Q4 2023 Zurn Elkay Water Solutions Corporation Earnings Call

Operator: Thank you for watching! Good morning, and welcome to the Zurn LK Water Solutions Corporation fourth 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 Pawley, Vice President of Investor Relations for Zurn LK Water Solutions. This call is being recorded and will be available for one week. The phone numbers for the replay can be found in the earnings release the company filed in an 8K with the SEC yesterday, February 6.

Okay.

Speaker Change: Good morning, and welcome to the Stern, Okay Water Solutions Corporation fourth quarter 'twenty 'twenty earnings results Conference call with Todd Adams, Chairman and Chief Executive Officer, Mark Peterson, Senior Vice President and Chief Financial Officer, and Dave Poly, Vice President of Investor Relations for <unk>.

Speaker Change: Okay water solutions.

Speaker Change: This call is being recorded and will be available for one week.

Speaker Change: The phone numbers for the replay can be found in the earnings release. The company filed in an 8-K with the S. E C yesterday February 6th.

Dave Pawley: At this time, for opening remarks and introduction, I'll turn the call over to Dave Pauley. 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 measurements. Our earnings release and SEC filings contain additional information about these non-GAAP measures, why we use them, and why we believe they are 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 file. With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zurn LK Water Solutions. Thanks, Dave, and good morning.

Speaker Change: At this time for opening remarks, and introduction I'll turn the call over to Dave Poly.

Dave Poly: 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 <unk>.

Dave Poly: 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.

Dave Poly: Insistent 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 ill turn the call over to Todd Adams, Chairman and CEO of Okay water.

Todd Alan Adams: Thanks, Dave and good morning, Thanks for joining US again this morning for our fourth quarter call.

Todd Alan Adams: Thanks for joining us again this morning for our fourth quarter call. You know, 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, and residential flattish, essentially with share gains, initiative growth, and a little piece of price driving what we expect to be our growth over Specifically, we see the opportunity to deliver positive organic sales growth, robust profitability, and significant free cash flow for 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.

Todd Alan Adams: 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.

Todd Alan Adams: Mark will go through the specific numbers for the quarter and the year with everyone in just a minute.

Todd Alan Adams: 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.

Todd Alan Adams: Essentially with share gains initiative growth.

Todd Alan Adams: Little piece of price driving what we expect to be our growth over the course of the coming year.

Todd Alan Adams: Specifically, we see the opportunity to deliver positive organic sales growth robust profitability and significant free cash flow for 2024, and as Youll see in a few minutes our outlook for the first quarter puts us off to a good start and accomplishing those objectives.

Todd Alan Adams: 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 infiltration growth, and profit realization from some 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 a market that we would say is flat to downs to touch. We leveraged that growth into a 320 basis point EBITDA margin expansion driven by synergies benefits and normalizing the supply chain and the continuous improvement benefits we get from the Zurn LK business system year in and year out.

Todd Alan Adams: 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 infiltration growth.

The 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 a market that we would say is flat to down just a touch.

Todd Alan Adams: We leveraged that growth into a 320 basis point EBITDA margin expansion.

Todd Alan Adams: Driven by synergy benefits of normalizing supply chain and the continuous improvement benefits, we get from the <unk> 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 five 3 million shares or about 3% of our outstandings.

Todd Alan Adams: 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 outstanding, raise the dividend 14%, and delever the balance sheet to only 1.1 times at the end of the year. 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.

Todd Alan Adams: As the dividend, 14% and de lever the balance sheet to only one one times at the end of the year.

Todd Alan Adams: 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.

Todd Alan Adams: 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 of having that behind us, I think, is an important milestone. So with that, I'll turn it over to Mark. Thanks, Todd. Please turn to slide number four.

Todd Alan Adams: But we also feel it's a really good use of some cash and overall benefit to shareholders, having that behind US I think is an important milestone so with that I'll turn it over to Mark. Thanks, Todd Please turn to slide number four.

Mark W. Peterson: 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 non-residential 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 in the prior year fourth quarter. With respect to demand in the quarter, pro forma orders expanded double digits on a year-to-year basis, with non-residential growth above the fleet average, with solid growth across all of our sectors led by drinking water. Although partially offset by softer demand in our residential end markets, this was in line with our expectations for the quarter.

Mark W. Peterson: Our fourth quarter sales totaled $357 million and on a pro forma core basis increased 900 basis points year over year.

Mark W. Peterson: Low double digit core sales growth in our non residential end markets was partially offset by a low single digit sales decline in our residential end markets.

Mark W. Peterson: 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.

Mark W. Peterson: We expect the demand in the quarter pro forma orders expanded double digits on a year over year basis nonresidential growth above the fleet average 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 the.

Mark W. Peterson: The 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. The strong margin expansion was driven by the benefits of our productivity initiatives.

Mark W. Peterson: The 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.

Mark W. Peterson: And our adjusted EBITDA margin expanded 460 basis points year over year to 23, 6% in the quarter.

Mark W. Peterson: The strong margin expansion was driven by the benefits of our productivity initiatives.

Mark W. Peterson: Inclusive of cost synergies, plus the lower material and transportation costs that fully ran through our financials in the second half of the year. Please turn to slide five, and I'll touch on some balance sheet and 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 of 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, we have a lot of capital allocation optionality going forward. I'll turn the call back to Todd.

Mark W. Peterson: The cost synergies plus the lower material and transportation costs that fully run through our financials in the second half of the year.

Mark W. Peterson: Please turn to slide five and I'll touch on some balance sheet and leverage highlights.

Mark W. Peterson: With respect to our net debt leverage we ended the year with leverage at one one times inclusive of deploying 125 million of cash to repurchase approximately 2% of our outstanding common stock during the year and $50 million common stock dividends.

Mark W. Peterson: In early October we paid down $60 million of our term loan eliminating all future required principle payments and generating approximately $4 5 million of annual interest expense savings going forward.

