Q1 2020 Earnings Call
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Welcome and thank you for standing by at this time, all participants sort of listen only mode. During the Q and a session. If he'd like to ask a question you May press star one under so today's call is being recorded if you have any objections you may disconnect. At this time now like turn the call over to Mr. Whit Kincaid, Sir you may begin.
Good morning, everyone welcome to Mueller water products first quarter 2020 conference call. We issued our press release reporting results of operations for the quarter ended December 30, Onest 2019 yesterday afternoon.
A copy of it is available on our website you were water products dotcom.
Discussing the first quarter's results in our outlook for 2020, or Scott Hall, our president and CEO and Martie Zakas. Our CFO. This morning's call is being recorded and webcast live on the Internet. We have also posted slides on our website to help illustrate the quarter's results as well as to address forward looking statements and our non-GAAP disclosure requirements.
At this time, please refer to slide to.
This slide identifies non-GAAP financial measures referenced in our press release on our slides and on this call and discloses. The reasons why we believe that these measures provide useful information to investors reconciliations between non-GAAP and GAAP financial measures are included in the supplemental information within our press release and on our web site.
Slide three addresses forward looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward looking statements.
Please review slides two and three in their entirety.
During this call all references to a specific year or quarter unless specified otherwise refer to our fiscal year, which ends on September thirtyth.
A replay of this morning's call will be available for 30 days at 1866 or for 18817.
Archived webcast and corresponding slides will be available for at least 90 days and the Investor Relations section of our website. In addition, we will furnish a copy of our prepared remarks on form 8-K. Later this morning, I'll now turn the call over to Scott.
Thanks, Whit. Thank you for joining us today to discuss our first quarter results for 2020.
We had a very good start to 2020 years, we generated solid organic consolidated net sales growth improved margins increased adjusted EBITDA in the quarter or net sales increased 10.3% driven by the benefit of the gross acquisition with organic net sales increasing 3.1%.
Both higher pricing and increased shipment volumes of our core infrastructure products drove our organic net sales increase.
We increased our gross margin by 290 basis points to over 34% in the quarter.
Higher pricing favorable product mix and the addition of pros more than offset increased costs from tariffs and inflation.
Infrastructure and technologies contributed to the gross margin improvements in the quarter.
Was especially pleased to see technologies achieve breakeven adjusted EBITDA in the quarter. This performance in the addition of Crows helped deliver nearly 20% consolidated adjusted EBITDA growth.
During the quarter, we settled the Walter energy tax liability with a 22.2 million dollar payment to the IRS after a significant effort managing and resolving a complex situation over the past four years regarding the obligation to have our onetime parent company. We can finally put this matter behind us.
Fiscal 2020, we expect to see continued favorable demand in our end markets driven by healthy municipal spending and improve residential construction.
However, we remain cautiously optimistic due to continued uncertainty from global and domestic matters. After a solid start to the year, we're increasing our expectations for both net sales and adjusted EBITDA growth for fiscal 2020, which I will discuss in more detail later in the call with that I'll turn the call overdone.
Morning.
Thanks, Scott and good morning, everyone I will begin with our first quarter consolidated GAAP and non-GAAP financial results. Then review our segment performance I consolidated net sales for the quarter increased 10.3% or $19.8 million to $212.6 million. This increase was primarily driven by the acquisition of crowd.
Yes, as well as higher pricing and increased shipment volumes it infrastructure.
As Scott mentioned, we achieved organic net sales growth of 3.1% in the quarter.
Our gross profit this quarter increased 20.8% or 12, and a half million dollars to $72.6 million.
Gross margin of 34.1% improved to 290 basis points over the prior year. This improvement was primarily due to higher pricing product mix and the addition of Crouse and was partially offset by higher costs associated with tariffs and inflation and approximately $500000 a startup costs.
Associated with our large casting foundry expansion in Chattanooga.
Selling general and administrative expenses were $49.9 million in the quarter and 8.9 million dollar increase every to prior year.
The increase was primarily due to the addition of SDMA from Crouse, which accounted for about half of the increase and IP related activities personnel related cost and professional fees.
DNA as a percent of net sales was 23.5% in the first quarter compared to 21.3% in the prior year.
Our current expectations for full year 2020 are for title SGN, a expenses to be about 20% of consolidated net sales.
Operating income increased 27.7% to $20.3 million in the first quarter compared to $15.9 million in the prior year.
Operating income included strategic reorganization and other charges of $2.4 million in the quarter versus $3.2 million in the prior year.
Turning now to our consolidated non-GAAP results.
Adjusted operating income increased 18.8% or $3.6 million to $22.7 million in the quarter.
