Good morning, and welcome to the Zurn Elkay Water Solutions Corporation Fourth Quarter 2022 Earnings Results Conference Call, with Todd Adams, Chairman and Chief Executive Officer; Mark Peterson, Senior Vice President, and Chief Financial Officer. and Dave Pauli, Vice President of Investor Relations for Zurn Elkay Water Solutions.

This call is being recorded and will be available for one week. The phone numbers for the replay can be found in the earnings release the Company filed in an 8-K with the SEC yesterday February 7. At this time for opening remarks and introduction, I will turn the call over to Dave Pauli..

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're helpful to investors. And contain certain 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..

Thanks, Dave, and good morning, everyone. This is what we hope is a relatively straightforward call.

We'll take everyone through what we saw in the fourth quarter along with some even more recent trends will also lay out what we believe next year could look like which is broadly reflected in the current consensus and then we'll get back to work and execute to maximize what we are actually holding ourselves accountable to.

After a couple of years of big transformative transactions to completely change our business to a premier pure-play water business, this upcoming year is simply about executing on what's right in front of us and we really like our hand. It's also not lost on us.

The noise of the past few quarters is not what investors expect of us, and realize the only way to do something about it is to execute at a high level, and so, that's what we are going to go do. There were a lot of facets to 2022, including some real challenges and some more perception based.

The good news is that over the past six months, we've acted quickly got to the core of what the new Zurn Elkay is and can be. And the overall cadence at which we've operated historically is fully embedded across the new Zurn Elkay to start 2023 just six months after the close of the deal.

The third-party rep changes 80-20 simplification decisions, integration planning, supply chain constraints and extended lead times are largely all behind us and now it's about leveraging the Zurn Elkay Business System to drive performance and build upon our competitive advantages.

As Mark will discuss the fourth quarter was impacted by some near-end macro issues, including a weaker residential market and some wholesale inventory destocking that is also now essentially behind us.

And what's been a pretty eventful last three years, I think it's important to highlight the strength of the legacy Zurn business, which has grown the top line at a compounded annual growth rate of 14% since 2019.

If you could turn to Page 4, we've just taken our Board through our three-year strategic plan, and with that as a backdrop, we decided to take the opportunity to formalize a more comprehensive and balanced capital allocation strategy as we start 2023.

It's grounded in the resilience of our business, strong balance sheet, and consistently high free cash flow profile we see over the next several years. And our commitment to delivering exceptional shareholder value. Our view of the intrinsic value of the company is materially higher than it sits today.

And as a result, we are integrating a significant share repurchase plan into our near to medium-term capital allocation strategy. Our current dividend yield of $0.28 on an annual basis represents a current dividend yield of about 1.3%.

We're committed to continuing the dividend and we'll look to review any increases to that annually, given the fact that we just increased the dividend in our third quarter this is something we'll look at over the course of the year and then obviously moving forward.

The $500 million buyback represents about 13% of our current market cap in a size and concert with maintaining a leverage profile between 1 time to 2 times while also accommodating macro-driven risks in the economy over the next couple of years.

For 2023, the minimum repurchase will be $100 million, and it's something that will be both programmatic and opportunistic about. Finally, M&A has historically been important to us to fill in product categories and enhance our competitive advantages within our portfolio as a bolt-on tuck-in level.

The Elkay transaction was transformational and provides us multiple levers to enhance our core growth over time while we continue to cultivate other opportunities. For this year, think of us as singularly focused on delivering the value we see and saw in the combination with Elkay.

The punchline is we believe this formalized comprehensive approach provides even more levers to drive shareholder value, and as you see in the release, we've already been executing on it across all fronts with 25 million of shares repurchased in the fourth quarter. I'll move on to Page 5.

I touched on our strategic plan just a minute ago, which is our 15th plan since the original Zurn acquisition in 2007. What started as a carve-out diversification play for a private equity-owned multi-industry business and part of the prior Rexnord has now become our core business.

And we've taken it a step further with the Elkay transaction last year. As we developed the now Zurn Elkay Business System, one of the significant pieces of learning and change over time has been the benefit of pure focus. And when I say focus, what I really mean is an 80:20 focus.

