of our productivity initiatives, inclusive of cost synergies, plus the lower material transportation costs that fully run through our financials in the second half of the year.
Please turn to slide 5, and I'll touch on some balance sheet leverage highlights, with respect to our net debt leverage. We ended the year with leverage at 1.1 times, inclusive of deploying $125 million of cash to repurchase approximately 3% of our outstanding common stock during the year and $50 million to common stock dividends. In early October, we paid down $60 million of our term loan, eliminating all future required principal payments and generating approximately $4.5 million of annual interest expense savings going forward.
Given the balance sheet position and our strong free cash flow generation with a lot of capital allocation optionality going forward. I turn the call back to Todd.

Todd A. Adams

Thanks, Mark. And I'm on page 6. Here. You'll see a preview of our 2023 sustainability report that we'll be issuing later this month. Solving for sustainability is embedded into our strategic planning process. And we continue to believe it's a critical pillar in how we create shareholder value.
That's just because we're checking boxes because it's ultimately exactly what we do for our customers. As the global climate crisis has exasperated significant water challenges from excessive rainfall and severe flooding, droughts and water scarcity, we understand our unique position as the industry leader to help our customers access, conserve and manage clean water while also focusing on improving our own sustainability efforts as part of our efforts. to continuously improve our sustainability reporting.
We included more data in this report than last year's, including a detailed performance index that presents three years of environmental data, a separate GRI index with separate additional KPI.'s and extended TCFD disclosure index, more robust data on our associate demographics, a new section on water scarcity and resilience, the introduction of an enhanced Supplier Excellence manual, and we established products as it is a distinct date sustainability pillar with an expanded Report section, demonstrating how our solutions help our customers meet their sustainability goals. Because of our efforts, we saw marked improvement in our scores and sustainability rating from the various agencies, MSCI, S&P and Sustainalytics. Now all ranked us in the top 10% of industry in earning the 2024 region and industry top-rated designation from Sustainalytics.
We were also named America's most responsible company, one of America's most responsible company companies by Newsweek for the fourth consecutive year and weren't done there. We're setting three new time-bound and actionable targets beginning in 2024 designed to reduce waste to landfill smartly, increase our use of renewables. And this is that these are all in addition to the nearly two dozen targets we already have in place and I'll talk about our 2023 progress towards those goals in just a minute.
If we could just move to Page 7. I think customers and consumers often associate our LK. filtered bottle filling stations with sustainability benefits around delivering clean filtered water and eliminating single-use plastics. What we don't usually talk about about our the broader environmental benefits of our products, single-use plastic bottles have negative environmental impacts in their production and through the and through the waste they generate and the statistics are staggering, it takes nine times the amount of water to make a plastic water bottle compared to the water actually in the bottle, bottled water is 2000 times more energy intensive than tap water.
Americans alone purchased 50 billion single-use plastics annually with 85% of those ending up in landfills or waterways. It takes about 450 years for plastics to degrade with 8 million metric tons of plastic ending up in the ocean every year. And so I guess we're trying to tell you is the punch line is our bottle filling stations, break. What we think is sort of an unsustainable cycle.
Since 2012, our bottlers have eliminated more than 84 billion single-use plastics, 18 billion in 2022 alone. Our installed base of filtered enabled drinking water dispensers continues to grow and at the same time, customers are shifting more and more to filtered solutions. And the reason for the shift is an important one at the heart of it, everyone deserves cleaner and safer drinking water, whether it's school at the gym and an airport or a home.
We know that our point-of-use filtration offers a unique, immediate and cost-effective solutions to the nation's infrastructure issues, for just $1 per student per year. Students can have access to filter drinking water and schools, just where they spend the majority of their day. That is why we're so supportive of filter first legislation across the country and in states where we continue to innovate around affordable and easily accessible solutions. And you may recall that in the fourth quarter, we introduced our first to market combined lead and PFOA PFOS filter for bottle fillers, PFOA and PFOS or two of the most prevalent PFIs chemicals and have been linked to a number of serious health concerns.
Last one for me is on page 8 and our ability to deliver tangible results that have an impact that our environment only continues to compound as we execute our fundamental business strategy, which happens to be the amazing symmetry of what our customers' goals are to do the right things for the environment in our communities who identify focus areas include volunteer water cleanup efforts that aid in the protection and preservation and restoration of major revision there, watersheds and through our fountains for youth product donation program for donating filtered bottle filling stations to schools where resources are low and lead and PFOS levels are high. Clean water, we believe is the most important natural resource in the world, addressing the water crisis essential to sustainability and essential to how we drive our business and sustainability strategy going forward.
I'll turn it back to Mark to hit the Q1 outlook.

