Zurn Elkay Water Solutions - Q1 2023

Transcript

Operator (participant)

Good morning, and welcome to the Zurn Elkay Water Solutions Corporation first quarter 2023 earnings results conference call with Todd Adams, Chairman and Chief Executive Officer, Mark Peterson, Senior Vice President and Chief Financial Officer, and Dave Pauli, Vice President of Investor Relations for Zurn Elkay Water Solutions. This call is being recorded and will be available for 1 week. The phone numbers for the replay can be found in the earnings release the company filed in an 8-K with the SEC yesterday, April 25th. At this time, for opening remarks and introduction, I'll turn the call over to Dave Pauli.

Dave Pauli (VP of Investor Relations)

Good morning, everyone, and thanks for joining us on the call 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 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 filings.

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

Todd Adams (Chairman and CEO)

Thanks, Dave. Good morning, everyone, and thanks for joining the call. When we announced our Q4 earnings in early February, we talked a lot about 2023 as a year of simply executing against the plans that we had developed throughout 2022. If you look at our Q1 results, it's simply a down payment on what we said we were going to do. As you'll hear from Mark, for the time being, we're leaving our full year outlook unchanged, but intend to take another look at it after we deliver the Q2 that we've outlined. Pro forma core sales were up 5% and pro forma EBITDA margins were up 280 basis points over the prior year to 19.5%.

As we discussed in February and we'll reiterate this morning, we have high confidence that our margins will continue to ramp throughout the year based on the current cost profile we've locked in and the benefit of the $25 million of Elkay synergies that will continue to roll into the results for the balance of the year. What that means is second half margins will improve at least 250 basis points relative to the first half. We repurchased an additional $37 million or 1.7 million shares against our anticipated minimum $100 million of repurchases this year and have continued to do so to begin the second quarter. Our Q1 cash flow was even in Q1, which was ahead of our expectations and gives us even further confidence in delivering a strong full year free cash flow.

Late in the quarter, we launched a national campaign to bring awareness to the problems with lead in drinking water, particularly in K-12 schools, and what we can do to help them solve this incredibly solvable problem. It's still early innings, but we're seeing demand for our drinking water solutions, both bottle fillers and filtration accelerate. Taken as a whole, Q1 was pretty much down the middle with lead times back to 2019 levels, no supply chain constraints, and all the 80/20 simplification work behind us. We were able to work on the Elkay integration efforts and executing on the strategic growth plan we've developed. We remain highly confident in the 2023 cost synergies from Elkay reading through this year while we continue to do the work to get the incremental $25 million benefit next year.

With that, I'll turn it over to Mark on page 4 to take you through some financial details on Q1.

Mark Peterson (SVP and CFO)

Thanks, Todd. Please turn to slide number 4. On a year-over-year basis, our first quarter sales increased 55% to $372 million. The Elkay merger contributed to 3% year-over-year growth, while foreign currency translation reduced sales by 100 basis points from the prior year. Core sales increased 300 basis points. On a pro forma basis, including Elkay in the prior year first quarter and adjusting for the product line exits that we outlined during last quarter's earnings call, core sales expanded 5% year over year. Breaking down that pro forma core growth, sales to our residential end markets were a bit better than we anticipated as a mid-teens year-over-year decline was partially offset by a few last time buys for certain SKUs we exited, resulting in a non-recurring sales of approximately $7 million in the quarter.

Sales to our non-residential end markets were also ahead of our Q outlook for the quarter and increased mid-single digits year-over-year with balanced growth across flow management and control, Water Safety & Control, Hygienic & Environmental and Drinking Water. With respect to our Elkay related product line exit work, we completed the exits in the first quarter as planned. As you will see on our outlook slide later in the call, those exits will have a year-over-year sales impact of $29 million in the second quarter and the $90 million we have been highlighting for calendar year 2023. Turning to profitability, our adjusted EBITDA totaled $72 million in the quarter, and our adjusted EBITDA margin was at the high end of our outlook for the quarter at 19.5%.