Infrastructure and technologies increased adjusted operating performance in the quarter, which was partially offset by higher corporate SJ expenses.
Adjusted EBITDA for the quarter increased 19.5% or $6.1 million to $37.4 million adjusted EBITDA margin improved 140 basis points to 17.6%.
Consolidated adjusted EBITDA conversion margin was 31% for the last 12 months adjusted EBITDA was $204.4 million were 20.7% of net sales.
As compared with the prior 12 month period, we have increased latest 12 months, adjusted EBITDA, 10.3% or $19.1 million and improved adjusted EBITDA margin 80 basis point.
Net interest expense for the 2021st quarter was $7.4 million as compared with five and a half million dollars in the prior year quarter.
The increase in net interest expense in the quarter resulted from a noncash adjustment to capitalized interest and decreased interest income due to lower cash balances and lower interest rates are updated full year 2020 expectations are for net interest expense to be between 24 and $25 million.
Income tax expense was $3.1 million were 23.1% of income before tax as compared with an income tax benefit of $5.9 million or 21.9% of loss before taxes in the prior year quarter.
The prior year quarter included a $7.7 million tax benefit on the Walter energy accrual.
We continue to expect our effective tax rate for 2020 will be between 24 and 26%. Our adjusted net income per share increased to eight cents for the quarter compared to seven cents in the prior year.
Turning now to segment performance starting with infrastructure.
Infrastructure, net sales increased 12.1% or $20.8 million to $192.8 million in the quarter.
This increase was due to $13.8 million in sales some crowds and a 4.1% increase in organic net sales this quarter, which was primarily driven by higher pricing and increased shipment volumes of our core products.
Adjusted operating income for the quarter increased 15.5% or $4.8 million to $35.7 million.
The increase was primarily due to higher pricing product mix increased shipment volumes and the inclusion of crouse, partially offset by higher costs associated with tariffs and inflation increased SGN, a expenses and approximately $500000 a startup costs previously mentioned adjusted EBITDA for the quarter incur.
Reached 16.3% or $6.7 million to $47.7 million, yielding an adjusted EBITDA margin of 24.7% and a conversion margin of 32% in the quarter.
Moving onto technologies.
Technologies net sales decreased $1 million to $19.8 million in the quarter, driven by lower shipment volumes that metrology, which were partially offset by higher volumes at echologics.
Adjusted operating loss improved $1.7 million from the loss of $3.7 million in the prior year, primarily due to product mix and higher pricing, partially offset by lower shipment volumes and higher cost associated with inflation.
Technologies adjusted EBITDA also improved $1.7 million in the quarter to breakeven as compared with a loss of $1.7 million in the prior year.
Including with liquidity cash used in operating activities for the first quarter was $12.4 million with negative free cash flow of $27.6 million, both cash flow from operations and free cash flow were impacted by the $22.2 million payment associated with the Walter tax settlement.
As a reminder, our cash generation is generally stronger in the second half of our fiscal year due to the seasonality of our business.
We invested $15.2 million in capital expenditures in the period, which was similar to the first quarter of the prior year.
We continue to expect our capital expenditures will be between 80 and $90 million for 2020.
At December 30, Onest 2019, we had total debt of $446.4 million and cash and cash equivalents of $136.8 million at the end of the first quarter, our net debt leverage ratio was one and a half times.
Finally on October Onest, we adopted new accounting requirements for leases as a result, we recorded assets and liabilities of approximately $30 million each related to our operating leases, which had previously not been recorded on the balance sheet.
I will turn the call back to Scott to talk more about our results and outlook for 2020.
Thanks, Marty I will provide some additional insights into key areas and then comment on our full year 2020 outlook. After that we'll open the call up for questions.
Going forward, we're continuing to focus on executing our key strategic priorities. These include accelerating new product development developing a fully integrated technology platform for infrastructure monitoring driving operational excellence and modernizing our manufacturing facilities. Our goal is to deliver above.
Market organic net sales growth and improvements in our margins from productivity initiatives and continued price cost realize Asian.
Our organic net sales in the first quarter performed well as we benefited from higher pricing as well as higher volumes in our core valve and hydrant and leak detection products.
During the quarter, our natural gas and metrology product sales experienced headwinds versus the prior year, our natural gas product sales experienced what we believe is a temporary slowdown in sales we expect that sales will improve through the balance of the year as our end markets normalize.
For metrology products, our 2019 sales benefited from a significantly stronger backlog entering the year. Our current backlog is meaningfully lower than the prior year due to inconsistent pipeline of large orders as a result, we expect our metrology sales to be flat this year.
In recent years, we have focused on developing stronger partnerships in the distribution channel.
