Q2 2020 Earnings Call
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Welcome and thank you for standing right at this time all participants are in listen only mode until the question and answer session. Please call is being recorded if you have any objections you may disconnect. At this time I would now introduce your conference host Mr. Whit Kincaid, Sir you may begin.
Good morning, I hope everyone is safe and healthy. Thank you for joining us on Mueller water products second quarter 2020 conference call.
We issued our press release reporting results of operations for the quarter ended March 31, 2020 yesterday afternoon, a copy of it is available on our website Mueller water products dotcom.
Got hall, our president and CEO and Marty's access our CFO will be discussing the cobot 19 pandemic, our second quarter's results and current market conditions.
This morning's call is being recorded webcast live on the Internet. We have also posted slides on our website to accompany today's discussion as well as to address forward looking statements and our non-GAAP disclosure requirements. At this time, please refer to slide to.
This lot 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 website.
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 one 808, 358 069, the archived webcast and corresponding slides will be available for at least nine.
The days in the Investor Relations section of our website.
In addition, we will furniture copy of our prepared remarks on form 8-K. Later this morning, I'll now turn the call over to Scott.
Thanks.
Thank you for joining us today I hope everyone in the audience is doing well and it's the safe and healthy during this challenging time.
Before we discuss our second quarter results for 2020, I will discuss the ongoing cobot 19, pandemic, which is affecting cities in countries around the world.
Today's call is a little different given we have participants located in a number of locations ROI apologize in advance for any technical difficulties, we may encounter.
Recovered 19 pandemic has created significant challenges for our customers communities and employees.
Hi, I'm incredibly proud of how our employees have responded to the challenges.
Our team members quick we stepped up to the challenge and our Cobot 19 response team meets daily to share information and make quick decisions.
Our most important priorities are keeping our employees safe protecting our communities and providing support to our customers.
We eliminated non essential travel for all employees and executed remote work procedures for support staff.
With a focus on employee safety and engage with we enhanced procedures for disinfection, including reinforcing handwashing all facilities established processes for physical dispensing and increased frequency of communication to employees.
We continue to operate as an essential business, providing products and services to customers, which are needed to manage and maintain our nation's critical water infrastructure.
We implemented prepared this plans to keep team safe while they work. These plans include operating or manufacturing plants and distribution centers with new physical distancing measures focused on safe distancing procedures and processes and usage of additional personal protective equipment.
All of our facilities are operational and able to fill orders and our teams have worked effectively to address a few temporary closures we have experienced.
We continue to proactively monitor our supply chain and have not experienced any material supply chain issues since the temporary closure of our German facility, which is located near Wu on in the who Bay Province.
Our commercial teams are focused on providing customer service maintaining contact with our direct customers and working closely with our distributors.
We have adjusted our approach to leverage digital channels and processes to fill orders as required for physical distancing.
I am inspired by how our teams are looking for ways to support their communities.
Our Albertville, Alabama product engineering team is producing threed printed faced shields for frontline medical professionals caring for patients.
The first round to face yields producer in support of the Marshall Medical Center, So both in Boaz, Alabama.
This contribution is important work that is providing much needed personal protective equipment for medical professionals, who continue to risk their own lives to save others are vital to covert 19 virus.
Ill now touch on our second quarter performance.
I was really pleased with our strong performance in the quarter as we generated consolidated net sales growth of 10.1%. The increase was driven by increased shipment volumes across most of our product lines and pricing. In addition, it was a significant sequential improvement versus the 3.1% organic net sales growth.
In the first quarter of this year, while higher volumes were driven by strength in our end markets, especially residential construction. In addition, we believe customers increased orders in anticipation of price increases announced during the quarter.
We improved our gross margin in the quarter. Despite the startup costs associated with our large casting foundry expansion in Chattanooga and expenses associated with addressing the covert 19 pandemic, excluding the crows acquisition costs in the prior year quarter. Our gross margin increased by 50 basis points. This improvement led to a 15.
49% increase in adjusted EBITDA at 100 basis point improvement in adjusted EBITDA margins.