This compares to $52 million and 21.7% in the prior year's first quarter. The benefits of price realization and our productivity initiatives, inclusive of the cost synergies that will benefit earnings by a little over $6 million each quarter in calendar year 2023, was more than offset by the sell-through of higher cost inventory purchased last year, investments in our growth and supply chain initiatives, as well as the impact of the Elkay merger. Please turn to Slide 5, and I'll touch on some balance sheet and leverage highlights. With respect to our net debt leverage, we ended the quarter with leverage at 1.6x, inclusive of approximately $37 million of cash used to repurchase common stock in the quarter.

We have purchased another $17 million worth of stock through the first part of the second quarter, bringing our total share repurchase to just under $80 million from the fourth quarter of 2022 through yesterday. In February, our board of directors approved an increase in our share repurchase program to $500 million. As we highlighted on our earnings call last quarter, we intend to utilize at least $100 million of our free cash flow in 2023 to continue to execute our share repurchase plan while targeting a net debt leverage ratio in the one to two times range over time. I'll turn the call back to Todd.

Todd Adams (Chairman and CEO)

Thanks, Mark. I'm on page 6. Over the next couple slides, I want to share a few positive developments on various legislation and other things we're doing to drive outsized growth from our safe water drinking platform. There are no safe levels of lead in drinking water, especially when it comes to kids, we were pleased to see the Michigan Senate pass Filter First water safety legislation last week. This legislation is intended to protect children from lead in drinking water by requiring all childcare centers and schools to implement a drinking water management plan, install filtered bottle filling stations or filtered faucets on outlets designated for drinking water, and test the filtered water to ensure that the filters are installed and operating properly.

This legislation now heads to the Michigan State House of Representatives for consideration and has widespread support from health and environmental experts because it is more cost-effective than requiring repeated testing at every school. While we view Michigan's legislation as the gold standard, there is growing awareness and more legislation developing in other states across the country, including California, Texas, and Massachusetts, as you can see here. This is all just within the last three months. We've been actively supporting this legislation as well as others, and believe the most proactive and protective solution to kids getting exposed to lead through school and childcare drinking water is to place filters at the point of use. For about $2 per student per year, schools can accomplish that with our filtration solution. Moving to page seven.

We're also doing our part to bring greater awareness and understanding about the importance of safer drinking water and healthy hydration through a broad awareness campaign. We started with a video series that launched across social media, connected streaming, and video on-demand services, and supported that with an entire toolkit of information and resources. In addition, we launched a dedicated section of elkay.com with information designed specifically for parents, teachers, administrators, and facility managers. The content ranges from letters parents can send to school administrators, maps indicating where water quality is most at risk for school boards and administrators, curriculum for students and teachers, plus where to buy and how to change our filters for facility managers. We know awareness drives action, and when parents, teachers, and the community call attention to their drinking water problems, the issue cannot be ignored. Moving to page eight.

It's just a fact that some school districts have more resources than others. However, all children deserve clean, safe water in the places where they're learning and growing every day. That's why we created our Fountains for Youth program in 2019, providing filtered bottle filling stations, filters, installation grants, or a combination of all of these to schools in need. The program assesses donation needs based on several criteria, including water quality issues and the ages of students attending the school, with a preference given to schools in early education and elementary schools where lead has the greatest impact on developing minds and bodies. The program has benefited dozens of schools across the country, with our most recent efforts focused on Los Angeles, Benton Harbor, Michigan, and Milwaukee.

We have plans to roll this out to even more schools across the country this year in places like Jackson, Mississippi, and others. This program is just a piece of our overall ESG efforts and a nice segue to the last one for me on page 9. We continue to make strides in our ESG efforts and clean water mission overall. In addition to our 2022 sustainability report issued in February and our UN Global Compact communication on progress that we'll issue next month, we also wanted to share our first quarter progress against key targets to provide additional transparency and accountability on our ESG journey. Developing clean technology water solutions that help our customers meet their water challenges and goals is core to our sustainability strategy, with 74% of our revenue coming from products with sustainable attributes during the quarter.