As a result, we have enhanced our partnership with Ferguson, one of our largest customers or many of our metrology products and have seen a greater percentage of our metrology sales growth through their distribution channel recently, we work with Ferguson to we have a $34 million multi year alibi water meter contract.
For Newport News, Virginia.
This contract win is an example of how we were able to differentiate ourselves with our technology for remote disconnect meters.
We could start benefiting from orders associated with this contract in the fourth quarter of this year.
I was pleased with the gross margin improvement we generated in the quarter. This was driven by a combination of increased volumes of our core valves and hydrants, which are some of our higher margin products and improved price realization.
During the first quarter, we benefited from carryover pricing, which included two price increases for our products and more than offset the impact of increased costs from tariffs and inflation.
We recently announced additional price increases in the western Canadian markets for many of our infrastructure products, which will be effective in February and merge the timing of these announcements is comparable to the prior year, although raw material costs are not currently contributing through inflation. We expect this higher pricing will help offset.
The anticipated increases in material costs and other inflation for the balance of the year.
The execution of our key capital investment projects to accelerate the modernization of our manufacturing facilities equipment and processes is well underway.
We have major projects driving capital spending above historical levels in order to both deliver above market sales growth by broadening our product capabilities and expand gross margins as we have previously discussed we have three large projects underway, including the large casting foundry expansion in Chattanooga, Tennessee.
A new brass foundry indicator, Illinois, and a new specialty valve manufacturing facility in Kimball, Tennessee.
These transformational projects are forecasted to account for approximately $130 million of capital spending.
Based on current timelines, we expect that these projects together will drive approximately $30 million of incremental gross profit in 2023 through both operational efficiencies and sales growth.
As mentioned previously we expect capital expenditures as a percent of consolidated net sales to decrease to less than 4% in fiscal 2023.
We have nearly completed the large casting foundry expansion in Chattanooga, we expect to begin producing product with our own castings by the end of the second quarter. As a reminder, this was a large multiyear investments in our Chattanooga facility to expand domestic manufacturing capabilities for large valves and introduce additive.
Manufacturing technologies to our foundries.
This includes one of the largest threed printers in the world, which will help decreased time to develop new tooling and shorten turnaround times for our customers. This investment will help us further differentiate ourselves in the marketplace.
Historically, we have focused on small cells, which are less than 12 inches.
They are used much more frequently increase population density and urbanization are driving a greater need for large valve sizes. Although today the market for large gate valves in North America is less than 30% of the gate valve market, we expect large gate valves to grow at a faster rate than small valves.
As a result, this investment will add additional flexibility and capabilities for new product development and help us provide a broader range of products to our customers. In addition, it helps with product efficiencies through insourcing and provides more products, which will satisfy our customers made in America specifications. We.
The less reliance on sourcing valve bodies from China.
As with any large project in new capabilities, we expect there to be a ramp up this year and anticipate that we will ultimately recognize the benefit of this project in fiscal 2021, the impact of the startup costs until full ramp up of these new operations is included in our annual guidance and was.
$500000 this quarter.
I will wrap up my comments with a review of our updated expectations for full year 2020 results.
During fiscal 2020, we expect to see favorable demand in our end markets driven by healthy municipal spending and improve residential construction.
The residential construction market appears to be improving based on the housing start data reported for our first quarter. It's still early in the year and we continue to see a wide range of predictions for housing growth in 2020.
For our fiscal year, we anticipate residential construction growing in the low single digit range municipal spending which accounts for the majority of our end markets continues to be healthy for our fiscal year, we expect the municipal and market will grow in the low single digit range.
Despite continued uncertainty from global and domestic matters, we are increasing our expectations for growth in both net sales and adjusted EBITDA for fiscal 2020.
Based on our current expectations for end market growth, we anticipate that our 2020 full year consolidated net sales growth will be EPA high end of the 3% to 5% range. We previously provided.
This growth will be driven by higher pricing increased shipment volumes and the contribution from growth in the first quarter.
Additionally, we expect adjusted EBITDA growth to be at the high end of the 4% to 8% range. We previously provided.
I'm confident that we are in position to accelerate our transformation to become a municipal and residential solutions company with a growing percentage of our products incorporating technology.
The traditionally conservative water and waste water utilities are increasingly more open to using digital tools to deliver more benefits there stakeholders with limited resources not to mention many face significant challenges from the aging infrastructure.
We expect technology enabled products to achieve significantly higher growth rates than some of the traditional products in the water utility industry. In fact, the overall digital water market is expected to grow at a 6.5% compound annual growth rate between 2019 in 2003 as for.
Tested by Bluefield research.
The segments, most relevant to our growth strategies like asset network and information management are forecasted to grow even faster.