Mark W. Peterson

Thanks Todd, please turn to slide 9, and I'll cover some high-level guideposts for calendar 2024 and our outlook for the first quarter of 2024. With respect to the full year and based on the assumptions I'll touch on shortly, we believe we can generate positive pro forma core sales growth year over year, expand our adjusted EBITDA margin by approximately 150 basis points and generate approximately $250 million of free cash flow in 2024.
On the upper right hand side, of the slide are a few assumptions embedded in our outlook. From an end-market perspective, our outlook assumes our market in total will modestly decline year over year at a mid-single-digit decline in our commercial end markets will be partially offset by low single-digit growth in our institutional and Waterworks end markets and flattish conditions in our residential end markets. We anticipate capturing approximately zero point of price realization during the year and our strategic growth initiatives to generate positive core growth over the prior year, led by double-digit growth in our drinking water.
Turning to profitability we anticipate delivering on our $25 million in synergies related to the Elkay merger from those synergies will be realized relatively ratable over the year. We're planning for stable material and transportation costs in the first half of the year have assumed some modest inflation in the second half of 2024. In addition, we have built-in incremental investments for our growth initiatives into our 2024 plan.
For the first quarter of 2024, we are projecting pro forma core sales growth to be in the low single digits over the prior year. So we anticipate our adjusted EBITDA margin to be in the range of 23.5% to 24% for the quarter, which is a 400 basis point to 450 basis point expansion over the prior year.
Before we open the call for questions, just to remind you that we had included on Page 9. Our first quarter and full year outlook, assumptions for interest expense, non-cash stock compensation expense, depreciation and amortization, our adjusted tax rate and diluted shares outstanding.
In addition, we've included the prior year first quarter and full year sales adjusted for the executed 80-20 product line exit actions to calculate pro forma core sales growth in 2024. Note that the prior year first quarter and full year was impacted by approximately $8 million of last-time buys for products we had exited going into 2024 and 2023. The balance of the adjustment comes from the actions that we communicated last quarter. We'll now open the call up for questions.

Question and Answer Session

Operator

(Operator instructions) Bryan Blair from Oppenheimer.

Bryan Francis Blair

Thanks.Good morning, guys. Nice close to the year. It was right rising the ground and start with drinking water is something you could offer a bit more color on that, preferably more metrics on that on the platform, help us think about momentum and positioning that, what was the growth rate for 2023? What's the scale of drinking water revenue now? And if you could offer finer points on your margin relative to fleet average, that would be helpful and then double digits, is it, of course, it's attractive regardless of the specific range but if you could offer some more detail on exactly how much growth you're anticipating for '24, that would be great.

Todd A. Adams

Yeah, Brian. So the bat platform grew this last quarter. High teens from a sales standpoint, low 20s from a quarter standpoint. So very good, strong exit rates on drinking water. As we mentioned going into next year, we're anticipating that growth to continue double digits. I wouldn't say we're going to given an exact number on, but we feel really good about everything we accomplished this year and ended the year with some really strong momentum. When you think about from a margin standpoint, Ryan had some that platform is basically overall a little bit above the fleet average with the filtration piece being a very strong margin. The pump another and the filtration piece on the I'll start with a lower base will grow at a faster clip than that type of rate, given where we're starting the year. But I think overall we feel not Nextra it.
And going forward on the roadmap platforms going to contribute, obviously, the question you're getting at is the positive mix impact what that can do for margins going forward. So and like we're in a really good spot from a growth perspective, what are the margin profile system, what that matures next year and beyond.

Bryan Francis Blair

I appreciate the details are very encouraging and shifting to the areas of concern for some investors, a major concern, commercial exposure that you have. I think the down mid-single digits -- I'd agree a surprise to the upside for the first time, albeit consistent with what you had laid out last quarter. It would be helpful.
I think if you spoke to some of the in the sub verticals there because it's pretty diversified exposure. I mean, retail office, warehouse, hospitality, other than any nuance you can offer on where there's potentially significant weakness versus relative stability within that next?