In our opinion, spending time, effort, and resources on pieces of our business, whether it's product customers, channels where we don't see real strategic upside it's pure waste and it comes at the expense of what really matters. It's that learning that led us to make the decisions on portions of the Elkay residential sink business since closing.

With that behind us, our teams have gone out and executed an integration plan that puts us in a position to deliver at least $50 million of synergies over '23 and '24 and that's before we capture the growth benefits of what the new Zurn Elkay can deliver.

The second significant thing to point out in our strategic planning process is the concept of deploying breakthroughs. In this three-year plan, we're over-indexing our strategy deployment process around drinking water, actually safe drinking water.

Focused on K-12 our students and schools, which we believe is worth hundreds of millions of dollars of growth moving forward as the States and legislation are now beginning to take meaningful action to solve the issue. The business model framework we leveraged over time has gone through some modifications.

But the critical piece of leveraging ZEBS is unchanged. We start 2023 in a spot that places are premium on execution and I can't thank our team enough for all their hard work this past year. And I know we're going to do great things in the coming years, as we execute, like, we can. If you turn to Page 6.

I'll spend just a minute on our drinking water strategy. The reality is in this country over half the population, drink water from lead service lines. The most vulnerable are our kids. With the impact felt, not only in places that you've heard of like Flint.

But very, very likely in the schools where you live, your kids, your neighbors, nieces, nephews or grandchildren go to school. With over 131,000 K-12 schools in the U.S. over 13 million kids went to school last year with elevated lead levels.

There is however a growing awareness and legislation that's beginning to take shape, and we're investing to make sure that we are the go-to solution to address this incredibly solvable problem. It starts with having a leading market share and the largest installed base of point-of-use drinking water solutions in Elkay.

And if you turn to Page 7, the inherent competitive advantage we have is starting point is so important. The competitive moat is large and growing and one that's been built by Elkay over time. Now it's time to take it to another level in our approach to not only grow the category but ensuring that the follow-on filtration business model is locked in.

The category has changed over time from drinking fountains to now bottle fillers, that was the initial evolution. Largely a way to improve hygiene and eliminate plastic waste. We believe the next evolution will be ensuring safe drinking water in public and private spaces with the devices and ensuring that through filtration.

By improving the attachment rate and continuing to grow the installed base, we're confident that filtration can be $100 million of high-margin recurring revenue in the coming years, as we expand accessibility to provide subscriptions and embed and proprietary technology to ensure that we're getting the replacement event.

Finally, both the funding and awareness is there whether it's asset funding, Filter First legislation or simply parents teachers community members taking some accountability to solve, but again is a very solvable problem.

This will be our why? Walking to talk not only and being recognized for being in an ESG compliant company but to actually be an ESG company, which is a nice segue to Page 8.

To give everyone a sense of the progress we've made in bringing these two businesses together to truly operate as one beginning in 2023, we've already fully aligned Zurn Elkay under a comprehensive and uniform ESG strategy and we'll issue our first combined report later this month.

As a combined organization we made solid progress in '22 and are firmly on track with the initial set of ESG targets we announced in our 2021 report. In fact, the combination did not require us to step back from our targets.

Instead, we'll be announcing seven new ESG targets in our upcoming report that are aimed at improving supplier diversity, air emissions, waste, plastic bottle elimination, engineering, and research and development stand. These new targets provide additional transparency and accountability.

For the first time, we're aligning our reporting framework with the task force on climate-related financial disclosure framework to guide our climate-related risk strategy and targets. We've leveraged Zurn Elkay Business System and applied our core values of continuous improvement to advance our sustainability efforts.

We continue to reduce our greenhouse gas emissions by completing several electricity and natural gas reduction projects in 2022. We also launched energy audits of key facilities, which will identify significant energy reduction opportunities in our 2024 target.

And finally on Page 9, here you'll see just a few of the highlights and statistics of the progress we've made over the last several years.