Our strong second quarter results are a testament to the growth and performance, we are delivering as well as our team's ability to execute in an increasingly challenging environment.
I will discuss current market conditions, given the cold and 19 pandemic later in the call.
Although we have delivered strong sales growth through the first half of year, we expect the material slowdown in our end markets for the rest of our fiscal year, especially residential construction.
However, our municipal customers are providing critical water energy and public works infrastructure services and continue to operate at reduced levels. During this crisis due to the slowdown in orders we have seen in April we are reviewing all aspects of our business and taking difficult, but necessary steps, including adjusting our production capacity.
To preserve liquidity and cash flow during this challenging period.
Before I turn the call over to Murdy, who will provide more detail on our second quarter I want to discuss why we believe that Mueller water products is in a much stronger position versus the last major recession.
We have impressive longevity as we have been working with our customers for over a century to ensure that may have a vital products and services they need to deliver clean safe drinking water, we have a strong balance sheet with ample liquidity and the net debt leverage ratio of 1.6 times at the end of the second quarter versus.
3.5 times at the end of fiscal 2008.
We are more focused company after selling us pipe at anvil with a leading position in the water infrastructure market today, our end market exposure is more focused on municipal repair and replacement versus residential construction residential construction made up about 25% to 30% of our consolidated net sales in fish.
Fiscal 2019, compared with approximately 50% in fiscal 2007.
We estimate 60% to 65% of our core products are critical to utilities to maintain their networks.
This gives us a strong base of business with additional sales coming from residential construction and project related work as a result, we have solid cash flow generation evidenced by consistently paying a quarterly dividend even during the great recession.
Finally, we have addressed legacy liabilities, including exiting multiemployer pension plans and settling the Walter tax liability with no future obligations in summary, despite the near term headwinds I am confident in the long term prospects for Mueller water products as a leader in water infrastructure products answer.
Services with that I'll turn the call over to murdy.
Thanks, Scott and good morning, everyone. I Hope you all are staying safe and healthy.
I will begin with our second quarter consolidated GAAP and non-GAAP financial results and review our segment performance and finished with a discussion of our cash flow balance sheet and liquidity.
We had strong second quarter sales growth with our consolidated net sales, increasing 10.1% or $23.7 million to $257.7 million increase was primarily driven by increased shipment volumes across most of our product lines, it infrastructure and higher pricing.
Gross profit this quarter increased 15% or $11.2 million to $86 million with a gross margin at 33.4%.
We improved gross margin by 140 basis points over the prior year. The improvement was primarily due to increased shipment volumes and higher pricing, which were partially offset by manufacturing performance and higher cost associated with tariffs.
Additionally, the prior year quarter included $2.2 million of cost associated with the Crouse acquisition.
Excluding this impact we generated a 50 basis point improvement in gross margin.
Cost of sales in our second quarter 2020 included approximately $1 million startup cost associated with our large casting foundry expansion in Chattanooga.
Selling general and administrative expenses were $49.3 million in the quarter, a 3.6 million dollar increase over the prior year.
The increase was primarily due to personnel related costs it related activities and professional fees, which were partially offset by lower teeny expenses as result of travel restrictions and shelter in place orders as DNA as a percent net sales was 19.1% in the second quarter compared to 19.5% in the prior year.
Operating income increased 61.3% by $13.6 million to $35.8 million into second quarter compared to $22.2 million in the prior year.
Operating income included strategically organization and other charges at $900000 in the quarter, which are primarily related to prior restructuring activities and were $6.9 million in the second quarter of 2019.
Turning now to our consolidated non-GAAP results.
Adjusted operating income increased 17.3% or $5.4 million to $36.7 million in a quarter.
The increase it infrastructure was partially offset by a decrease in adjusted operating income that technologies and higher corporate Sta expenses.
In addition, we estimate that expenses associated with addressing the covet 19 pandemic impacted our consolidated adjusted operating income by approximately $800000 during the second quarter.
Adjusted EBITDA for the quarter increased 15.9% or $7.1 million to $51.8 million adjusted EBITDA margin improved 100 basis points to 20.1%.