Mark W. Peterson

Hey Brian, I'll take a cut at it. I think the thing we've tried to highlight over the last several years is really the diversity of commercial structure taken as a whole. It's not a contiguous market across United States. It's a it's a it's a series of independent markets based on in-migration industrial activity and things like that and so on rather than trying to parse it into, well, this is what we're assuming for restaurants or warehousing.
I think you have to think about this as a massive market where there's always something happening somewhere in the country and there's a fair amount of retrofit replaced that is also sort of embedded in there. And the reality is if we say it's down mid-single digits and it's a little bit worse, nobody does. So I think I don't think that we're going to sort of have any thing to reconcile or combat what others think versus what we see.
I can just tell you that there is enough commercial construction activity in this country for us to deliver the kind of growth that we said we were going to deliver over the course of the year, which is it's far from heroic. But I also think it's not the kind of scenario where and the world is ending, which we pointed out last time. So that's the way to think about it. And you know, and I think as time goes by, I think everyone will sort of gain a little bit of comfort around the fact that it's a large diverse end market and there's always some level of opportunity, obviously, a little bit less this year but going forward, a big, broad, diverse end market to grow it.

Bryan Francis Blair

All fair points that last one for me, if I can. You specifically referenced in a lot of capital deployment optionality. And netting back That's clear. Given your balance sheet position and cash generation and you've been active with buybacks, you've signaled that will continue. Should we anticipate that your team returns to bolt-on M&A during the year. They have been speak to and just your readiness to return to that, that growth lever going forward and anything you can offer on the composition of your deal pipeline and potential actionability?

Mark W. Peterson

Yeah. What we said last year was a year we were going to put our heads down and really focus on giving the LTE integration complete. We feel good about that. He's in a good spot for us, a lot of success with that over the past 12 months. So yes, we feel we're definitely in the spot where we are ready to turn to turn back to that is we've always talked about the pulse of proprietary funnel and you don't know when things are going to hit. But I see the funnel remains active, although we were we've been doing we've done even this year. We obviously stay very close. That funnel worked on that funnel on as we were working on the integration same time. So yes, it's fair to say we're back ready to do acquisitions again, that bolt-on tuck-in nature, nothing imminent that we talk about today. But those opportunities are themselves. We're ready to execute on that again.
So again, like you said, in remaining balanced with share repurchase and going forward, I think you'll see next year and beyond utilizing that full balance sheet capacity and our ability to allocate that where we where we see fit from an allocation standpoint.

Todd A. Adams

Yes, Brian, maybe one one thing to add was Mark mentioned that we'd be back. We never left. I mean, we continue to cultivate things that are important to us. Obviously, if something of high strategic value would have decided or wanted to do to do a transaction over the course of last year. We would have done it and we've got the capability, the resources on it on to do that integrated extraordinarily well, I think as we're proving with the LK. transaction, so on everything else you said is clear. I just want to make sure that the distinction is we never left that business anything yet.

Bryan Francis Blair

I have definitely understood that. Thanks again.

Operator

Mike Halloran, Baird.

Michael Patrick Halloran

Your line is open to more than everyone you have posed on promote if we could maybe revisit the new filter that got relief that we talked about a little bit last quarter. Can you maybe talk about some of the adoption and the reception. And then I want to go back to a comment, I believe Mark made on filtration being a bit of a smaller base when you speak to the filtration piece. Is that is that specifically the aftermarket filter replacement piece? Or is there also a little bit of an element of attachment to the are we bottle filler as well?

Todd A. Adams

Yeah. I mean, I guess in terms of the PFOS PFAS filter, it's brand-new. And I think we're selling thousands of them today, um, but I don't think that's something that I think is something we're counting on as being a massive catalyst immediately. But I think the slow, steady build of that amidst a large and growing installed base of units is sort of the way to think about it.
And in terms of the size or the scale of it, obviously, you know, the way to think about it is there are some units installed in the field and then there is a normal sort of replacement pattern. And so that the mix of filtered versus non filtered units and then the rate of attachment or replacement value against those installed base is sort of the algorithm.
And so if you think about more units going into the field, more of those units being filtered and then the attachment rate moving, you know, from less than one time a year to maybe just a little bit above that. The compounding benefit of that is huge. So I think the way to think about it is if the installed base grows at 10% a year, the attach rate can grow materially higher than that. And as Mark talked about the profitability for drinking water infiltration are each it's very attractive.

Michael Patrick Halloran

Great. That's super helpful color. And then just one one clarification, and we've gotten a couple of questions on it. This morning and the 2024 assumptions on the slide here on drinking water is separate from institutional, correct. We are thinking about institutional completely separate from drinking water. We're not saying that institutional with drinking water is up low single digits, correct.