Mark W. Peterson: Given the balance sheet position and our strong free cash flow generation, we have a lot of capital allocation optionality going forward I'll turn the call back to Todd.

Todd Alan 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 in our strategic planning process, and we continue to believe it's a critical pillar in how we create shareholder value. Not just because we're checking boxes, but because it's ultimately exactly what we do for our customers.

Todd Alan Adams: Thanks, Mark and I'm on page six here, you'll see a preview of our 2023 sustainability report that will be issuing later this month solving for sustainability is embedded into our strategic planning process and we continue to believe is a critical pillar and how we create shareholder value.

Todd Alan Adams: Not just because we're checking boxes, because it's ultimately exactly what we do for our customers.

Todd Alan Adams: As the global climate crisis is exasperated significant water challenges from excessive rainfall and severe flooding the 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.

Todd Alan Adams: As the global climate crisis has exacerbating significant water challenges, from excessive rainfall and severe flooding to 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, an extended TCFD disclosure index, more robust data on our associate demographics, and a new section on water scarcity and resilience. The introduction of an enhanced supplier excellence manual, and we established products as a distinct Sustainability pillar with an expanded report section demonstrating how our solutions help our customers meet their sustainability goals. Because of our efforts, we saw a marked improvement in our scores and sustainability rating from the various agencies, MSCI, S&P, and Sustainalytics. Now, all rank us in the top 10% of the industry in earning the 2024 Region and Industry Top Rated designation from Sustainalytics. We were also named one of America's most responsible companies by Newsweek for the fourth consecutive year.

Todd Alan Adams: As part of our efforts to continuously improve our sustainability reporting we included more data in this report than last years, including a detailed performance index that presents three years of environmental data a separate <unk> index, which separate additional kpis and extended Tcf D disclosure index more robust data on our.

Todd Alan Adams: Our associate demographics, a new section on water scarcity and resilience.

Todd Alan Adams: The introduction of an enhanced supplier excellence manual and we established products as it is.

Todd Alan Adams: A distinct to date sustainability pillar with an expanded report section demonstrating how our solutions help our customers meet their sustainability goals.

Todd Alan Adams: Because of our efforts we saw marked improvement in our scores and sustainability rating from the various agencies MSCI S&P and sustained <unk> now all ranked us in the top 10% of industry and earning the 2024 region and industry top rated designation from sustainability.

Todd Alan Adams: We were also named America's most responsible company one of America's most responsible companies companies by Newsweek for the fourth consecutive year and we arent done there we're setting three new time bound and actionable targets beginning in 2024 designed to reduced waste to landfill smartly increase our use of renewables.

Todd Alan Adams: And this is 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.

Todd Alan Adams: If we could just move to page seven 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, but we don't usually talk about about our the broader environmental benefits of our products.

Todd Alan Adams: And we aren't done there. We're setting three new time-bound and actionable targets beginning in 2024 designed to reduce waste to landfill and smartly increase our use of renewables. And these are all in addition to the nearly two dozen targets we already have in place.

Todd Alan Adams: And I'll talk about our 2023 progress towards those goals in just a minute. But 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 plastic. What we don't usually talk about are the broader environmental benefits of our products. Single-use plastic bottles have negative environmental impacts in their production and through the waste they generate.

Todd Alan Adams: You will use plastic bottles have negative environmental impacts and their production and through that through the waste that 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 and tap water Americans.

Todd Alan Adams: <unk> purchased 50 billion single use plastics and annually.

Todd Alan Adams: With 85% of those ending up in landfills or waterways and 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.

Todd Alan Adams: 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 2,000 times more energy intensive than tap water. Citizens alone purchase 50 billion single-use plastics annually, with 85% of those ending up in landfills or waterways.

Todd Alan Adams: <unk> fillers are eliminated more than 84 billion in single use plastics 18 billion in 2023 alone.

Todd Alan Adams: Our installed base of filtered enabled drinking water dispensers continues to grow and at the same time customers are shifting more and more to filter solutions.

Todd Alan Adams: And 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 what we're trying to tell you is the punchline: our bottle filling stations break what we think is sort of an unsustainable cycle. Since 2012, our bottle fillers have eliminated more than 84 billion single-use plastics, 18 billion in 2023 alone. And 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 at school, at the gym, in an airport, or at home. We know that our point-of-use filtration offers a unique, immediate, and cost-effective solution to the nation's infrastructure issues. For just $1 per student per year, students can have access to filtered drinking water in schools, which is where they spend the majority of their day.

Todd Alan Adams: And the reason for the shift is an important one is the heart of it everyone deserves cleaner and safer drinking water whether at school at the gym in an airport or at home.

Todd Alan Adams: Note that our point of use filtration offers a unique immediate and cost effective solutions to the nation's infrastructure issues were just $1 per student per year students can have access to filter drinking water in schools, which is where they spend the majority of their day.

Todd Alan Adams: 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 led and <unk> filter for bottle fillers <unk> are two of the most prevalent.

Todd Alan Adams: <unk> chemicals and had been linked to a number of serious health concerns.

Todd Alan Adams: Last one for me is on page eight.

Todd Alan Adams: And.

Todd Alan Adams: 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 customer's goals are to do the right things for the environment and our communities who identify focus areas include including volunteer water cleanup efforts that aided that protection.

Todd Alan Adams: 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 are two of the most prevalent PFAS chemicals and have been linked to a number of serious health concerns.

Todd Alan Adams: Preservation and restoration of major revision, there watersheds and through our fountains for youth product donation program, we're donating filtered bottle fueling stations to schools, where resources are low and led and <unk> levels are high clean water. We believe is the most important natural resource in the world addressing the water crisis is central to sustainability.