Consolidated adjusted EBITDA conversion margin was 30%.
For the last 12 month, adjusted EBITDA was $211.5 million or 20.9% of net sales.
Income tax expense was $6.8 million or 22.2% of income before tax as compared with 26.4% in the prior year quarter.
The lower 2022nd quarter effective tax rate is primarily due to increases in R&D tax credits and excess tax benefits from stock compensation.
We anticipate that the effective tax rate will be between 23 and 25% in 2020.
Our adjusted net income per share increased to 15 cents for the quarter compared to 12 cents in the prior year.
Turning now to segment performance starting with infrastructure.
Infrastructure had a very strong quarter with net sales, increasing 12.2% or $26.2 million to $240.3 million. This improvement was due to increased shipment volumes and higher pricing. The increased volumes were driven by many of our core product categories, including Iron gate valves hydrants specialty thousand.
Repair products.
Adjusted operating income for the quarter increased 17.1% or $7.4 million to $50.8 million. The improvement was primarily due to increased shipment volumes and higher pricing.
These benefits were partially offset by higher SGN, a expense increased costs associated with tariffs and manufacturing performance, which included approximately $1 million a startup costs associated with the large casting foundry expansion in Chattanooga.
Adjusted EBITDA for the quarter increased 14.8% or $8.1 million to $62.9 million, yielding an adjusted EBITDA margin of 26.2% and a conversion margin of 31% in the quarter.
Moving onto technologies technologies, net sales decreased two and a half million dollars to $17.4 million in the quarter driven by lower shipment volumes at metrology, which were partially offset by higher volumes at Echologics.
Adjusted operating loss was $4.7 million as compared with a loss of $3.6 million in the prior year, primarily due to lower shipment volumes, partially offset by favorable manufacturing performance and higher pricing.
Technologies, adjusted EBITDA was a loss of $2.6 million in the quarter as compared with the loss of $1.7 million in the prior year.
Moving onto cash flow.
Cash used in operating activities for the six month period ended March 30, Onest 2020 improved $26.1 million to $3 million as compared with $29.1 million a cash used in the prior year.
Cash flow used in operating activities includes the 22.2 million dollar payment associated with the Walter tax settlement, which occurred in the first quarter of this year.
The company invested $22.1 million in capital expenditures during the second quarter, bringing the year to date title to $37.3 million.
Free cash flow for the year to date period improved $19.3 million to negative $40.3 million.
We have a strong balance sheet and liquidity.
As a reminder, our debt includes $450 million, a 5.5% senior unsecured notes and we also have an asset based lending agreement with up to $175 million revolving facility. We did not have any amounts borrowed under our ABL at quarter end.
At March 31, 2020, we had total debt of $447.3 million and cash and cash equivalents at $111.3 million at the end of the second quarter, our net debt leverage ratio was 1.6 times.
We currently have no debt repayments prior to June 2026, our 5.5% notes have no financial maintenance covenants. In addition, our asset based lending agreement is not subject to any financial maintenance covenants, unless we exceed the minimum availability thresholds.
At approximately $159 million of excess availability based on March 30, Onest 2020 data under that lending agreement.
As a result, we believe that we are well positioned to face the impacts of the kind of at 19 pandemic I'll turn the call back to Scott to talk more about market conditions.
Thanks, Murray our will provide some additional insights into market conditions and how we are adapting after that we'll open the call up for questions.
We have withdrawn or annual guidance due to the uncertainty of the duration and magnitude of the covert 19 pandemic as well as the timing of the recovery. We do expect that covert 90 will have material effects on all of our end markets in the near term.
Our primary end market as the municipal repair and replacement segment, which accounts for approximately 60% to 65% of consolidated net sales, although water utilities are essential service providers, the economic that operational affects of shelf replace orders and physical distancing practices are being felt by all to varying.
Agrees.
They have shifted their priorities, leaving to delays for some ongoing projects and postponement of new projects.
As a result, we expect to see a significant near term sales volume decline in the project related areas of our business, which primarily affect our metering leak detection and specialty valve products to be clear, we believe that the majority of our products for the municipal end markets are essential for water utilities to do their planned and.