Our commitment to clean technology innovation and continuous improvements keeps us focused on expanding our line of products that conserve water, contribute to a cleaner environment, protect human health and hydration, save energy, and reduce the use of plastics and other non-renewable resources. Zurn Elkay products saved an estimated 8 billion gallons of water during the quarter, and our goal is to reach 40 billion gallons of water saved annually by 2024. Additionally, Elkay water bottle fillers have prevented the use of more than 4 billion single-use plastic water bottles well on our way to the target of preventing 15 billion annually. Within our own operations, we identified and are launching eight new projects to reduce our energy usage and greenhouse gas emissions, and we have clearly defined path to meet targets for both.

Collectively for the quarter, our philanthropic donations, in-kind gifts, and associate volunteer time exceeded $1 million. In March, we announced Emma McTague joined our board of directors. With the addition of Emma, our board now has nine independent directors, three of whom are women. Overall, continued strong progress with our ESG efforts. Now I'll turn it back over to Mark to take you through our outlook.

Mark Peterson (SVP and CFO)

Thanks, Todd. Please turn to Slide 10, I'll cover the highlights of our outlook. As you saw in the press release we issued yesterday, for 2023, we are going to continue to take a view on our external outlook that encompasses a broader range of volatility than we have the past couple of years.

Our outlook for calendar year 2023 remains unchanged, with sales in the range of $1.5 billion to $1.55 billion and our consolidated adjusted EBITDA in the range of $325 million to $345 million, resulting in year-over-year margin expansion of at least 110 basis points up to 170 basis points. Similar to last quarter, to help better understand the growth trends in the business in 2023, on the right side of the chart, we have presented Zurn Elkay pro forma 2022 sales for the second quarter, which takes reported sales for 2022, plus Elkay sales for the second quarter of 2022, less the year-over-year impact of the 80/20 product line exits we have executed.

For the second quarter of 2023, we are projecting sales to be in the range of $385 million to $395 million, and our adjusted EBITDA margin to be in the range of 21% to 21.5%, which is a 150-200 basis point step up from the first quarter. With respect to the sales outlook, you can see on the page our assumptions for year-over-year growth in our non-residential and residential product groups, which are impacted by the timing of shipments last year as we began working down an elevated backlog in the second quarter of 2022.

We anticipate pro forma orders in the second quarter to expand low to mid-single digits year-over-year, with mid to high single-digit growth in our non-residential end markets, partially offset by a mid-teens decline in our residential end market. Turning to profitability, our second quarter margin is expanding 150 to 200 basis points sequentially from the first quarter of 2023 as the sell-through of the higher cost inventory we purchased in 2022 will be complete in the first part of the quarter, and our margin will begin to benefit from the lower commodity and transportation costs in the back half of the second quarter and into the second half of 2023, where we anticipate another margin step up from the second quarter.

Our synergy savings related to the Elkay merger will continue to deliver just over $6 million a quarter and $25 million for the full year in 2023. Before we open the call for questions, just a reminder that we have included on page 10 our second quarter outlook assumptions for interest expense, non-cash stock comp expense, depreciation and amortization, our adjusted tax rate, and diluted shares outstanding. We'll now open the call up for questions.

Operator (participant)

At this time, if you'd like to ask a question, simply press star one on your telephone keypad. Our first question will come from the line of Bryan Blair with Oppenheimer. Please go ahead.

Bryan Blair (Managing Director and Senior Research Analyst)

Thank you. Good morning, guys.

Mark Peterson (SVP and CFO)

Good morning, Bryan.

Todd Adams (Chairman and CEO)

Good morning, Bryan.