Mark W. Peterson: The last one for me is on page 8. And, you know, our ability to deliver tangible results that have an impact on our environment only continues to grow 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, we identify focus areas, including volunteer water cleanup efforts that aid in the protection, preservation, and restoration of major rivers and their watersheds. And through our Fountains for Youth product donation program, we're donating filtered bottle filling stations to schools where resources are low and lead and PFAS levels are high. Clean water, we believe, is the most important natural resource in the world. Addressing the water crisis is central to sustainability and essential to how we will drive our business and sustainability strategy going forward.

Todd Alan Adams: 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.

Mark W. Peterson: On to slide nine.

Mark W. Peterson: Some high level guideposts for calendar 'twenty, four and our outlook for the first quarter of 2024.

Mark W. Peterson: With respect to the full year and based on the assumptions I will 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 this 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 and markets and flattish conditions in our residential end markets.

Mark W. Peterson: <unk>, capturing approximately a 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.

Mark W. Peterson: I'll turn it back to Mark to hit on the Q1 outline. Thanks, Todd. Please turn to slide nine, 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 proforma core cell growth year-to-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, there 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, as 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 a 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 another $25 million in synergies related to the LK merger, and those synergies will be realized relatively ratably over the year.

Mark W. Peterson: Turning to profitability, we anticipate delivering another $25 million of synergies related to the <unk> merger synergies will be realized relatively ratable over the year.

Mark W. Peterson: We're planning for stable material and transportation costs in the first half of the year and have assumed some modest inflation in the second half of 2024.

Mark W. Peterson: In addition, we have built an incremental investments for our growth initiatives into our 2024 plan.

Mark W. Peterson: 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, we anticipate our adjusted EBITDA margin to be in the range of 23, 5% to 24% for the quarter, which is a 400 to 450 basis point expansion over the prior year.

Before we open the call for questions. Just a reminder, that we are included on page nine our first quarter and full year outlook assumptions for interest expense noncash stock compensation expense depreciation and amortization, our adjusted tax rate.

Mark W. Peterson: And diluted shares outstanding.

Mark W. Peterson: 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.

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 into 2023.

Mark W. Peterson: We're planning for stable material and transportation costs in the first half of the year, and 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, and we anticipate our adjusted EBITDA margin to be in the range of 23.5% to 24% for the quarter, which is a 400 to 450 basis point expansion over the prior year. Before we open the call for questions, just a reminder that we have included on page 9 our first quarter and full year outlook assumptions for interest expense, non-cash, stock compensation expense. Appreciation and Amortization, Adjusted Tax Rate, and the Lube Shares Outstanding.

Mark W. Peterson: The balance of the adjustment comes from the actions that we communicated last quarter.

Speaker Change: We'll now open the call up for questions.

Speaker Change: Thank you I'd like to ask a question. Please press star followed by the number one on your telephone keypad.

Speaker Change: To withdraw your question. Please press star one again.

Speaker Change: Our first question comes from Bryan Blair from Oppenheimer. Please go ahead. Your line is open.

Bryan F. Blair: Thanks, Good morning, guys nice close to the year.

Speaker Change: Good morning, Brian and Brian.

Bryan F. Blair: I'll start with drinking water I was hoping you could offer.

Bryan F. Blair: A bit more color.

Speaker Change: Perfect with more metrics on.

Speaker Change: On the platform and help us think about momentum and positioning there.

Speaker Change: What was the growth rate for 2023, what's the scale of drinking water revenue now.

Speaker Change: A good offer finer points on margin relative to fleet average that would be helpful. And then double digits and then of course.

Speaker Change: Attractive regardless of the specific ranch.

Mark W. Peterson: 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 were impacted by approximately $8 million of last time buys for products we had exited going into 2024 into 2023. The balance of the adjustment comes from the actions that we communicated last quarter. We'll now open the call up for questions. If you would like to ask a question, please press star followed by the number one on your telephone keypad.

Speaker Change: You could offer some more detail on exactly how much growth youre anticipating for 24 that would be great.

Speaker Change: Yes, Brian So that platform grew this last quarter.

Speaker Change: High teens from a sales standpoint, low <unk> from up.

Speaker Change: Order standpoint, so very good strong exit rates.

Brian: And drinking water as we mentioned going into next year, we're anticipating that growth to continue double digits I Wouldnt say, we are going to given an exact number.

Brian: But we feel really good about everything we accomplished this year and exit the year with some really strong momentum when you think about from a margin standpoint, Ryan It's Tom.

Brian: That platform is.

Brian: Is basically overall, a little bit above fleet average with the filtration piece.

Brian: Very strong margin component of it and the filtration piece.

Bryan F. Blair: To withdraw your question, please press star one again. Our first question comes from Bryan Blair from Oppenheimer. Please go ahead, your line is open. Thanks. Good morning, guys.

Brian: I'll start with a lower base will grow it up at a faster clip than that type of rate given where we're starting the year, but I think overall we feel.

Brian: And going forward the growth in that platform is going to contribute obviously the question that youre getting added to the positive mix impact of what that can do for margins going forward. So.

Todd Alan Adams: To start with drinking water, I was hoping you could offer a bit more color, preferably more metrics on the platform to help us think about momentum and positioning there. For example, what was the growth rate for 2023? What's the scale of drinking water revenue now? If you could offer finer points on margin relative to the fleet average, that would be helpful. And then double digits is, of course, attractive regardless of the specific range.

Brian: It's like we're in a really good spot from a growth perspective, where the margin profile. So small that matures next year and beyond.

Speaker Change: I appreciate the detail so very encouraging.

Speaker Change: Shifting to the areas of concern for some investors a major concern commercial exposure that you have I think the down mid single digits.

Speaker Change: A degree of surprise to the upside for first time, albeit consistent with what you laid out last quarter.

Todd Alan Adams: But if you could offer some more detail on exactly how much growth you're anticipating for 24, that would be great. Yeah, Bryan, so that platform grew, you know, this last quarter in the high teens from a sales standpoint, and low 20s from a orders standpoint. So very good, strong exit rates in drinking water.

It would be helpful. I think if you spoke to some of the.

Speaker Change: The sub verticals there.