With our market, leading positions and extensive installed base of infrastructure products, we are well positioned to take advantage of these trends today, we have a number of products addressing these segments, including Echologics pipe condition assessment services and fixed leak detection solutions.
Metrology is advanced meters and communications equipment, smirk hydrants pressure in water quality monitors and most recently or centric software platform.
In summary, we are well on our way to incorporating technology into our infrastructure products. While also modernizing our manufacturing facilities in operations. As a result, we believe we will be able to deliver above market sales growth and drive margin expansion and earnings growth. While also continuing to return cash.
To shareholders and with that operator, please open the call for questions.
So mines are now open for questions. If you would like to ask a question over the phone. Please press star one and record your name if you'd like to withdraw your question press star to thank you.
The first question the Q is from Michael Wood with Nomura Instinet. Your line is now open.
Hi, good morning.
Great job this quarter.
Infrastructure gross margin stepped up versus last quarter. Despite the seasonally slower sales was there anything unusual there I know you typically experienced a seasonal gross profit margin decline. So I'd love. It. If you can just talk about what drove margins higher whether they are sustainable and how that compared to your expectations.
As as we said the prepared comments I think with a combination of things certainly infrastructure.
Crouse impact along with pricing.
Probably the two largest driving.
Items and then the mix that we mentioned that we got with.
So.
Vibrancy and R&D felt a.
A larger portion of sales.
Also skew the margin so.
As long as we are talking about sustainability I believe as long as we keep those kinds of mixes with.
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We will have favorable Prudence review.
And how should we think about the three projects contributing to that $30 million. Your gross margin improvement to roughly 10 million each one larger or smaller than the other and can you just talk about how long it takes one to plants up and running to get the plan deficiencies.
Yeah, I think you should think about it that the Brad foundry is certainly the largest project of free.
And that $30 million is going to be.
Frankly fairly fairly lumpy with the first piece coming from improvement as a result of the.
Chattanooga large casting foundry being virtually completed by mid way through this year, and then to file and Swift Campbell and Decatur, having a much longer fuse and so the bulk of though.
All of those savings coming in the back half as a result of Decatur and Kim.
Got it just finally I wanted to ask on the guidance. It seems early in the fiscal year to increase guidance. So just wondering if you could shed more light on maybe the top one or two things that you're seeing that gives you the confidence and visibility.
Thank you. Thank you I think that the biggest thing is when you when you come out of the gain at 10.3.
And you do the weighted average map for the rest of the year I feel confident that we should be able to maintain implied organic growth rates in the.
Great about 40% range given.
Bookings and.
Let's say the market. We we also for the language in there that we're cautiously optimistic given some of the global domestic uncertainties and certainly we we recognize that were in the early days.
From a virus.
That there could be some supply chain impact and so.
Regarding to what's been a strong order book through the first Forfar malls.
Well I save time.
Hi, guys enters Theres some risks on the horizon.
Great. Thank you.
Next question in the cues from Brent Thielman from D.A. Davidson. Your line is now open.
And again thank you.
Scott, maybe just touching on that last point I mean anything in particular, you're looking at related to supply disruptions or risks that you're monitoring I'm, assuming with net change in the guidance.
A lot, but just curious what you might see show up.
Yes, so I think with our facilities in China, we have a great handle on what they produce how they produce what that risk while the timeline to them off being and running in that is.
What I think the uncertainty for all of.
National Associates were manufacturers may apply and other organizations.
How much of your domestic supply chain is dependent on components from foreign supply chain and what does that port supply chains.
Kindness look like especially in the Weve Big Province cubic provinces in China. So I think that are.
Overall, scrambling frankly to figure out where.
We source components are two or three steps back in the supply chain of I think thats, where the railroads.
Manufacturing lies in the next let's call it 12 to 16 weeks.
Yes, okay.
And then can you just talk about.
How colleges integrating and are benefiting from the integration and the neo Laramie It seems like.
Pretty good growth are they seeing faster core growth in their business and sort of benefiting from the synergies and and a distribution channel you brought them.
Yes, I believe that you know everything that we identified in our synergies case, when we made the acquisition, we've tracked quarter by quarter and.
I would say that without question on at the aggregate. We're we're very pleased with the acquisition Howard's perform where we've gotten growth the introduction to existing Mueller.
Customers and Conversely, very pleased with exposure to some of the traditional crowds customers of newer products.
And in the aggregate.
I would give M&A that teams done a very good job integrating the sales teams have very good job of harmonizing programs across our customer base.
We still have room for improvement and we're going to continue to imaginary management around management or and manage all the way through the process until we get to our Rob.
Fully integrated stake, which I think in another year away.
Yes, Okay, and then any views or I guess expectations built and related to kind of larger municipal capex projects, which some of your larger products in valves are attached you is it's going to be a.