On planned repair and replacement work in this environment.
Residential construction is the second largest end market for our core products and made up approximately 25% to 30% of consolidated net sales in 2019.
Based on our organic sales growth through the first half of the year increased housing starts and industry commentary residential construction had strong momentum going into merger. This year. However, given the economic impacts from covert night team, we anticipate a sharp decrease in activity as new residential construction significantly slows down with.
Holders focusing on their existing lot inventory our exposure to the residential construction market is much lower than it was prior to the great recession. Additionally, the opportunities for growth are much healthier as average housing starts are below the long term average and there are fewer develop loss in inventory. However, we believe this portion.
Of our sales will feel the most near term pressure driven by the sharp decrease in economic activity and high unemployment.
The smallest end market for our bras and repair products is for downstream natural gas distribution, which represents less than 10% of consolidated net sales.
Similar to water utilities, we expect this end market to slow down with delays in some ongoing projects and postponement of new projects, but to a lesser degree.
We are well positioned with many of our products being used for the mandated repair and replacement of gas distribution lines.
We expect this end market through experienced the least near term pressure.
In summary, we are assuming a material slowdown in our end markets for the second half of our fiscal year, especially residential construction.
Based on our current outlook, we expect our third quarter to be the most challenging quarter of this year with our April orders down approximately 25% versus the prior year, we anticipate that our consolidated net sales for the third quarter could be 20% to 30% lower than prior year quarter. After.
Our discussions with our channel partners, we expect them to meaningfully lower their inventories during the quarter, we believe that the federal governments direct and indirect efforts to support citizens and businesses will help our end markets begin to recover during the second half of the calendar year, However, the timing and magnitude of the recovery.
Remain highly uncertain.
Given our fixed cost structure, especially for our core products. The decrease in volumes will lead to a higher declined in adjusted EBITDA for the third quarter, resulting in elevated decremental margins.
We are reviewing all aspects of our business and taking action as needed.
This includes adjusting our production capacity to preserve liquidity and cash flow during this difficult period.
In April we began implementing temporary furloughs at some of our manufacturing plants as we adjust to market conditions and manage inventory.
We have also implemented furloughs for most salaried employees salary reductions for our senior leadership team and reduced fees for our board of directors.
In addition to eliminating all non critical business expenses, we are evaluating further actions as the change in market demand evolves, we will look to find the right balance between maximizing our cash flow from operations and continuing to invest in the business in anticipation of the market's returning to a more normalized.
Level.
With this in mind, we are reducing our capital expenditures for the full year 2022 between 70 and $75 million versus our prior guidance range between 80 and $90 million.
Given the strength of our balance sheet and liquidity, we will continue to prioritize completing the remaining large capital projects, we reviewed last quarter.
These are the specialty valve manufacturing facility in Kimball, Tennessee, and brass foundry indicator, Illinois, However, given the timing of the completion for the brass foundry, we are pushing out some of the spending associated with this project, which could impact the completion date as well as the timing of the benefits.
When it comes through our other strategic priorities, we will continue to focus on making appropriate investments to further incorporate technology into our infrastructure products, while also modernizing our manufacturing facilities and operations.
Given the liquidity position on our balance sheet, our capital allocation priorities will continue to focus on capital investments and returning cash to shareholders through our quarterly dividend.
We recently approved our quarterly dividend, which is payable in May we did allocate $5 million towards share repurchases in February prior to the pandemic. However, after further review we are temporarily suspending our share repurchase program to provide additional flexibility.
We are reviewing our M&A priorities and anticipate the discussions will continue but do not expect to execute anything in the near term. We will continue to review our overall approach to capital allocation as we learn more about the length severity and recovery of the crisis.
In conclusion, we are continuing to stay abreast of the events surrounding covert 19, knowing that the situation is very fluid.
As events unfold, we will take action as needed our most valuable assets are our employees and our customers and their respective communities depend on us.
During this critical time, we will continue to work to protect our workforce and ensure that our customers have the vital infrastructure in emergency repair products and services they require to continue delivering clean safe drinking water.