Speaker Change: Because it's pretty diversified exposure to retail office warehouse.

Speaker Change: Hospitality.

Todd Alan Adams: As we mentioned, going into next year, we're anticipating that growth to continue double digits. You know, I wouldn't say we're going to give an exact number, but we feel really good about everything we accomplished this year. And the end of the year had some really strong momentum.

Speaker Change: Any any nuance you can offer on where there's.

Speaker Change: Potentially significant weakness versus relative stability within that mix.

Scott: Hey, Brian Scott ill take a cut at it I think.

Bryan F. Blair: The thing we've tried to highlight over the last.

Bryan F. Blair: Several years is really.

Todd Alan Adams: When you think about from a margin standpoint, Bryan, it's, you know, that platform is basically, overall, a little bit above the fleet average with the filtration piece being a very strong margin component of it. And the filtration piece, We're starting with a lower base, and we'll grow it at a faster clip than that type of rate given where we're starting the year, but I think overall, we feel next year and going forward, the growth in that platform is going to contribute. Obviously, the question you're getting at is the positive mix impact of what that can do for our margins going forward. So I feel like we're in a really good spot from the growth perspective as to what the margin profile system will contribute to next year. I appreciate the detail.

Bryan F. Blair: The diversity of commercial structure taken as a whole.

Bryan F. Blair: It's not a contiguous market across the United States. It's a.

Bryan F. Blair: A series of independent markets based on migration.

<unk> industrial activity and things like that and so.

Bryan F. Blair: Rather than try to parse it into all of this is what we're assuming for restaurants or warehousing I think you'd have to think about this is a massive market, where theres always something happening somewhere in the country.

Bryan F. Blair: And Theres a fair amount of retrofit replace that is also sort of embedded in there and the reality is.

Bryan F. Blair: If it's down mid single digits.

Todd Alan Adams: Shifting to the area of concern, and for some investors, you know, major concerns, the commercial exposure that you have, I think the down, mid single digits, there's a degree of surprise to the upside for some, albeit consistent with what you had laid out last quarter. It would be helpful, I think, if you spoke to some of the sub-verticals there, because it's pretty diversified exposure. You have retail, office, warehouse, hospitality, other, any nuance you can offer on where there's potentially significant weakness versus relative stability within that mix, and Bryan Stott. I'll take a cut at it.

Bryan F. Blair: And it's a little bit worse, nobody dies, so I think.

Bryan F. Blair: Don't think that we're going to sort of have any thing to reconcile or come back.

Bryan F. Blair: 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.

Bryan F. Blair: Far from heroic, but I also think it's it's not the kind of scenario where.

Bryan F. Blair: The World is ending which we pointed out last time, so that's the way to think about it and.

Bryan F. Blair: 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 is always some level of opportunity, obviously, a little bit less this year, but going forward a big broad diverse end market to grow in.

Todd Alan Adams: I think... You know, the thing we've tried to highlight over the last several years is really the diversity of commercial construction taken as a whole. You know, it's not a contiguous market across the United States. It's a, it's a series of independent markets based on migration, industrial activity, and things like that. And so, rather than try 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. And there's a fair amount of retrofit replaced that is also sort And the reality is, if we say it's down mid single digits. And it's a little bit worse. Nobody dies.

Speaker Change: All fair points.

Speaker Change: Last one for me if I can mark you.

Speaker Change: Specifically referenced a lot of capital deployment, Optionality and I think that that's clear given your balance sheet position.

Speaker Change: Cash generation.

Speaker Change: And you've been active with with buybacks you've signaled that will continue.

Speaker Change: Should we anticipate that your team returns too.

Speaker Change: Bolt on M&A during the year.

Speaker Change: If you can speak to.

Speaker Change: Just just readiness to.

Speaker Change: To return to that.

Speaker Change: And that growth lever going forward.

Speaker Change: Anything you can offer on the composition of your deal pipeline and.

Speaker Change: Potential accident the audience here.

Mark W. Peterson: So I think, you know, I don't think that we're going to sort of have anything to reconcile or combat what others think versus what 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 a year, which is far from heroic, but I also think. This is just not the kind of scenario where... The world is ending, as we pointed out last time. So that's the way I think about it. 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. All fair points there. Last one for me, if I can, Mark, you specifically referenced a lot of capital deployment optionality, and I think that that's clear, given your balance sheet position and cash generation. You've been active with BIVACS.

Speaker Change: Yes, like we said last year with you we were going to put our heads down and really focused on given the healthy integration complete we feel.

Speaker Change: That is 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.

Speaker Change: We are.

Speaker Change: We're ready to turn to turn back to that.

Speaker Change: As we've always talked about in the past a proprietary funnel.

Speaker Change: You don't know when things are going to hit but I'd say the funnel remains active although we were we've been doing we are doing it in this year, we obviously stay very close to that funnel work down that funnel.

Speaker Change: As we are working on the integration at the same time. So I think 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.

Speaker Change: But when those opportunities for them. So we're ready to execute on that again, so again as I said.

Speaker Change: And remaining balance with share repurchase.

Speaker Change: Going forward, so I think youll see next year and beyond.

Speaker Change: Utilizing the full balance sheet capacity and our ability to allocate that where we see fit from an allocation standpoint.

Speaker Change: Yes, Brian maybe one one thing to add was.

Speaker Change: Mark mentioned that we will be back, but we never left I mean, we continue to cultivate things that are important to us obviously, if something of high strategic value.

Mark W. Peterson: You've signaled that it'll continue. Should we anticipate that your team returns to... You know, bolt-on M&A during the year, if you can speak to them? Just readiness to, you know, return to that growth lever going forward and anything you can offer on the composition of your deal pipeline and potential actionability in this area. Yeah, you know, like we said, Brad, last year was a year we were going to put our heads down and really focus on getting the LTE integration complete, and we feel that that is in a good spot for us, having had a lot of success with that over the past 12 months. So, yeah, we feel we're definitely in a spot where we are, you know, ready to turn back to that.