Stronger year based on what you you can see today.
So thanks for that and happy to get into it I think that.
In the large valve market, you will see far more kind of Bob.
Project basis, not going to be cognizant routine maintenance.
Hi that thing and so there will be some some lumpiness in that and the.
Fuse on these things tends to be much longer timeline. So jobs that are bidding for 72 inch file today are likely not going to be in an installed base for another 12 to 18 months and sometimes even longer and so we expect the job.
The large gave val and a large waterflood valve market to behave very much like the Henry Pratt business, where we have a fairly significant carry forward a backlog with water fuses on big capital projects and so I think that.
The call it.
You know a meaningful impact in the current fiscal year.
Would be a.
Misnomer and we look at at more in the things we're bidding now.
54, 60 answer 70, Twoa trial being installed as call 21.
So I do not anticipate a huge lift this year from large wells.
Yep, Okay I appreciate it I'll pass it on thank you.
Thank you.
Next question is from Deane Dray with RBC capital markets. Your line is now open.
Thank you good morning, everyone.
Good morning.
Hey, just congrats on resolving that tax overhang I know that was enjoying and it did take cash to do it but it is resolved so just a.
A moment of appreciation for that thanks.
Thank you.
So Scott I was really interested in hearing more about regarding when you listed all the different technologies at Mueller today, Thats shared developing and.
Between it.
Eco logics metrology, the smart hydrant San tracks. So how will you any new machine you like to measure and manage what's the deployment of these what's the take rate of these technologies, what's the contribution and either this year and the.
To wrap up and the next couple years I know each one of them as different but from our perspective. This is where all the growth is going to be the higher growth the higher margins that will come through so.
Maybe in terms of tree hours and the most important ones just expectations on take rates and growth in contribution and maybe we can start there. Please.
Okay. So that's a that's quite quite a lot. So let me let me speak in general theme and then we can and.
You can ask follow up questions I think most mature technologies that we have right now relate to.
Obviously am I being the most mature or where there is a fair deal all take by water municipality that business has transitioned in my three years from about.
Let's call. It 70 30 between am our is what we need to 30% analyzed to now that the businesses majority kind of a commodity dependent software revenue dependent project management competitive.
So with the most mature and so we talk about the meter business, we're really talking more about radios collectors holidays and being a bigger bigger portion of sales going forward.
When you think about the next most mature we'd have to be in both quite condition assessment.
And our.
Fixed leak detection.
Yes, we're short, but I think those two things and particular are kind of in their nascent stage.
Of exploding I think people estimate that market to be between 100 and $200 million today growing over the next step. Good Bluefield uses a 19 to 30. So we'll use that to something that could be north of a billion that have added dollars by 2030.
And you know you have to look at by condition assessment and is that include the related services all repair of the pipes does that include.
The other aspects life index, most mature and we really expect always to technologies for that business at kind of.
Double every three to five years.
The numbers.
But we're starting with real at relatively small numbers and so it's impacted.
As huge if you will.
In the near term and then last but not least I would take all of this water quality as it relates to smart high growth.
Hi, crush for fall water quality monitoring.
As it relates to sampling stations flushing stations and those kinds of things.
Hey, it's a least mature.
But it has the most potential.
Or revolution, if you will and what brings watering and I think that.
There was a view out there why some people that says we will continue to see large utility all homes.
Wireless infrastructure being deployed for five to 10 years, certainly if you look at add.
People's values multiples what prices are being paid you would say that we're going to be in the utility owned deployed.
Wireless network for for maybe three or four more generations reiterations all the technology and we believe that Fiveg and what we understand of its power requirements that that that may be had one or even two generations lot and that and that fiveg with it.
Tremendous bandwidth will probably put us in environment in water with more mesh networks and more kind of backhauling over fiveg cellular for multiple devices and Thats why we think once people realize the about that bandwidth that could be available thus far heidrick halt and the vast number all day.
Data points that can be connected to it through a mesh network, we could have kind of a step change in potential adoption.
Fiveg World and so we continue to believe we continue to develop both.
Hey, I am by solution with backhaul overwritten by backhaul over Lora, when backhaul backhaul over Rob cellular both match and unique because I. You know we were not into business of betting on which one will win and so weve maintained all along where the open architecture solution.
Where if you invest you will have Max flexibility at a future date and that's that's kind of been our our take so now the second party question is what the take rate look like while we have large customers with metrics. As you know we've had successful launches and fixed leak detection as we have more than 50.
Oh, hi condition assessment.
Of the customers were well on our way to establishing acoustics and.