Our customers care about the sustainability of their buildings and retrofit products, that's why we will soon complete our first product lifecycle analysis, the document, end-to-end environmental impact of our Elkay stainless steel sinks with plans to do more.

Creating LCA's alongside environmental product declaration gives our customers additional confidence that Zurn Elkay products will help them achieve their own sustainability goals and earn sustainability certifications like WELL 2.0 and LEAD.

We simply believe that doing the right thing and we're proud of our sustainability efforts continue to be recognized. For the third consecutive year, Newsweek has named Zurn Elkay one of America's most responsible companies.

We're continuing to build on all the work we've done and including embedding ESG into our strategic planning process efforts and hope that you will take care of a look at our report later this month. With that, I'll turn it over to Mark..

Thanks, Todd. Please turn to Slide number 10. On a year-over-year basis, our fourth-quarter sales increased 46% to $340 million.

The recently completed merger with Elkay contributed 50% year-over-year growth while foreign currency translation reduced sales by 100 basis points from the prior year and core sales declined 300 basis points sales to our residential end markets down 30% and sales to our non-residential end markets expanding low single-digits versus the prior year fourth quarter.

Our Fourth quarter sales were impacted by two things. During the quarter our lead times continue to improve and are back to historical normal levels. At improvement -- at a near-term impact on order patterns from our channel partners in the quarter as reacted to our improved lead times.

In addition, our residential end markets were approximately 10 points tougher than we had anticipated heading into the quarter. With respect to Elkay in the quarter, I'll provide some color on the fourth quarter, update on demand trends in 80:20 product line exits.

Our non-residential business, which is comprised of drinking water and commercial sinks continuing to experience low double-digit demand growth on a year-over-year basis. As Todd discussed earlier, we are aggressively investing in our growth initiatives to further accelerate demand for safe drinking water.

With respect to residential sinks, we continue to execute on our 80.20 simplification actions in the quarter to exit certain residential commodity private label and OEM sink SKUs and remain on track to our targeted SKU reduction and related profitability improvement.

Our cadence of exits is unchanged from our last earnings call, but just as a reminder, we exited in our $20 million in the fourth quarter, bringing the total for the second half of 2022 to $25 million or $100 million on an annualized basis.

We will be completing the balance of the exits in the first quarter of 2023, bringing total exits to the annualized $115 million. And as you'll see in the next slide, these exits will have a year-over-year sales impact of $90 million for calendar year 2023 and a $28 million year-over-year sales impact in the first quarter of 2023.

Turning to profitability. Our adjusted EBITDA totaled $65 million in the quarter and our adjusted EBITDA margin was 19% compared to $45 million and 19.4% in the prior year fourth quarter.

The benefits of price realization and our productivity initiatives on our fourth-quarter margin was more than offset by the sell-through of higher-cost inventory purchased earlier in the year, investments in our growth and supply chain initiatives, as well as the impact of the Elkay merger. Please turn to Slide 11.

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 an all-time low of 1.4 times inclusive of approximately $25 million of cash used to repurchase common stock in the quarter.

As Todd highlighted earlier, we intend to utilize a minimum of $100 million of free cash flow in 2023 to continue to execute our share repurchase plan while targeting a net debt leverage ratio in the 1 time to 2 times range over time.

Please turn to Slide 12, and I'll cover some of the highlights of our outlook for fiscal year 2023 as well as the first quarter of the year.

To help a better understand the growth trends in the business in 2023, we have presented Zurn Elkay pro forma 2022 sales for the year and first quarter, which takes reported sales for 2022 plus Elkay sales for the first and second quarters of 2022. Let's say year-over-year impact of the 80:20 product line exits we have executed.

As you see on the slide that results in a pro forma calendar year 2020 to jump off point of $1.49 billion and that is a number we will be working off of to discuss pro forma core growth and the combined business in 2023.

For 2023, we're taking a view on our external outlook that encompasses a broader range of volatility than we have the past couple of years.

For the full year, we are projecting consolidated Zurn Elkay sales in the range of $1.5 billion to $1.55 billion and our consolidated adjusted EBITDA to range from $325 million to $345 million resulting in a year-over-year margin expansion of at least 110 basis points up to 170 basis points.