Bryan Blair (Managing Director and Senior Research Analyst)

I believe you said that resi was down mid-teens with roughly $7 million of unanticipated sales that, you know, while being unwound, they stayed in the quarter. Just to clarify, what was the margin on the $7 million?

Mark Peterson (SVP and CFO)

The margin on the $7 million was, I'd say about the fleet average what we had for the quarter. We did a little better on that given the fact that the last time buy is below what you'd normally anticipate. You know, it didn't materially impact the overall EBITDA margin in the quarter, Bryan.

Bryan Blair (Managing Director and Senior Research Analyst)

Okay. Understood. Maybe offer a little more color on year-over-year backlog dynamics impacting Q2. You know, any additional insight you can offer there in terms of, you know, how much of a headwind that is and how we should think about the phasing, and in extension, you know, the progression of growth rates into the back half for, you know, non-res in particular. Also your resi sales, obviously, you know, easier comps as the year progresses.

Mark Peterson (SVP and CFO)

Yeah. Specifically as it relates to Q2, there's a sizable headwind in Q2 from a backlog reduction. We built backlog in Q1, reduced it significantly in Q2 and Q3. You know, if you look at our order rates relative to the prior year in Q2, they're actually going to be up nicely. The sales growth, you know, is clearly impacted as a result of the backlog reduction in Q2 reasonably acutely and also Q3. We are seeing, you know, the trajectory of year-on-year order rates continue to stabilize and be positive as we go throughout the year. The phenomenon that you talked about, Bryan, is impacting what, you know, we're talking about in terms of sales growth for the quarter.

It's not what we would characterize as the underlying demand or market growth.

Todd Adams (Chairman and CEO)

Right. Yeah. If you, if you go back and just look at the backlogs, you know, just go back to last year's Qs, it was about a $60 million backlog burn last year on the Zurn side of the core business. That's what Todd's referring to. When you, when you look at the sales rates, you got to take that into consideration. As Todd pointed out, the order rates are accelerating in Q2, and we think right now we see a good second half year-over-year demand pattern coming out.

Bryan Blair (Managing Director and Senior Research Analyst)

Got it. One last one higher level question. Just be great to hear your thoughts on non-res in general. There's been a fair amount of concern regarding the cycle that's obviously levered in recent past, you know, like, you know, consternation related to the, to the banking sector. Just wondering how your team feels about the backdrop overall and in which end markets or product lines you're most confident in growing through an uncertain market and where there may be a bit more risk to Zurn Elkay going forward.

Todd Adams (Chairman and CEO)

Sure. Yeah. We, we've heard the concerns. You know, I think qualitatively, if you look at our forecast for the remainder of the year, it's essentially unchanged, from what we had developed, you know, to start the year. I think that's an important piece to take into consideration. Secondly, if you look at our overall non-residential mix, 47% of that is institutional, primarily healthcare and education, and some water works. So you get to over half of the overall revenue. If you look at the slice of commercial, you know, obviously

You know, we're watching it. When we entered the year, we had, you know, we had obviously identified a lot of that risk in the outlook that we had provided. We're not seeing anything that points us to being more outsized than that at this point. Again, Bryan, I think, you know, our forecast for the remainder of the year is essentially unchanged. That wouldn't be reflected in sort of the consensus view of the world, but from our standpoint, very little change in the last 90 days relative to maybe the range of outcomes that we thought could happen for the year.

Bryan Blair (Managing Director and Senior Research Analyst)

Yeah. Appreciate all the color. Solid start to the year.

Operator (participant)

Your next question comes from the line of Jeff Hammond with KeyBanc. Please go ahead.

Jeff Hammond (Managing Director and Equity Research Analyst)

Hey, good morning, guys.

Todd Adams (Chairman and CEO)

Morning, Jeff.

Mark Peterson (SVP and CFO)

Morning, Jeff.