Got it basis by condition assessment technologies on a broad basis. So I think now it's really about our educating our customers and being obviously economically viable for them to want to to adopt these technologies and for that we think we have.
All of bass business case and.
The most let's call it up.
Lowest risk implementation methods to.
To determine the help of the utility so we feel very bullish about it now will that translate into you know.
Eight 910% growth rates.
In a normal environment I would say, yes, absolutely we should be very bullish about it but as I've said many times to people on the phone. We're also in now the 10th year of an economic expansion of that gives us pause the say will treat over over the sky what those finding look like what the interest rates long run interest rates look like and so we've tempered battle.
Little bit.
But we have not given multiyear guidance.
Scott I know asked a pretty complex question, but I admire how thoughtfully you click through all the different technologies I really appreciate the answer and we do conservativeness to be the exciting part of the of the story and I'll stop there. Thank you.
Thank you.
Next question is from Brian Blair with Oppenheimer. Your line is now open.
Good morning, everyone Nice Dr. there.
Thank you.
I was hoping we could circle back on the.
Quarterly cadence Bank engineer guide I know you've touched on some of this spring and it was very strong first quarter.
Relatively easy second quarter comp and then it.
Seems like here.
Got it contemplates flat to down operating profitability in the back half ad.
I guess to two parts to that one am I correct in what is assumed in your guidance structure and Q.
Yes that is the cancer or whatever the specific points of conservatism that.
Looking into the fiscal third and fourth quarter admittedly more difficult comps.
On top of Das what's.
What drives the conservative stance.
Hey, Brian I'm going to I'm going to.
You bet Marty as you know, we don't guide two quarters, we guided year, so I'm not sure with the influences and I'll leave that to the higher mathematical grades in the room already well you know I think just starting off I think I'd I'd understand one piece is certainly in our first quarter is the last quarter that we have crouse as additive on it.
Year over year base, so as we move into the second half of our year.
I'm, sorry last three quarters of our here Krauts well have been in that in the prior years result, So I think that's certainly a portion of what we saw with that growth rate.
In first quarter on net sales and I think as just as you heard with the guidance now towards the upper end of the net sales range that we gave within the baked in addition across this quarter that sort of you know in implied continued organic net sales calls going forward and.
And we would say with that it also implies you know continued growth from an adjusted EBITDA perspective, as well without any particular guidance with respect to the quarters other than as you know where typically going to see stronger growth in the second half of our year due to the seasonality of.
Our business.
Okay.
I appreciate the color there.
And and then.
Also appreciate the additional detail you've offered on the large project investments and in particular, the 30 million in incremental gross profit step up I just wanted to clarify that as we look out to 2023 that.
That is truly incremental.
As an additive to the more normalized margin progression that you've spoken to you offered at a 100 basis points.
Side gross margin improvement each year, Diane your typical productivity initiatives and dropdown.
Right. So I kind of expected that question because that there. So let me say that though it's mostly out of that Theres I think of it as a 30 recovering from a from volume in absorption and incremental profit on that thinking about two thirds of it kind of coming from operational efficiency. So no question being asked.
If I could restate it is.
Outlined 50 basis points, Nat hundred basis points of productivity, a year 50 basis points net after you reinvest in engineering and some of the other things tend to use the 50 basis points and twentyish million of it as the cumulative or is there. Some overlapping the answer is there is there's a there is a slight amount.
Overlap you think about the math you think about what's going on with depreciation and you think about the depreciation offset.
With that and then there is by definition incremental productivity that has to take place and well I think for the purposes of modeling I am confident that we can find be the noise. If you will in other productivity initiatives and other capital projects that we still have baked in in the out years.
Is that are not fully.
Available.
For us to see today, because if we can see that we do.
Well you know I Trust from my 20 odd years of doing this that there will be cost savings projects that will allow us to say that this is though.
So I think you should think about it that way part of the 50 basis net improvement than in the $30 million.
Okay excellent and last one from me.
On capital deployment balance sheets, obviously in good shape.
Do you have these these large projects underway, but still a decent capacity. So I assume if something crouse asks came along you could pull the trigger on it in terms is.
Deploying that capital.
Would you at this stage of Kras integration be able to take another deal that size and the complexities to come on it.
Yes, I think what I, what I said to everybody and when we bought process that we would not do deals for 90 to 180 days with what we saw how the you know we're well beyond that now and I feel like the the playbook from a from the team on the integration and where we are with with integration that I'm I'm I'm eager.
To.
The to exercise those both muscles as an organization again, but you know it's got to be the right deal is the right price and I'm, sorry, Yes, we would nothing to nothing to disclose today.
Got it thanks again.
Thank you.
Next question the cues from Joseph Giordano from Cowen. Your line is now open.