Mark W. Peterson

We'll highlight. I mean, institutional market is going to grow low single digits. But we think if you look at our drinking water franchise in the context of all of our end markets grows at a double-digit pace. A lot of that, obviously coming from our actions, our admissions versus what the market may do next year.

Todd A. Adams

Yeah. I mean, maybe just to touch, definitely, I believe that we're highlighting that inside of institutional, the drinking water business for us will grow at a double-digit rate. So it's inclusive of the low single digits. Institutional is inclusive of double digit drinking water.

Michael Patrick Halloran

Understood. Thank you. I'll pass it on.

Operator

Jeff Hammond from KeyBanc Capital Markets.

Jeffrey David Hammond

Yes, good morning, guys. Just so just following up on that because a little confusion on the kind of end market assumptions, I think you said, Mark, all in you think your end markets are kind of flat to slightly down. Is that correct? And then institutional ex drinking water, you think is maybe if you pull out that drinking water, it's more like slightly down versus up low-single digits?

Todd A. Adams

No, I think you said that I think I don't think there's a lot of confusion. I think we're trying to highlight the fact that diagnostic from maybe how we would call the end markets drinking water is growing at double digit rate. I think in aggregate, we still believe institutional is up as a as an end market commercial down as we've been highlighting that. I think that's the way to think about it, Jeff.

Jeffrey David Hammond

Okay. So, I did the math on kind of the growth. It seems like your end markets are maybe growing 2 to 2.5 and then you get maybe a point of price and a point outgrowth is that the way to think about the growth algorithm and in '24?

Todd A. Adams

Yeah it is a range of outcomes in terms of your so I think that so the weighted end market growth next year, you can end up at minus one minus two or you can do your math, it ends up plus one plus two, somewhere in that ZIP code for sure, um, and so I think that our low single digit growth has some assumption around end market growth, some modest assumption around price and then obviously some assumption around some share gains and initiative growth there that we've talked about.

Jeffrey David Hammond

Okay, great. And then just on the margin, I think you said 150 basis points of margin that kind of it lines up to $20 million to $25 million of kind of incremental improvement. And I think you've called out the $25 million incremental synergies, the lapping of the high-cost inventory $10 million to $15 million. Just wondering what maybe some of the headwinds are that would eat into some of those good guys.

Mark W. Peterson

Yeah, I mean, again, I think it's more of a function of we're sitting here on a February 7. And we sort of only know what we know at this point. And so I think that I don't have a long list of headwind reconciliations for you. I just think we're trying to describe a scenario that we see with a enormous amount of confidence. And if you do your math and you just take the LTE synergies, you can get that 150 basis points. And so I think we'll sort of stay close to and update people along the way. But I don't have a long list headwinds to rattle off rate.

Jeffrey David Hammond

Okay. Thanks, guys.

Operator

Joe Ritchie, Goldman Sachs.

Joseph Alfred Ritchie

Hi, this is Ravish Srivatsav on for Joe and thanks for the question. My first question is just trying to understand what's out what's the expectation for the portfolio apart from drinking water. So you said drinking water will grow double digits. It means the rest of the portfolio probably declined slightly. Maybe just give us some color on what is the expectation that water safety, hygiene and flows is comprised of the portfolio and what more pressure to lease?

Todd A. Adams

Yeah. Again, I think we're going to go back to look at the end market mix and you can wean yourself to one in aggregate, flat to up one or two or flat to up one or two relative. Nothing significantly. And it's different than that. I think what we've been answering this morning regardless of product category. And so I don't think I have anything it gives you that is sort of different than that as it relates to a product group because at the end of the day, all of our products go into those particular end markets. I think what we're highlighting is the sort of secular opportunity we see in a category that's being built perhaps to a degree outside of those core end markets. And so that's why we're, I think, highlighting drinking water more specifically than we are any of the other categories.

Joseph Alfred Ritchie

Okay. That's helpful. And then maybe just on the margin cadence, looks like you ended the year pretty strong and you are starting the first quarter strong with about 400 basis points of margin expansion. Is there some conservatism baked in the second half of the guide right now because fully is made around one 50 bps. So just any color on the cadence would be helpful.