Jeff Hammond (Managing Director and Equity Research Analyst)

I guess just on the margin bridge first half to second half, can you just kind of remind us the moving pieces? I know you've got some, you know, certainly the higher cost inventory, the, the investments, in the safe drinking water, and then kind of the synergies. Just walk us through kind of that, I think you said 250 basis point, you know, first half to second half move.

Mark Peterson (SVP and CFO)

Yeah, Jeff, I think the synergies play out consistently across the quarter. No H2 versus H1 benefit really from the synergy. That's playing out consistent each quarter. Yeah, a bit of a modest step down in some of the investments that was a little more front-end weighted. The big thing that really matters the most, is the inventory cost structure. As we've said, you know, we were buying inventory in 2022 at elevated levels from a cost standpoint. That worked its way through Q1. It's gonna impact us a little bit in the first part of Q2.

The big difference is the back half of Q2 and then into Q3 as well as Q4 will be at, you know, the lower commodity, lower transportation costs that we've been experiencing for a period of time here impacting the P&L. That's the biggest piece of the puzzle, Jeff. You'll really see it in the third quarter because it really, we're not expecting anything different in Q4. You'll see a meaningful improvement in the Q3 margin, and then that margin will decline a bit in Q4 just based upon the seasonal reduction in sales in Q4. Expect a normal decremental margin in Q4. Q3 is the point where you'll see that full run rate of those lower commodity and transportation costs impacting the P&L.

Jeff Hammond (Managing Director and Equity Research Analyst)

Okay. Perfect. Then just on this clean water opportunity, can you just maybe size it and what you think, you know, the funnel of opportunities is? Just, you know, how important it is for, you know, additional states to kinda drive regulation versus, you know, just, you know, more organic, you know, kind of penetration?

Todd Adams (Chairman and CEO)

Yeah, Jeff, as it relates to our sort of regular way, core new construction work, we think that that is gonna continue to accelerate and grow as it has been for a long period of time. The opportunity, you know, is measured in the $ hundreds of millions when we look at a combination of aftermarket retrofit replace and filtration. Obviously, you know, we've got, you know, some pretty targeted initiatives in key states, as well as this broader awareness campaign that, you know, we're going, you know, state by state, school district by school district to begin to identify, you know, where is the problem most acute, what's installed, what can we do to replace, and then obviously how can we provide, you know, that filtration on a recurring basis.

You know, I think the opportunity continues to be there. I think the awareness campaign and this legislation is just bringing it into bringing it closer and closer to impact. You know, we're building the funnel as we speak. We're obviously addressing these states, particularly the ones we identified first. I think this has got a very long tail. And, you know, we would qualify it as something measured in the $hundreds of millions, you know, over the next three to four years, incremental to that core business that we continue to see nice growth from.

Jeff Hammond (Managing Director and Equity Research Analyst)

You mentioned filtration. Can you just kinda, as you've dug in on the integration, maybe, you know, reassess kinda where you see the filtration opportunity relative to maybe what you thought initially?

Todd Adams (Chairman and CEO)

Well, it's not much different than we identified. If you think about the attachment rate and you think about the, you know, the ability to continually provide this through subscription services or other things and really drive, you know, the replacement with our filters, was not a strategic focus that Elkay really had spent a lot of time on. We identified it through the size of the installed base, the conversion from non-filtered to filtered units, and then obviously ensuring that we would capture that replacement event. You know, we think this is clearly identifiable and broadly the same size we thought.

It's, you know, it's not crazy to think about this as, you know, a $100 million dollar opportunity in the next 2 to 3 years.

Jeff Hammond (Managing Director and Equity Research Analyst)

Okay. Thanks, guys.

Operator (participant)

Your next question will come from the line of Mike Halloran with Baird. Please go ahead.

Mike Halloran (Senior Research Analyst and Associate Director of Research)

Hey, good morning, everyone.

Following up on Bryan's last question there. When you think about the guidance for the back half of the year, certainly realize it's unchanged all else equal for the full year. What is the assumption for demand relative to normal seasonality? Is it just a stable backdrop on the residential side and the non-residential side when you normalize for kind of the inventory machinations and all the other things? Are you just assuming a relatively stable demand pattern underneath, or is there something different?