Good morning, guys. This is actually friends he's gone on for Joe.
What's your outlook for profitability for tech for the rest of the year.
Let's have a a longer term outlook as well.
Yeah. So we do not give guidance by segment and I I found it to be kind of a trap in the past and so I'm not going to get back, but I will say that I expect tack to.
To do exactly what it did in the first quarter, which is to show operational improvements quarter over quarter over quarter over quarter through taking necessary action on the manufacturing floor in the market from a pricing perspective and from a deal point of view to make sure that we.
Continuously improve profitability I'm not interested in being the largest meter manufacturer in the world and not making any money.
I'm interested in being profitable and we are going to continue that March I think since I've got from here.
You know we've gone from a 15 ish million dollar loss.
We've been steadily marching that down at the same time, we've steadily marks that down we've launched a centric platform. We've launched by that for we've lost multiple radios in the lower away and that work we've gotten a lot of really good technology out of the group that we can apply to infer.
Sure and though and I think that the team has done a good job showing good progress will eventually get profitable of course, that's why we invest well I think that we're going to have.
You know some time left and I would I would point out again, if you must have already in her section.
We know we've got a ways to go at Echologics and continued investment there.
It has to get scale in order to be profitable one that I think the whole of the segment will be good.
Great appreciate.
A detailed answer and that certainly encouraging to see the margins in filling back on and then when does the impact from price increases Matthew and infrastructure starts to fade out and do you guys have any more price increases planned for the year.
Yeah. So just to give you. A reminder, this is starting to last quarter, where with a lot of our products and got the benefit of two price increases the one that we implemented a back in September of 18 as well as the February 19, so going forward, we have announced a price increases for IDE and.
Number at our infrastructure products, you know sort of in that February March timeframe, and so I'd say five from that piece, what reasonably comparable on a year over year basis, but this would be the last where you see the benefit and so a couple of price increases.
Okay, great. Thank you if I could squeeze in just one quick one on the outlook for interest expense noticed it's about 3 million higher than less last quarter is related to the capitalized interest on lower cash interest or what exactly is driving the increase.
I'd say largely so certainly looking at the quarter for the noncash adjustment for capitalize interest and then I think as well just a small piece, which is lower interest.
And on outlook going forward.
Okay excellent. Thank you very or your answers.
Next question is from Brian Lee with Goldman Sachs. Your line is now open.
Hey, guys. Thanks, It's a little question Lonnie.
I guess study will add technology in the Q1 company sleeves.
So I can appreciate the site said revenue decline, but so wondering how should we be thinking about that in this segment in the next in the quarters cm comps seem to be getting easier here.
At least until you get to the fourth quarter and then just I guess higher level do you expect technology the abroad and go.
And below or above the 5% combine it.
Yes, so I think in our prepared comments, what we said was that metrology you should expect flat performance year over year.
And you know as as I discussed so we're going to transition the business to more of the a focus and kind of distribution model and we've got a lower backlog.
As Weve ceased the elephant hunting at lower prices and you know we've we've recognized the improved performance we've recognized improve.
Well from a cost perspective and from an operating perspective, so I think that so we're going to continue to run the business that way. So you should think about a meter business kind of you flat for the year. The a growth part of technologies ought to be in our fixed leak detection enterprise condition assessment business, that's where we're focusing sale.
Selling resources, that's where we're focusing our marketing resources. So people can start to.
Got a broader based acceptance of the Echo shore Dx product line and you know we've got good penetration at San Jose in Connecticut, Another big customers marquee customers that are using this technology successfully to five weeks and their network and you know this will be the years of kind of.
Getting it out into a much broader acceptance.
Arena, So you know that number.
What that growth should be you know, we're not disclosing any of that for obvious reasons and I think that a you know, we'll we'll have relatively slower growth because of the flat meter business, which is the bulk of the which involved in the segment today, but won't be in the longer.
Okay helpful. Appreciate the color and then just a second question and I'll pass it on I might have missed that split them. The EBIT margin in the quarter, we get to something like type C.
Thanks, Brad So wondering if that if that sounds like it's about ballpark in if you add any thoughts on the trend line.
Interestingly yen extended historical targets and.
35%, plus and then yet number different initiatives mimicking the S wondering.
How we should be thinking about that that conversion by himself. Thank you.
Look I think overall, we think about conversion margins you can absolutely fine. Some lumpiness as you look I think about it on a quarterly basis. Yeah. So I started I think you've got implicit a with a guidance, we've given where the conversion margin falls out from that but.
You know certainly on a quarterly basis, it's there can be lumpiness.
Okay fair enough. Thanks.
Next question the cues from Walter Liptak with Seaport Global Your line is now open.
Hi, Thanks, good morning, everyone.