Speaker Change: <unk>.

Bryan F. Blair: Would have decided or wanted to do is do a transaction over the course of the last year, we would have done it we've got the capability of the resources.

Okay.

Bryan F. Blair: To do that integrated extraordinarily well I think is improving with the <unk> transaction. So.

Speaker Change: Everything else you said is clear I just want to make sure that the distinction is.

Speaker Change: We never left Miss anything.

Speaker Change: Definitely understood. Thanks again guys.

Speaker Change: Our next question comes from Mike Halloran from Baird. Please go ahead. Your line is open.

Michael Patrick Halloran: Hey, good morning, everyone you have paused on for Mike If we could maybe revisit the new filter that got released that we talked about.

Todd Alan Adams: As we've always talked about, you know, the proprietary funnel. You don't know when things are going to hit, but I'd say the funnel remains active, although we didn't get, you know, we didn't do anything this year. We obviously stayed very close to that funnel, worked on that funnel, as we were working on the integration at the same time. So yeah, yeah, it's fair to say we're back, ready to do acquisitions again, that full-time tuck in nature Again, like I said, in the remaining balance with share repurchase going forward, so I think you'll see, you know, next year and beyond, utilizing that full balance. I'm going to allocate that where we see fit from the allocation list. Yeah, Brian, maybe I just want one thing to add. Mark mentioned that we'd be back, but we never left.

Michael Patrick Halloran: A little bit.

Michael Patrick Halloran: Last quarter could you maybe talk about some of the adoption and the reception and then I wanted to go back to a comment I believe mark made.

Michael Patrick Halloran: Filtration being a bit of a smaller base.

Michael Patrick Halloran: 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 a element of attachment to the OE.

Michael Patrick Halloran: OE bottle pillar as well.

Michael Patrick Halloran: Yeah, I mean, I guess in terms of the.

Michael Patrick Halloran: CFO PFS filter.

Michael Patrick Halloran: Brand, new and I think where we are selling.

Michael Patrick Halloran: Thousands of them to date.

Michael Patrick Halloran: But I don't think thats something that.

Michael Patrick Halloran: I think it's something we're counting on as being a massive catalyst.

Michael Patrick Halloran: Immediately, but I think the slow steady build of that.

Michael Patrick Halloran: Amidst a large and growing installed base of units is sort of the way to think about it.

Todd Alan Adams: I mean, we continue to cultivate things that are important to us, obviously. If something of high strategic value, I would have decided or wanted. Transaction over the course of the last, We would have done it. We've got the capability, the resources, um, You know, to do that and integrate it extraordinarily well, I think, is agreeing with the LK transaction. Everything else he said is clear. I just want to make sure that, The only distinction is that we never left. All right, definitely understood. Thanks again, guys. Our next question comes from Mike Halloran from Baird. Please go ahead; your line is open. Hey, good morning, everyone. You have Pez on for Mike. If we could maybe revisit the new filter that got released that we talked about, a little bit, last quarter. Can you maybe talk about some of the adoption and reception?

Michael Patrick Halloran: And in terms of the size or the scale of it.

Michael Patrick Halloran: <unk>.

Michael Patrick Halloran: The way to think about it is there are.

Michael Patrick Halloran: 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.

Michael Patrick Halloran: Replacement value.

Michael Patrick Halloran: Against those installed base is sort of the algorithm and so if you think about.

Michael Patrick Halloran: More units going into the field more of those units being filtered and then the attachment rate moving.

Michael Patrick Halloran: From less than one time, a year or two 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 <unk>.

Michael Patrick Halloran: 10% a year the attach rate can grow materially higher than that.

Unnamed Questioner: And then I want to go back to a comment I believe Mark made, you know, filtration being a bit of a smaller base. You know, when you speak to the filtration piece, is that specifically the aftermarket filter replacement piece? Or is there also a little bit of an element of attachment to the OE Bottle Filler as well?

Michael Patrick Halloran: And as Mark talked about the profitability.

Michael Patrick Halloran: For drinking water infiltration or each.

Michael Patrick Halloran: Each very attractive.

Speaker Change: Great. That's super helpful color and then just one clarification.

Speaker Change: We've got a couple of questions on it this morning.

Todd Alan Adams: Yeah, I mean, in terms of the PFOA, PFAS filter, you know, it's brand new. I think we're selling, you know, thousands of them, you know, to date. But I don't think that's 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. Units is sort of the way to think about it. And in terms of the size or the scale of it, obviously, you know.

Speaker Change: The 2024 assumptions on the slide here.

Speaker Change: 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.

Speaker Change: What we're highlighting in the 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 growth and a double digit pace a lot of that obviously coming from our actions or initiatives versus what the market may do next year.

Todd Alan Adams: The way to think about it is that there are, you know..., units installed in the field. And then there is a normal sort of replacement pattern. So, you know, the mix of filtered versus non-filtered units and then the rate of attachment, or replacement value against the 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, you know, maybe just a little bit above that, the compounding benefit of that is huge, you

Speaker Change: Yes, maybe just to touch differently.

Speaker Change: I believe.

Speaker Change: That we're highlighting the insight of institutional the drinking water.

Speaker Change: Business for us will grow at a double digit rate. So it is inclusive of the low single digit institutional is inclusive of double digit drinking water.

Speaker Change: Understood. Thank you I'll pass it on.

Speaker Change: Our next question comes from Jeff Hammond from Keybanc Capital markets. Please go ahead. Your line is open.

Jeffrey D. Hammond: Yes, good morning, guys.

Morning, Jeff.

So just following up on that because a little confusion on the kind of the end market assumptions I think you said mark.

Todd Alan Adams: So I think the way to think about it is, you know, if the installed base grows at, you know, 10% a year, the attach rate can grow materially higher than that. And as Mark talked about, you know, the profitability for drinking water and filtration. R.E.T.C. experience. Great, that's that's a super helpful color.