Mark Peterson (SVP and CFO)

We are. Yeah, we're not assuming. I think, you know, if you go back to 90 days ago, we thought. Look, we think over the course of the year, the residential end market could get modestly better in the back half sequentially, and non-res pretty stable over the course of the year. When I say modestly, not a material impact. That may offset a little bit of a slowdown in the fourth quarter. I think, you know, everything that we see right now, when you look at contractor backlogs, you know, pulsing contractors across the regions, you know, people still feel reasonably good about 2023 today. You know, the visibility that you can appreciate is only so far out.

I think that, you know, we right now, from all the data points that we have with our main contractors and reps, no one has pointed to some cliff coming in the back half of the year at this point in time of what everyone can see.

Mike Halloran (Senior Research Analyst and Associate Director of Research)

No, no, that makes sense. On the inventory side, maybe just talk how you feel about channel inventories as well as how you feel about your own inventory levels, and how you see that working out through the year.

Todd Adams (Chairman and CEO)

Yeah. I think from a wholesale channel inventory perspective, there's the right levels of inventory for the future demand that we see. We don't see it elevated in really any specific categories. Taken as a whole, I think we're sort of through that right sizing more based on where our lead times are today relative to maybe where they had been over the course of 2021 and 2022. That feels very normal. In terms of our inventories, you know, obviously, we've got an outlook on the second half. We've essentially dialed in, you know, the purchase requirements that we see that match that. You'll see inventory continue to come down over the course of the year, as lead times from our suppliers have sort of normalized.

Taken as a whole, I think the jockeying of, you know, lead times and inventory, you know, for us and our suppliers is largely behind us. A sort of steady state, at much lower costs as Mark identified, and that's where we see the margin lifts. It's, you know, sort of spot rate current purchases that we've locked in. We feel, you know, we've got a nice cost tailwind heading into the second half.

Mike Halloran (Senior Research Analyst and Associate Director of Research)

Thanks. Appreciate it, gentlemen. Have a good one.

Todd Adams (Chairman and CEO)

Yep. Thanks.

Operator (participant)

Your next question comes from the line of Joe Ritchie with Goldman Sachs. Please go ahead.

Joe Ritchie (Managing Director and Senior Equity Research Analyst)

Hey, good morning, guys.

Todd Adams (Chairman and CEO)

Good morning.

Joe Ritchie (Managing Director and Senior Equity Research Analyst)

I'm just trying to square your non-res commentary. It, you know, back of the envelope, it looks like non-res was probably up, I don't know, high single digits this quarter, and now we're expecting it to be negative, modestly in the second quarter. I'm just wondering, like, is this mostly, you know, channel inventory dynamics? Were there, you know, any, you know, cancellations in your backlog? I'm just trying to understand that a little bit better.

Todd Adams (Chairman and CEO)

Joe, we touched on it a little bit earlier. The sales growth in Q2 and Q3 would be impacted by backlog reduction last year. Not necessarily the order rates or the market. It's a function of last year's Q2, Q3 comparable would have a pretty significant backlog reduction from both Zurn and Elkay. As a result of that, obviously, we're working through that headwind. If we look at sort of daily order rates and what we're projecting for Q2 and C and Q3, the order growth in non-res would be positive for those two quarters. Remember last year in the first quarter, you know, lead times were extended, supply chains were long.

We built backlog and then, you know, spent Q2 and Q3 reducing that. I wouldn't say that our outlook on the market is really any different from Q1 to Q2. It's more a function of the comparable last year as we reduce backlog.