Mark W. Peterson

Yeah. I mean, again, I think we're guiding to Q1 based on a detailed forecast and process of what we see, we're giving you the full year outlook here on February seventh. I'm acknowledging that there's a lot of road to go in the year, but also the progression on a comparable basis changes. So obviously, having just done 23 six, we're not going to have a 320 basis point or 400 basis point margin expansion over that in next year's fourth quarter. So I don't know that it's conservatism or anything else, but it's sort of our best view of what we think we can we can achieved over the course of the year.

Joseph Alfred Ritchie

Great. Thanks.

Operator

Brett Linzey from Mizuho.

Brett Logan Linzey

And good morning, all data. Just I wanted to come back to just destocking. I was hoping you could put a finer point on where you think we are from a destocking dynamic in non residential. I know you saw some in late '22 and Ramsey and throughout '23. But are you contemplating any additional destock here early in the year or do you think we're pretty well match sell-in, sell-out?

Mark W. Peterson

Yes, our view Brett is we haven't really faced that phenomenon for the last three or four quarters. So I think our view now is a very balanced book to bill was above one inventory levels, really across the wholesale channel, e-comm channel and everything else are in really good shape. So I don't think we're we don't I don't think we're having any sort of conversations in that. Not been sorry, build reserves.

Brett Logan Linzey

Yes, let's take that. You're going to hear us just maybe shifting to Waterworks, you're thinking about that, that market up low singles, I guess given some of the public works funding in the Infrastructure Act and some of the fiscal support there, I would have thought maybe it would have been a little stronger. What are you seeing in that area? How you and how do you participate there and, you know, any insight on your expectations as the year rolls out?

Mark W. Peterson

Yeah. Again, I think we're trying to give you a perspective of our expectation of what the end market grows based on the funnel of opportunities that we're looking at. I guess, you know, as a principle, the federal funding to how it ultimately gets spent that that never really translates particularly well, at least in my in my experience and the length of time from when that's, you know, talked about actually being spent is quite a lag. So I think, look, we're seeing good activity in areas where there is population growth. And so our products really sort of attach from the primary water supply to the developments and things like that. And so that's what we're seeing growth and opportunity. And hopefully, hopefully, it's a little bit better with maybe some of the stimulus that you mentioned. But I think for now that's what we're seeing as we've talked about 2024.

Brett Logan Linzey

Appreciate the insight. Best of luck.

Operator

Nathan Jones, Stifel.

Nathan Hardie Jones

Good morning. This is Adam Farley on for Nathan Jones. As it relates to the margin guidance, what is the level of incremental growth investments in 2024?

Mark W. Peterson

And while we're not giving details around the numbers, I'll put it, like I said, delivered two things that we that I called out in the back half of the year. What is going to be we think there could be some inflation back half of the year, the growth investments over the course of the year, we're not going to an exact amount, but we are, as you know, like we did last year and every year we reinvest in growth in the business itself. That's a minor headwind. It could be, but we're not going to give exact numbers at this point in time.

Todd A. Adams

Well, yes. I mean, again, I think you know, I think if the question is no, if you just get the Elkay synergies and you get to 100, maybe 150 basis points of margin expansion with the kind of growth we're talking about. So there's got to be there's got to be some other things. And I think the point is yes, there are lots of puts and takes. I think I think you got to separate and what we're sort of guiding to versus what we think we can do, particularly on February seventh here.
And so as Mark pointed out, there are certainly growth investments, but it's not as if there's a list of things to reconcile for you, but I would say or outsized or unexpected. I mean, obviously, we give people rates, but we have productivity and we have material savings that have been obviously, there's certain areas where we see material cost inflation. So nothing out of the norm one way or the other. I think we're just trying to give you a view with high degree of confidence and we'll update that as we go.

Nathan Hardie Jones

That makes sense. And then turning Turning to capital allocation again, we do have any planned buyback activity in '24.

Todd A. Adams

Yeah, we're going to we're going to do buyback on a sort of regular cadence but know nothing that we think is outsized or maybe different in scope than last year. So there's a range that we'll go through and evaluate what we think fair valuation on our outlook and everything else. And we'll clearly do some some ratably over the course of the year. So yes, we do have it right.

Nathan Hardie Jones

Thank you for taking my questions.

Operator

No further questions in queue. I'd like to turn the call back over to Dave Pauli for closing remarks.

David Pauli

Thanks, everyone for joining us today.
We appreciate your interest in Zurn Elkay water solutions, and we look forward to providing our next update when we announce our March quarter results in late April. Have a good day.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.