Jeffrey D. Hammond: All in you think your end markets are kind of flat to slightly down is that correct and then.

Jeffrey D. Hammond: Institutional ex drinking water you think is maybe if you pull out that drinking water.

Mark W. Peterson: And then just one clarification. We've gotten a couple questions on it this morning on the 2024 assumptions on the slide here. Drinking water is separate from institutional. Correct. We are thinking about institutional water completely separate from drinking water.

Jeffrey D. Hammond: It's more like slightly down versus up low single digits no.

Speaker Change: No I don't think you said that I think.

Speaker Change: I don't think there is a lot of confusion I think.

Speaker Change: We're trying to highlight the fact that.

Speaker Change: Okay.

Speaker Change: Gnostic 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.

Mark W. Peterson: We're not saying that institutional use of drinking water is up low single digits. Correct. What we're highlighting on the institutional market is going to grow at a little single-digit rate, but we think if you look at our drinking water franchise in the context of all of our end markets, it grows at a double-digit rate, a lot of that obviously coming from our actions, our initiatives versus what the market may do. Yeah, I mean, said maybe just a touch differently.

Speaker Change:

Speaker Change: As a as an end market commercials down as we as I highlighted and I think thats the way to think about it Jeff.

Jeffrey D. Hammond: Okay. So so if I did the math on kind of the growth it seems like your end markets or maybe.

Growing 222, and a half and then.

Jeffrey D. Hammond: And you get maybe a point of price and a point outgrowth is that the way to think about the growth algorithm in 2024.

Mark W. Peterson: I believe that we're highlighting the inside of institutional, the drinking water business for us will grow at a double-digit rate. So it's inclusive of the low single-digit. Institutional is inclusive of the double-digit.

Speaker Change: Yes, I mean, there is a range of outcomes in terms of the eurozone.

Speaker Change: I think that the.

Speaker Change: The weighted and market growth next year, you can end up.

Mark W. Peterson: Understood. Thank you. I'll pass it on.

Speaker Change: Minus one minus two or you can do your math that ended up plus one plus two it's somewhere in that ZIP code for sure.

Jeffrey D. Hammond: Our next question comes from Jeff Hammond from KeyBank Capital Markets. Please go ahead, your line is open. Yeah, good morning, guys. Good morning, Jeff.

Speaker Change: And so I think that our low single digit growth.

Jeffrey D. Hammond: Hey, just so I'm following up on that because there was a little confusion about the, you know, kind of the 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 x drinking water, you think is, you know, maybe if you pull out that drinking water, it's, it's more like slightly down versus up, low single digit. No, I don't think he said that.

Speaker Change: As some assumption around end market growth some modest assumption around price and then obviously some assumption around.

Speaker Change: Share gains in initiative growth.

Speaker Change: We've talked about.

Speaker Change: Okay, Great and then just just on the margin I think you said 150 basis points of margin.

Speaker Change: In all lines up to $20 million to $25 million of of kind of incremental improvement.

Speaker Change: And I think you've called out the $25 million incremental synergies.

Todd Alan Adams: I don't think there's a lot of confusion. I think we're trying to highlight the fact that, agnostic from maybe how we call the end, drinking water is growing at that double-digit rate.

Speaker Change: 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.

Todd Alan Adams: I think in aggregate, we still believe institutional is up, as is an end market. Okay, so if I did the math on kind of the growth, it seems like your end markets are maybe, you know, growing to, you know, to two and a half, and then you get maybe a point of price and a point out of growth. Is that the way to think about the growth algorithm and in 24 hours? Yeah, I mean, there's a range of outcomes in terms of your assumptions. I think that the weighted end market growth next year could end up... Do your math and end up plus one, plus one. It's somewhere in that zip code, for sure.

Speaker Change: Yes, I mean again I think it's more of a function of.

Speaker Change: We're sitting here on.

Speaker Change: February 7th and we sort of only know what we know at this point and so I think that.

Speaker Change: I don't have a long list of headwind reconciliations for you.

Speaker Change: I just think we're trying to.

Speaker Change: Describe a scenario that we.

Speaker Change: We see with <unk>.

Speaker Change: Ms amount of confidence in.

Speaker Change: Do your math.

Speaker Change: You just take the Alka synergies you can get to that 150 basis points and so I think we will sort of stay close to it and update people along the way, but I don't have a long list of headwinds to rattle off for you.

Todd Alan Adams: So I think that, you know, our low single-digit growth has some assumptions around end market growth, some modest assumptions around price, and then obviously some assumptions about Okay, great. And then just, just on the margin, I think you said, you know, 150 basis points of margin. That kind of, you know, lines up to, you know, 20 to 25 million of that kind of incremental improvement. And I think you've called out, you know, the 25 million incremental synergies, you know, the lapping of the high-cost inventory, 10 to 15 million. Just wondering what maybe some of the headwinds are that would eat into some of those good guys. Yeah, I mean, again, sitting here on February 7th. And we sort of only know what we know at this point.

Speaker Change: Okay. Thanks, guys.

Speaker Change: Our next question comes from Joe Ritchie from Goldman Sachs. Please go ahead. Your line is open.

Speaker Change: Hi, This is <unk> on for Joe Thanks for the question.

Speaker Change: My first question is just trying to understand what's the XP.

Speaker Change: <unk> for the portfolio apart from drinking water. So you said drinking water and grow double digit.

Speaker Change: The rest of the portfolio probably declined slightly.

Speaker Change: Maybe just give us some color on what is the expectation would walk in and see if the hygiene will.

Speaker Change: The impact of the portfolio and what more pressure relief.

Speaker Change: Yeah again, I think we're going to go back to.

Todd Alan Adams: And so I think that, You know, 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 an enormous amount of confidence and Chuck Stenton. You just take the LK synergies, and you can get to that 150 base.

Speaker Change: When you look at the end market mix.