And with that operator, please open the call for questions.
We will now begin our formal question and answer session. If you have a question. Please UN mute your phone press star one only record your first steam to withdraw. Your question you May Prestart Q. The first question is coming from Deane Dray RBC capital markets. Your line is open.
Thank you good morning, everyone.
According to the warning if we start with the the range at your given for the second quarter and look I completely understand and appreciate.
Fluid. This is how is lots of uncertainty, but the bias here is at least one immunity side, you've got a pretty good line of side on the bank.
So why would there be such a wide range.
20% to 30% of what would take you to the low animal would take you to the high end, if we could start there.
Okay.
Great question, Thanks, and I think a biggest wildcard in this is from our discussion with.
Our channel partners is off to the inventory deleverage in the channel look like we know they're out there in their statement, saying that they're going to remove.
Protect their liquidity by removing hundreds of millions of dollars inventory.
From the channel and I think Thats the biggest piece of it I think you should think about this.
10% first half growth that we've had.
Certainly we're not sitting here, saying that we believe the markets are up 10%. We know that after our Q4 last year that there was a fair deal of inventory taken out of the channel and now through the first two orders of our fiscal year. This year, we've seen some of that come back in and certainly they.
They were relatively bullish as residential was strong, especially corn made in Ferguson and some of the big guys.
And had been bulking up we had announced our two price increases wonderful grass and one for Rob the iron business and as a result, I think a lot of the growth in our Q2 was actually in channel inventories.
I want to be clear on the call to everyone. We do not believe the market will be down 20% to 30%. We believe we will experience that in the near term as the market will be down probably let's say zero to 10%.
We will see.
And the impact of the channel reducing inventory position in getting very lean I believe that most of our partners deed are going to be.
Protecting their liquidity very very carefully.
And Scott I'm. So glad you added that last point about the market size.
The market dynamic would be zero to 10% because that makes so much more sand.
Do you have a sense of how much that pull forward contributed.
The first.
Second quarter.
It's hard for me to give a number but I would say that if you were to think about.
Everybody else reporting in the not that I would say the.
I think of it. It's about 50 50, you don't think about 50% of it really being growth from the strength of the market.
In January and February a little softness in March and then the other half kind of building inventories.
As a result of the announced price increases tried to take advantage of channel taking advantage of the lower cost.
In the first couple of months, but Theres nothing scientific about that I think of that had a 50 50 in that range. There team great Thats helpful and then.
How about any chance you can size the potential decrementals.
Maybe taking that the two and the 20% 30%.
The Decrementals might look like in the second quarter, and then for the balance of the year, where might you be managing decrementals too.
Well, that's a great question, what we will kind of thought a lot about.
Thank you the third quarter, our Decrementals of B B, the worst and the reason is that is because I have with the leadership team.
We spent a couple of days together and virtual meetings.
Talking about what the recovery it looks like and I want to our investors to understand that.
We've we've run through contingencies contingency is kind of the traditional recessionary recovery with flow quarter on quarter growth over the other is more like of the.
The probability we see for both of those recoveries, though the rapid jump in a near term, let's call. It our Q4 of the probability of the slower recovery, we estimate to be equally profitable at this point, we don't know how much of a jump will get when the economy starts up again, but certainly away.
Won't be as bad as it was in April.
So that's on a long way of saying we have elected to keep our powder dry we have not walk laid off any of our hourly workforce, we entered into and we will use with all of the unions and we gave ourselves Max flexibility here in Q3 to make sure that if there is a pop we have all of our operators we.
No learning curve, we have.
The right inventory position, we have the right skills mix on the floor and so basically gone a little bit to reduce our fixed costs as a result of the furloughs and the reductions to pay for.
For the leadership team and.
And the board but.
On the whole we have maintained Max flexibility.
So that we can be the strongest coming out of this.
And as strong as we work going it as a result of that.
To get to your point I think our decremental margins will be the highest if you think about our fixed cost being approximately 20, 25% of our Cogs.
And you take away, 20% to 30% of the volume loss you have a measure of inventory reduction.
I think you could you could easily get.