On the slide, you can see our assumptions where the sales trends for our non-residential, and residential product groups at the low and the high end of the range. In the first quarter of 2023, we are projecting sales arrangement of $340 million to $355 million and our adjusted EBITDA margin range of 19% to 19.5%.

With respect to our sales outlook, you can see on the page our assumptions for growth trends in our non-residential, and residential product groups which also incorporates a more cautious approach to buying patterns in the channel given the recent improvement in our lead times. Turning to profitability.

Our first quarter margin will be temporarily impacted by the sell-through of higher cost inventory purchase in 2022 as well as some accelerated investments primarily related to our safe drinking water growth initiatives Todd covered earlier in the call.

Partially offset by the benefit of our synergy savings related to the Elkay merger, which is on track to deliver $25 million in 2023.

With respect to margin progression over the course of the year, and starting at the second quarter, we will begin to benefit from lower material and transportation costs, as well as a sequential step down in the growth investments, resulting in an improving margin profile as the year progresses.

Before opening the call for questions, I'll touch on a few additional outlook items on Page 13. We anticipate our interest expense to be approximately $11 million in the first quarter and approximately $44 million for the full year.

Our non-cash stock comp expense to be about $12 million in the first quarter and approximately $47 million for the full year. Depreciation and amortization will come in around $23 million in the first quarter and approximately $90 million for the full year.

Our tax rate on adjusted pretax earnings will be in the range of 27% to 28% in the first quarter and a range of 28% to 29% for the full year. And finally, diluted shares outstanding will be approximately 180 million in the quarter and for the full year before the impact of share repurchases. We'll now open the call up for questions..

[Operator Instructions] We will take our first question from Bryan Blair from Oppenheimer. Please go ahead..

Thank you. Good morning, guys..

Good morning, Bryan..

Good morning, Bryan..

I was hoping you could offer a little more color on the impact of destocking in Q4 and perhaps offer your views on channel position in Q1 where we know that the resi remains on a downward trajectory for the time being that's unsurprising.

More so curious the trends and then any insight you can offer on the non-res side and how we should think about Q1 impact and then going into the seasonally stronger quarters?.

Yes. Bryan, it's Todd. I'll start and then Mark will sort of fill in some of the blanks. Fundamentally, the order patterns really sort of in the back half of November into December. We're sort of unprecedented in terms of how weak they were and a lot of it materially driven by wholesale inventory destocking as our lead times came down.

And so, when we crossed over the year and have gotten through January and sort of most of the first couple of weeks of February or at least first week of February, it's sort of much better than it has been and I would say obviously there is not a lot of inventory where non-res products in the channel.

So, what we saw was maybe a lot less inventory destocking and also a combination of our lead times coming in and being sort of back to normal.

And so, our order patterns really through the first five or six weeks here have been, I would say very much in line with what we would expect to see at this time a year, and then obviously ramps heading into the busier parts of the middle of the year for us..

Yes, I think just to put some numbers in the first part of your question. Bryan if you think about the outlook that we had and let's use the midpoint as a simple starting point.

We fair to say if you look at the delta from there to $340 million mid to high single-digit millions will be coming from the residential decline and the balance that are really coming from that Todd talked about from the order pattern. So, that's just kind of put some numbers to what Todd was discussing..

Okay. Appreciate the color. And if we think of your core non-res outlook growth in the mid-single-digit range.

How are -- as your team contemplating the growth trajectory for your key verticals you discussed education, specifically any context of the Elkay opportunity, but that is your largest end market and there are even broader opportunities beyond what was presented their funding backdrop seems quite good.

Any incremental color you can offer in education and then of course healthcare matters quite a bit as well?.

Yes. Again, I think half of our non-res is -- are those two verticals, which as you pointed out, continue to be quite good. I think the initial framework that we've laid out certainly the hedges, all of that growth to get to the range that we're sort of talking about in that mid-single-digit range.