Speaker Change: You can find yourself to an aggregate flat.

Speaker Change: Flat.

Speaker Change: <unk> up one or two are flat to up one or two nothing significantly.

Different than I think what we've been answering this morning, regardless.

Todd Alan Adams: I think we'll sort of stay close to it and update people along the way. But, you know, I don't have a long list. Okay. Thanks, guys. Our next question comes from Joe Ritchie from Goldman Sachs. Please go ahead.

Speaker Change: <unk> category and so.

Speaker Change: Don't think I have anything.

Speaker Change: Give you that as sort of different in 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.

Vivek Srivastava: Your line is open. Hi, this is Vivek Srivastava on behalf of Joe, and thanks for the question. My first question is just trying to understand what the expectation is for the portfolio apart from drinking water. So you said drinking water will grow double digits.

Speaker Change: Is this sort of secular opportunity, we see in a category thats being built perhaps to a degree outside of those core end markets and so thats why were I think highlighting drinking water more specifically than we are any of the other categories.

Vivek Srivastava: It means the rest of the portfolio probably declines slightly. Maybe just give us some color on what the expectation is for the water safety, hygiene, and flow system sides of the portfolio and what's most pressured to lead. Yeah, again, I think we're going to go back to, When you look at the end market mix... You can wind yourself up to, in aggregate, flat, to up 1 or 2, or flat to up 1 or 2, nothing significant. I think we've been answering this morning, regardless of product category. I'll give you that, you know, 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 categories. 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 do in any of the other markets.

Speaker Change: Okay.

Speaker Change: Okay. That's helpful. And then maybe just on the margin cadence looks like you ended the year pretty strong and you guys. Starting the first quarter was strong with about 400 basis points of margin expansion.

Speaker Change: Is there some conservatism baked into the second half of the guide right around 150 bps. So just any color on the cadence would be helpful.

Speaker Change: Yes, I mean again I think we are.

Speaker Change: Sure.

Speaker Change: We are guiding to Q1 based on.

Speaker Change: Okay.

Speaker Change: Detailed forecast and process of what we see.

Speaker Change: Giving you the full year outlook year on February seven.

Speaker Change: Acknowledging that there is a lot of road to go in the year, but also the progression on.

Speaker Change: Comparable basis changes, so obviously, having just done 23 six.

Speaker Change: We're not going to have a 320 basis for later 400 basis point margin expansion over that in next year's fourth quarter. So I don't know that its conservatism or anything else but.

Todd Alan Adams: 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 base points of margin expansion. Is there some conservatism baked in the second half of the guide right now because full year is like around 150 bips, so just any color on the cadence would be helpful. Yeah, I mean, again, I think we're guiding to Q1 based on, you know, a detailed forecast and process of what we're doing. We're giving you the full-year outlook here on February 7, acknowledging that there's a lot of road to go in the year, but also the progression on a comparable basis changes. So obviously, you know, having just done 23-6, we're not going to have a 320 basis point or 400 basis point margin expansion over that in next year's fourth quarter. I don't know that it's conservatism or anything else, but it's sort of our best view of what people achieve over the course of their lives.

Speaker Change: It's sort of our best view of what we think we can we can achieve over the course of the year.

Speaker Change: Great. Thanks.

Speaker Change: Our next question comes from Brett Linzey from Mizuho. Please go ahead. Your line is open.

Brett Logan Linzey: Hi, good morning, all.

Brett Logan Linzey: Hey.

Brett Logan Linzey: Just I wanted to come back to this Destocking I was hoping you could put a finer point on where you think we are from a destocking dynamic in non res and residential I know you saw some in late 'twenty, two and Roseanne throughout 'twenty three but are you contemplating any additional destock here early in the year or do you think we are pretty well matched sell in sell out.

Speaker Change: Yes, our view Brett is we haven't really faced that phenomenon for the last three or four quarters. So I think our assumption set of auditors.

Speaker Change: It's very balanced.

Speaker Change: Book to Bill was above one inventory levels really across the wholesale channel.

Mark W. Peterson: Great, thanks. Our next question comes from Brett Linzey from Mizuho. Please go ahead, your line is open. Hi, good morning all.

Speaker Change: E Comm channel and everything else are in really good shape. So I don't think were.

Brett Logan Linzey: Hey, just I want to come back to just de-stocking. I was hoping you could put a finer point on where you think we are from a de-stocking dynamic in non-res and residential. I know you saw some in late 22 and resi and, you know, throughout 23.

We don't I don't think we are having any sort of conversations about.

Speaker Change: No inventory building Burns.

Speaker Change: Okay good to hear.

Speaker Change: Just maybe shifting to water works youre thinking about that that market up low singles I guess, given some of the public works funding and the infrastructure Act and some of the physical support there I would have thought maybe it would have been a little stronger.

Todd Alan Adams: But are you contemplating any additional de-stock here early in the year? Or do you think we're pretty well matched sell in, sell out? Yeah, our view, Brett, is that we haven't really faced that phenomenon for the last three or four quarters. So I think our sell-in, sell-out is very balanced. Book-to-bill was above one.

Speaker Change: And what are you seeing in that area. How do you how do you participate there and.

Speaker Change: Any insight on expectations as the year rolls out.

Speaker Change: Yes, again, I think we're trying to.

Speaker Change: To give you a perspective of.

Speaker Change: Our expectation of what the end market grows based on the funnel of opportunities that we're looking at I guess.

Speaker Change: As a principle.

Todd Alan Adams: Inventory levels... really across the wholesale channel, the e-commerce channel, and everything else, really good shape. So I don't think we're, We don't, I don't think we're having any sort of conversation. No, I'm sorry, Builder.

Speaker Change: The federal funding to how it ultimately gets spent.

Speaker Change: That never really translates, particularly well at least in my.

Speaker Change: In my experience in the length of time from when that is.

Brett Logan Linzey: Okay, yeah, good to hear. Just maybe, shifting to waterworks, you're thinking about that, you know, that market for 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 do you participate there?