Into the Fortys or 15% now obviously, it's up to us as managers to then mute that by taking SGN actions by taking plants actions and we anticipate doing that so.
I don't want to the reason, we didnt give guidance is because I don't want to.
Assume all of eventualities, but.
It will be our most challenging quarter on a detrimental margin basis, but I want to assure everybody.
It's not because we are being slow about.
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So we lay offs or.
Cutting costs or anything like that is.
We actually see.
A low interest environment.
And this is either going to be something the country shrugs off as a blip for six weeks and we go back to six seven.
8% unemployment, which I don't think would be a bad situation from being down what looks like 20.
If we got back to six quickly I think you'd see us.
The had a good position to come out of this with growth again.
I appreciate all the color best select everyone. Thank you. Thank you I'd.
The next question is coming from Brian Lee with Goldman Sachs. Your line is open.
Hey, Scott Good morning, everyone hope everyone is doing well thanks for taking the questions.
Maybe just a follow up fundings.
I know, you're not giving specific guidance Scott and.
Your reserving a little bit of dry powder here, but to the extent that.
This isn't a six week.
At the recovery.
And you do have to manage a little bit during the cost structure. If if Q3 is the worst quarter from a decrementals perspective, you are saying kind of Fortys fiftys range.
Where do you think you can manage that down to if you had to sort of stuck to hit on tried some more structural changes in the cost structure, let's say moving through the year if that happened to be the case.
Thats a really tough question you mean, you have your fixed and you have your step fixed and certainly.
I'm not sure how much of that I want to get into what you should expect that.
The documents.
We're kind of a 35% gross margin business I believe.
You know your duck permits are going to be in the.
40 range, even in the best of cases, because you know you've you've got to look at what the elements of that 20% to 25% of fixed costs are you're not going to get rid of.
The fact that.
Got a lot of depreciation.
We're a vertically integrated manufacturer. So we will look a little different then.
You know a lot of the peer set that we tend to look at him in water.
So I think that our depreciation load and you know just our fixed utility load and things like that are going to be a little tougher to get out but sizing the business.
I just want to give everybody from confidence that we this is not our first rodeo I mean.
Been through these downturns in.
Eightys the Ninetys dotcom bubble in 2000, 2008, I mean, it's.
What you do you reduce the amount of indirect labor you have handling materials operators get the raw materials you look at what efficiencies are you looked at.
Staffing level, if you looked at all of those things that we would we would need to flex and.
And we will so I think that the.
The good news is where our high gross margin high EBITDA business. The bad news is all your decrements get tougher to manage when you when you're already sitting there at 21%.
EBITDA margin business.
Okay Fair enough I appreciate the color and then also on.
Fiscal Q3, you mentioned this is.
Yeah. This is going to be by far the worst quarter here moving through the prices and appreciate some of the color around inventory trends.
It's more specific to your view than the market outlet, but.
In the context of not giving full year guide you on calling for Q3 to be the bottom here for you is there anything besides the inventory data specific.
That you can you can point to other indicators that you're looking at to make that call right now and you can can you kind of walk us.
Okay.
Sure. So I think the most important thing we've done in the last 45 days is we are watching the order intake at the channel as opposed to at just what is coming through so the sell through that we look at at the channel.
As.
It's kind of.
I think a better indication of where the market is and you see some people that are just basically flat year over year.
Through the first.
Got a 35 40 days in the quarter and then you see a bunch of people, who will be down zero to 10% kind to.
Depending on the region.
Were you see the activity and so I think there is a lot of uncertainty of Howard comes out in terms of the rest of the quarter, but I don't think theres any question that.
Right now we believe April will be the bottom it will have the double whammy of.
Inventory adjustments along with the least amount of economic activity is basically every state was closed for some period of pollen.
In the month April.
In the northeast and basically the alliance of the northeastern Governors basically shut down at whole territory.
For.
45 days so.
The color I think you should take is that we're at the we're kind of in the trough in April as these states start to open up even partially.
We'll start to see improvement in in the sell through Fourq for the channel and we'll kind to grow from there I think and and so.
You know to to try and say is at 25% is at 22% is a 27% I don't know.