I think we're going to take an intentionally cautious view to start 2023. But I think qualitatively from an end market standpoint, those two are actually still quite good and obviously, with the drinking water opportunity we see in schools and the way we're investing, we certainly hope to do better than that.

So, I would characterize it as sort of a cautious way to start the year and with a variety of outcomes that are going to play themselves out over the next 11 months. But I think we feel really good about those two verticals in particular..

That makes sense. One last one if I may. Thinking about 2023 EBITDA guidance. Maybe walk us through the bridge starting with $265 million in '22.

How to think about a year-on-year contribution from core Zurn the full year of Elkay contribution and then layering on deal synergies and within to that perhaps how you think of the potential risk to the framework and well also upside to that range?.

Sure. I think if you were to pro forma '22 to include sort of a more full year of Elkay, you really start the year closer to $300 million. Obviously, we've got $25 million of synergies. And then if we get some of the growth we expect you find your way to the higher end of the range.

Obviously, as Mark pointed out, we're chewing through some of that high-cost inventory to start the year.

And so, I think the framework around guidance really puts a premium on just executing at a high level to start the year worked through that high-cost inventory and then obviously get the synergies from the Elkay transaction that we're highly confident in, and we're starting the year with the range of $325 million to $345 million.

I think we're optimistic that if we execute well and the world sort of hangs together. We've got a chance to clearly end up inside that range at the end of the year. Throughout a variety of different scenarios rather than try to walk it for you Bryan, I think that's more the context of how we're thinking about it..

Understand. Thanks, again guys..

And our next question will come from Jeff Hammond with KeyBanc Capital Markets. Please go ahead..

Hi, good morning, everyone..

Good morning, Jeff..

So, just wanted to go back to the margin ramp.

One, can you just talk about how much of this accelerated investment falls into Q1? And then just maybe talk through a little bit more of the higher cost materials because it seems like you guys have been pushing price and staying ahead and now it seems like you're kind of maybe having a price cost issue in 1Q.

And then just the cadence of the synergies? Thanks..

Yes. Jeff to start with the high-cost inventory I think it's been headroom we fought over the course of the year, and this is really expected the same phenomenon with the fact that price, yes, it's discovering the higher inventory cost but its adversely impacting margins as we're not been generating a normal incremental margin on those price dollars.

So, I think it kind of came to ahead in the fourth quarter into the first quarter and I think we're at the point where we're still covering the cost, but the margin pressure is just peak at this point in time. So, I think, as Todd mentioned, look we feel good about working through that. During the second quarter is also part of the margin progression.

Over the balance of the year is that finding is a way to more of a -- let's say a normalized incremental margin on the price and then getting some benefit in the back half of the year as the price we put in place last year fixed is and you start getting all the full benefit of improved transportation costs and in the commodity environment.

As far as investment goes, again H1 weighted given some things we're trying to get in front of around safe drinking water, marketing campaigns getting pretty aggressive with that early in the year.

So, think about that is something that we're going to be again weighted heavier in the first half and in Q1 probably being the heaviest overweight quarter of all of them. And that will slowly reduce as the year progresses.

And Elkay synergies, think about relatively flat over the course or I should say consistent -- with the course about $25 million, let's start with that $6 plus million in Q1, a couple of things got to get done in this quarter, but then kind of getting back to that little over $6 million cadence over the balance of the year to equal of the $25 million.

So, I think a long-winded answer to your question, but hopefully I covered, and then you're trying to touch on..

No. That's very helpful.

And then just on some of the non-operating items, just can you walk through what's driving the higher tax rate and the interest rate looks hardly high for $540 million of debt? So, just maybe hit those two items?.

Yes, interesting, we've just kind of use the forward curve assume interest rates stay high for the balance of the year. So, we were hopefully, a little sooner than that. But we're assuming that they stay elevated over the balance of the year using the forward curve for 2023.

Tax rate, tax is really a functional some timing of compensation that ties in this [161] adjustment as effectively a fixed tax item that this year just increases for us for numerous reasons. So, it's not a variable element to deal with.