Speaker Change: Talked about to actually being spent is quite a lag. So I think look we're seeing good activity.

Speaker Change: In areas, where there is population growth and so our products really sort of.

Speaker Change: Attach from.

Speaker Change: The primary water supply.

Speaker Change: To the developments and things like that and so thats, what were seeing growth and opportunity and hopefully.

Todd Alan Adams: And, you know, any insight on, you know, expectations as the year rolls out? Yeah, again, I think we're trying to give you a perspective of, you know, our expectation of how the end market grows based on the funnel of opportunities that we're looking at. You know, as a principle, federal funding to how it ultimately gets spent. That never really translates particularly well, at least in my...

Speaker Change: 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.

Speaker Change: <unk> talked about 2024.

Speaker Change: Alright, I appreciate the insight and best of luck.

Speaker Change: Our next question comes from Nathan Jones from Stifel. Please go ahead. Your line is open.

Speaker Change: Good morning. This is Adam Farley on for Nathan Jones.

Adam Farley: As it relates to the margin guidance, what is the level of incremental growth investments in 2024.

Todd Alan Adams: In my experience, the length of time from when they talk about it to actually being spent, which is quite a lag. So I think, you know, look, we're seeing good activity in areas where there is a population... So, you know, our products really sort of. Attached from the Professor and founder of the School of Nursing, Ericson urgent care does not want to establish a cookie-cutter system for the sake of nursing education, but action is needed for what they have available.

Adam Farley: We're not giving details around the numbers, but like I said, two things that I called out.

Adam Farley: In the back half of the year, one is going to be some inflation in the back half of the year and the growth investments over the course of the year.

Adam Farley: The Mt.

Speaker Change: But we are.

Speaker Change: Like we did last year with every year, we invest in growth in the business. So that's up a minor headwind it could be but we're not going to give exact numbers at this point in time.

Brett Logan Linzey: Bye. All right, appreciate the insight. Best of luck. Our next question comes from Mason Jones from Stiefel. Please go ahead, your line is open. Good morning, this is Adam Farley on behalf of Nathan Jones.

Speaker Change: Yes fair enough.

Speaker Change: Okay.

Speaker Change: No I mean again I think.

Speaker Change: Think if the question is.

Speaker Change: No.

Mason Jones: As it relates to the margin guidance, what is the level of incremental growth investments in 2024? And we're not giving details around the numbers, you know, but like I said, the two things that I called out in the back half of the year. One is going to be, we think there could be some inflation in the back half of the year and the growth investments over the course of the year. We're not going to give an exact amount. But we are, it's, you know, like we did last year, we do every year; we invest in growth in the business. So that's a minor headwind, it could be, but we're not going to give exact numbers at this point. Well, yeah, I'll clear it off. Now go ahead, Todd. No, I mean, again, I think, you know, I think if the question is, you just get the LK synergy. You get through a hundred and fifty bases.

Speaker Change: If you just get the <unk> synergies.

100, 150 basis points of margin expansion with the kind of growth we're talking about.

Speaker Change: So there's got to be.

Speaker Change: 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've got a separate.

Speaker Change: What were sort of guiding to versus what we think we can do particularly on February 7th year end. So.

Speaker Change: As Mark pointed out there are certainly growth investments, but it's not as if there is a list of things to reconcile for you, but I would say, our outsized or or unexpected I mean, obviously.

Speaker Change: We give people raises but we have productivity.

Speaker Change: We have material savings and then obviously there is there are 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.

Mark W. Peterson: Margin Expansion with the kind of growth that we're seeing. So there's got to be some other things.

Speaker Change: High degree of confidence and we'll update that as we go.

Speaker Change: No that makes sense and then turning to capital allocation again.

Todd Alan Adams: And I think the point is, yeah, there are lots of things I think you've got to separate. What we're sort of guiding to versus what we think we can do, particularly on February 7th here. And so, as Mark pointed out, there is certainly growth. But it's not as if there's a list of things to reconcile for you that I would say are outsized or unexpected. I mean, obviously, you know. We give people raises, but we have productivity.

Speaker Change: Do you have any planned buyback activity in 2004.

Speaker Change: Yes, we are going through.

Speaker Change: We're going to do.

Speaker Change: Our buyback on a sort of regular cadence.

Speaker Change: But nothing that.

Speaker Change: We think as outsized or maybe different in scope than last year. There is a range that will go through and evaluate what we think fair value is and on our outlook and everything else.

Todd Alan Adams: We have material savings, and obviously, there are certain areas where we see material costs; nothing out of the norm one way or the other. I think we're just trying to give you a view with a high degree of confidence, and more.

Speaker Change: We will clearly do some.

Speaker Change: Ratably over the course of the year.

We do have a plan for that.

Speaker Change: Alright, Thank you for taking my questions.

Speaker Change: Mhm.

Speaker Change: We have no further questions in queue I'd like to turn the call back over today's poly for closing remarks.

Poly: Thanks, everyone for joining us today, we appreciate your interest in <unk> 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.

Adam Farley: And then turning to capital allocation again, do you have any planned buyback activity in 24? Yeah, we're going to do, you know, we're going to do a buyback on a sort of regular cadence, but you know, nothing that Thank you. Yeah, we do have a lot.

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

Poly: [music].

Poly: Okay.

Poly: Yes.

Poly: Okay.

Poly: [music].

Poly: Yes.

Poly: [music].

Adam Farley: All right, thank you for taking my questions. We have no further questions in queue. I'd like to turn the call back over to Dave Pawley for his closing remarks. Thanks, everyone, for joining us today. We appreciate your interest in Zurn LK 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. This concludes today's conference call. Thank you for your participation. You may now disconnect.

Poly: Okay.

Poly: [music].

Poly: Thanks.

Poly: Yes.

Poly: [music].

Poly: Sure.

Poly: Sure.

Poly: Sure.