Joe Ritchie (Managing Director and Senior Equity Research Analyst)

Okay. Got it. That's helpful. I guess maybe just as we're progressing through the year, I know you've given a lot of color at this point on the margins improving, particularly in the third quarter. I guess, you know, I know that you guys typically don't give pricing, but I'm just curious, you know, you're seeing across, you know, the sector, you know, some really good tailwinds from price cost. I'm wondering if you can at least give us maybe some quantification on with lower cost inventories going through your P&L, what does that ultimately mean from a dollar standpoint? Just trying to understand the impact that we should see in the second half.

Mark Peterson (SVP and CFO)

Yeah. I think, you know, we're not gonna get into giving the actual dollars, you know, for the third quarter. We'll get to the outlook at the end of this quarter when we report again in July. I think if you think about pricing and cost, you know, we've been talking about getting effectively a low single-digit price realization on a year-over-year basis this year. That's been sticking. There's been no, you know, price walking back at all as we anticipated, and we think that continues for the balance of the year. From a cost standpoint, you know, we said there's about a 250 basis point headwind in year-over-year in the first quarter.

That moved stuff down to closer to 100 basis points in the second quarter. Then obviously that headwind disappears. The benefit really is that we get to that lower cost structure we've been talking about, yet the price stays in place in the back half. You'll really see that stand out in the third quarter margin when we, you know, give our outlook 90 days from now.

Nathan Jones (Managing Director and Senior Equity Analyst)

Okay. Thank you.

Operator (participant)

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

Nathan Jones (Managing Director and Senior Equity Analyst)

Good morning, everyone.

Todd Adams (Chairman and CEO)

Good morning, Nathan.

Nathan Jones (Managing Director and Senior Equity Analyst)

I wanted to maybe take a look a little further into the future. You guys have talked about some of these new non-res projects that you're aware of. You track for up to 2 years before they turn into revenue, which gives you some visibility not only into 24, but maybe even out into 25, which I think is probably where people are more concerned on the at least the commercial side of non-res construction. Can you talk about that sales funnel that you track, you know, further out into the future and whether you've seen much change in that, you know, more distant kind of opportunity?

Todd Adams (Chairman and CEO)

Yeah. I think it's way too early, Nathan. The, the short answer would be, it would be unidentifiable for us to look at 2024 and 2025 and notice a meaningful change as a result of what's happened in the last 90 days. There's been no significant adds beyond what we would normally expect or cancellations. Taken as a whole, you know, the, the market and the level of project activity that we're seeing, particularly on the institutional side, is not changing dramatically 1 year or 2 year out as a function of, you know, where interest rates are or, you know, the banking crisis. I would say, you know, when you look at our commercial exposure, you know, it's a mix of retail, office, warehouse, hospitality and other things.

you know, I think it'd be disingenuous to say that we've seen any change in our, in our project outlook beyond qualitatively saying, "Hey, it's probably not gonna be as good in 2024 as 2025 as a function of, you know, where rates are today." But I don't think that we could identify anything specific that would maybe answer what you're trying to get at.

Nathan Jones (Managing Director and Senior Equity Analyst)

Okay. Fair enough. Maybe just on the share repurchase, you know, higher than the average for the first quarter. You talked about having done more in the second quarter here. Is how much you execute on on the share repurchase in 2023 dependent on share price opportunities you find for other capital deployment, bolt-ons, anything like that? Just any more color on where that number might end up for the year?

Todd Adams (Chairman and CEO)

Well, I think, you know, obviously we communicated, you know, at a minimum of $100 million. We're off to a very strong start on free cash flow. We're executing against the projections that we had. The stock prices has been, obviously a little bit lower than maybe we would all like. I think that there's upside to that $100 million. You know, we'll just continue to work at identifying how much we do and how we execute it throughout the year.

Nathan Jones (Managing Director and Senior Equity Analyst)

Okay. Thanks for taking my questions. I'll pass it on.

Operator (participant)

I will now turn the call back over to Dave for any further remarks.

Dave Pauli (VP of Investor Relations)

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

Operator (participant)

Ladies and gentlemen, that will conclude today's meeting. Thank you all for joining. You may now disconnect.