I'll also say too, Jeff and our tax rate, we don't assume any equity exercises of the year to the extent that our equity exercises that would drive the rate down, people exercise any form of equity. So, we assume that doesn't happen in our base rate. So hopefully, there's a chance to do a little bit better than that over the course of the year..

Okay. Thanks, guys..

Our next question will come from Mike Halloran with Baird. Please go ahead..

Thanks. Good morning, everyone..

Good morning..

Good morning, Mike..

I just want to make sure I understand the dynamic and how you're thinking about the cadence or the growth cadencing through the year on the non-res, it seems like the first quarter is simply sellout still strong but selling a little softer as the order patterns normalize.

But beyond the first quarter, the expectation is to have sell-out sell-in be more aligned. And therefore the commentary on the end market strength coming through more fully in your numbers, right? I mean it's just as simple as that..

That's it, Mike..

Good. So, Mark touched on some of the growth initiatives, talking about some of the promotional activities.

Maybe just highlight some of the other things you guys are working on the growth side of things, on the Elkay piece that you think you're going to gain traction as we work through the area?.

Well, I mean again I think we are leading with safe drinking water and obviously, adjacent that filtration. And so, I would say the thrust of what you're going to hear us talk about what we're focused on are really those two things.

Obviously, we've got some other opportunities, particularly around building upgrades at MRO now that we have the entire package between all the hygienic products that we had historically and now pairing that with drinking water in sinks.

So, the way to think about what we're focused on is really that drinking water piece, but also the leverage we're getting out of having this broad portfolio that we have sort of unrivaled the ability to specify that spec it -- pull it through it's an advantage for building owners, it's been a hit with the wholesale community and we're really excited about that first turn of traction we're getting with our newly instituted third-party rep network.

But as relationships and in territories where we went through a lot of change over the course of the last year. But now six to six months in, we're really starting to see the traction of driving change and preference in share opportunities with the new fully constituted portfolio..

And then -- thanks for that. And then the last one if I may. So, the share buyback commentary makes a lot of sense.

And I just wanted to clarify something from your prepared remarks, it sounds like you feel comfortable that given the cash flow situation and the leverage levels on the balance sheet that you'd be able to do a complement of buyback as well as strategic M&A. And then just flex the buyback piece if the M&A opportunities ramp.

Is that a fair thought process?.

Yes. I think the way to think about it, really, over the course of the -- at least as we start the year here is we said a minimum of $100 million.

If you think about the earnings sort of range that we've provided, and then the $200 million of cash flow you can see that you end up in a leverage scenario that is frankly below where we are today at the end of next year.

And so we do have room to do more on the buyback, and we also have room to continue to cultivate some of the bolt-on tuck-in activity that we historically do. And so, I think that this framework at least initially accommodates sort of a very balanced view of the world with the opportunity to do more on the buyback than clearly the $100 million..

Appreciate that. Thanks..

Thanks..

Our next question will come from Joe Ritchie with Goldman Sachs. Please go ahead..

Thanks, good morning. This is Vivek Srivastava on for Joe Ritchie..

Okay..

My first question is just on the residential side. So, now that you are exiting the residential sink business on Elkay.

Can you help us understand how much residential exposure is left in Elkay? And then on the Zurn side given the demand for residential is lower this year, help us understand how you're managing factories throughput in this demand environment?.

Sure. Vivek, really I have just one company. And so, we're not going to talk about it as Zurn or Elkay. It's one company. The residential exposure of the entire company is probably in the 12% range of total sales, maybe 13% today. So, all that sort of non-Elkay branded home center, private label business is the stuff that we've decided to walk away from.

And if you were to look at how are we managing the production of that portion of our business, we're managing it very much like we manage the rest of our business. We have a combination of third-party suppliers. We do some assembly and test, we do some late point modification.

And so, just like we manage the rest of our business we're flexing those product categories, those cells to meet what we see as the current demand. So, nothing different and frankly just sort of one business in aggregate..

That's helpful, thanks. And then maybe just zooming in within the non-residential vertical, how much office exposure do you guys have? And the demand for days like in the office vertical days lower build rate and occupancy.