I wanted to ask about a about prowess and you guys didn't call out what the contribution was a year in percentage or whatever for for the quarter and since this is the last one I think where it's incremental I wonder if we can get that number.
Yeah, I think what we said we will continue to say is that a you should think about it as a.
Consolidated.
EBITDA margins for.
Business.
Would be about equal, but we're not getting into what pieces are trading and as we negotiate pockets of products were were decidedly not disclosing that so I think walton okay holidays in the context so.
Kind of a at par with a consolidated results should be pretty close.
Okay, all right great and then the a the capex startup costs you called out thank God I half million dollars of incremental costs in the first quarter is that something that continues on or was this lumpy where we got.
You have extra costs this quarter, but then they ramp back down in the second and third quarter.
Oh, what I'd say, we did we called out the roughly $500000. This quarter for the large casting therapy, which includes depreciation and I you know as we said we expect a oh, yeah start start production by the end of the second quarter and what I would say is start up costs are expected startup costs for the balance of the year.
Our incorporated into the guidance that we have provided.
Okay, Yeah, I heard that I guess was the question is they're happening and keep ramping like is it another half a million or more in the second quarter and then continuing to ramp through the are we.
Yes, what we have we called out the dollar amount in the first quarter, we do expect more through the balance of a year and that is incorporated in the guidance that we have just provided.
Okay. Okay got it and then if I could just ask the last one and.
Ferguson and the Tech margins is there something structural changes with the the Ferguson relationship with better visibility to profitability in that the tech segment now.
No I wouldn't say, it's better visibility or that both of the lumpiness of the jobs will go away or anything like that I think what it is is.
That.
Oh.
Contrary to the way we used to do it up.
You go elephant hunting for these multiyear contracts and you know you look at the average price points out of contract you look at the average price point.
In the a replenishment market and there was a significant spread I'm not going to say how much.
But just it's better business, it's better business from a flow perspective in its better business from a a.
So a yield perspective, and so yes. So it's not got some of the complexity and we would take more but I'd be happy to have more distribution business.
Okay, Great sounds good thank you.
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And last question the cues from Jose Garza with Gabelli. Your line is now open.
Hey, good morning, guys.
Good morning was it.
Oh, Hey, Scott I notice you guys are bought in a that debt Pratt JV I'm, just I guess.
Talk about its kind of any structural difference that you guys are undertaking now that you guys kind about that in small enough.
Yeah. So let me just a start off so definitely the joint venture that we entered into in 2014 gets to be clear as you think about it from a financial statement perspective, since we entered into that joint venture, we have always consolidated or the results within our our operations.
As you look at it you won't see anything.
Yeah freight from that perspective at least just a small amount of the equity interests that was.
That was back it out, but we did acquired the balance the non controlling interest that we had of about 51%. It was just a little over $5 million. It's had a small business. It's part of our up Frac brand and I can give this capabilities largely in the industrial south segment of the business and Ah.
We think it's a good opportunity at the business that we certainly watch the last five years and you know will continue.
To let to grow that business and and integrated as we need to.
So I guess nothing strategic difference.
Well I would say the the these strategic rationale to take it over was to be in control of both the brand on the product offering we like the industrial space. There are certain applications. There that we think how long term growth capabilities and that we think we can also bring some some technology to that will give us.
And an ability to a you know be successful against the traditional competitors. There, but you know are you asking me or are we going to go into flow control in the industry all in pop up again.
He ever since it suffered no not interested in doing that.
We have our niche we believe it's got some attractiveness to it that's why we bought it out.
Okay Fair enough and then you talked quite a bit about the technologies, a new product introductions.
I guess, if you could.
Talk about on the infrastructure side, a you know your new product pipeline or kind of going into this and this year and then compare that to where you've been.
Yeah, I think that you know we've we've we've been working tremendously I I'm not going to say our announced something here that we plan to announce at ace or something but I think you've seen a at the last couple of basis. Some some new restraints, you're seeing some integration of hydrants and the crowds for.
Products, you're seeing some integration of valves in the cross products you've seen some early indications of a new insertion valve there's been many many things that the infrastructure team has been working on that over the past three or four product that we windows. We we have watched and the pipeline is a is.
Full for the year that is to say that though you know when we review our product development pipeline and we look at our engineering resource availability or we currently set for the year at a deficit that as we have more projects. Then we have resources that we go through the prioritization process and.
You know come up with what will be launching next and you don't become the Athree comes a web tech hopefully you'll see some things you have not seen before.
You know so many be there thanks very much guys.
Thank you have that thanks, operator, thank you I believe that and the Q and a you can wrap up now.
This concludes today's call. Thank you for your participation you may disconnect at this time.
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