So, any concerns on demand this year on the office side?.

Yes. I mean, I don't think there is a specific call out there. I mean if half of the business is institutional. There is a sliver of office and I don't think that there's anything that I could sort of give you qualitatively that makes me excited one way or the other.

It's not been a big part of our business for really at any point in time, and obviously, the somatic no one's ever going to work again. So that part is dead, it's sort of played itself through.

So, I'm not sure exactly how to characterize what you're trying to zoom in on there, but I wouldn't think of it as a significant headwind or frankly tailwind to our business whatsoever..

Thank you. That's helpful..

And our final question will come from Nathan Jones of Stifel. Please go ahead..

Good morning, everyone. I'd like to go back to this safe drinking water for students' slide that's up there and specifically the $2.9 billion TAM that you've put up there. Elkay obviously has a very large market share of what that TAM would be. Can you talk about what kind of time period you would be looking to address that opportunity.

How much of that you'd think will actually be realized? I mean $2.9 billion with Elkay's market share would be extremely needle-moving for the company.

So, just any more color you can give us around that?.

Well, Nathan, I think it's the reality of having a large aged infrastructure in this country.

And I think we've been fortunate to develop products that are beginning to replace some of that large age infrastructure, but it's been done at a product level as opposed to these devices is actually provide safe drinking water and in many cases in schools for kids.

And so, I think where we're headed with this is to begin to again as Mark said begin to help shape the narrative around what the opportunity is. There is some broader awareness and then obviously book and that with providing the right kind of filtration to ensure that when you drink out of these things, you know that the water is actually safe.

And so, I think we've taken a cut at it three years out, and as we talked about measured in the hundreds of millions of dollars. And so, we're just going to continue to sort of go back to work and begin to build this thing out.

Bolt-on, the conversion strategy as well as the filtration strategy, but I would say that we would see it in the hundreds of millions of dollars over the next call it three years..

So, that $2.9 billion would be the opportunity if we kind of rated the 131,000 K-12 schools.

And we got somebody to pay for it all?.

[technical difficulty] as a country and really, really sort of had a timeline. Yes. And that's a conversion that's over I wouldn't even big to guess the number of years, but it's 10 plus years, but it's a big number. Yes. It should continually be refreshed over time. So, it's a TAM, it's going to continue to grow as we install more units.

But that's a big number for sure..

Got it. That makes sense. Okay. So, I'm going go back 12 months to the announcement of this Zurn Elkay deal. The deal deck that they had 2023 EBITDA target of $425 million to $450 million. Obviously, a lot has changed over the last 12 months. High rates, versus resi you've got -- this year, you've got some price cost stock in the first quarter.

Can you talk about the things that need to happen to get back on to a path to that kind of number, whether they are recovering end markets, things that you guys need to do internally, or whatever else the contributing factors are to get us back onto a path to that kind of target that was laid out a year ago?.

Sure. I think the biggest is obviously the embedded run rate. In 2002, for Elkay frankly was behind the curve, and I think it's been a well-traveled story really since we announced the deal.

The combination of the change in the rep network, in the lead times coming down and a lot of different things created a little bit of a hangover in '22 that we're going to think about '23 is a really strong down payment on getting that back on track. And I can tell you that we feel very good about that.

The residential piece of both our business and the combined business, we certainly didn't have that dialed into what we thought '23, '24 could look like back in February of '22. So that's obviously a piece, but I would say the vast majority of things to get us on that trajectory are in our control.

There's nothing structural, there's nothing permanently off track. The $50 million of synergies are on track. Obviously, we had a double-digit top-line growth plan for Zurn at that point in time we don't have that today is what talked about, we've got a more conservative growth rate.

And so, I would think about '23 is sort of a strong down payment on getting back on that kind of trajectory and obviously, a lot of it has to do with the macro side of life that is out of our control..

Great. Thanks for taking my question..

Yes..

And that will conclude today's question and answer session. At this time, I'd now like to turn the call back over to Dave Pauli for closing remarks..

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

And that will conclude today's conference. Thank you for your participation and you may now disconnect..