How much inventory is going to come out of the channel, but I do know that the underlying demand.
For Muni is going to be.
Be pretty steady and.
I do know that we're not going to go to zero housing starts so.
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No that that will also not just be 35% of our business taken out and so.
To answer the question directly we're not it's really cloudy.
The visibility to the demand profile, but from what we've seen.
We think we've given you a fairly fair range.
Okay. Thanks, guys I'll pass it on.
The next question is coming from Ryan Connors, Bonnie and Scattergood. Your line is open.
Great. Thanks for taking my question hope everybody as well.
So I don't want to beat the dead horse, but I appreciate the distinctions you draw Scott between the business in the portfolio now versus the last cycle.
Certainly valid, but just to play sort of Devil's advocate I mean, one of the lessons of the last recession was that there was this.
Correlation between housing and the municipal.
Infrastructure spending which is of course because tax receipts are.
A big part of those local government revenues, so we actually saw.
Pretty big decline and municipal LD it on a two or three year delay.
And so those those two markets actually ended up behaving similarly, but but housing was kind of a leading indicator on where muni was headed and then you see things like MWW Lang surveying their membership couple of weeks ago, and thank 68% of us water utilities as of a couple of weeks ago are planning budget reductions heading into.
You know budget discussions most of them on a June fiscal year.
I mean, we just want to see people, making the same mistake twice and making the same call. It was made and languages Muni will be resilient. When in fact, we've seen that wasn't the case in the past. So what is that that gives you the confidence to to two.
The call the bottom, but with all those things in mind.
Yes, I think that I think it's fair point something you know I told you we had a virtual meeting with our senior leadership team and something we dwelled on a great deal I think in adult shell. The two biggest differences between eight and today or muni.
As a the most important is that crisis was a crisis of liquidity and what basically happened with the ability to borrow.
Evaporated not just for homeowners, but if you think about a whole banking system, what happened and even muni is found it difficult to raise money and the and the idea of taking on debt when a lot of they're projects, where then in question.
It's probably the biggest reason, we see them getting very inexpensive money right now to do the upgrade that's.
0.8 point B is we're all 11 years on in the aging of this infrastructure kit.
I can't get into the actual specifics, but suffice it to say that that even in March and April the amount of break fix you know that crowds kind of coupler product all grew appreciably why because we're we're into the kind of the point of the curve the Bath tub.
That the amount of money that's going to have to go to emergency repair was going to continue to increase and so those are the two big drivers the last but the not least is I believe that this time as we start talking about stimulus.
That unlike the last time in 2010, when I think you actually froze the market.
With a are.
You actually had.
Projects the got left on the sidelines I think this time argued the lessons learned in Washington that any stimulus will qualify for water upgrades as opposed to.
Kind of.
The Obama are a period freezing municipalities for me actually pulling the trigger on projects as they waited to see what they could get yes in essence, they had to understand some of the provisions of the IRA which really put a lot of the water projects on hold it they have to get in there and specifically say well what does it mean for by America.
Is there a small component of this project that wouldn't qualify so they delayed a lot of the spending and so I think it was more a timing of the spending that you saw that a lot of that we attributed back to the provisions of the.
The more the detail there are a not the fact that there with money available by the way that made the money available to I think if you recall Ryan it will likely change this time as well.
Got it okay very fair.
My other one has to do with technology, which which I guess, we've discussed a little bit less here on the call, but just just to it seems like there is a bit of a catch 22, there where you've got to keep up on innovation and R&D. If you want to.
Staying relevant in terms of product line, but then again, obviously the business was already on profitable even before covance. So without some some pretty sharp cost reductions it could become a pretty big drag on earnings. So how do you manage the balance between.
Having to do some things, but yet making sure that.
You are keeping up with the Jones is because of the some of the larger players what we'll just keep plowing money into R&D.
Yes, I think that.
The mission critical you know if you think about these economic downturns one of the exercises you do as you go down the road five years and you say if you try and do the Visioning purpose. So who are we why do people buy from us once the selling proposition what are we know and for those kinds of things and if you. If you think about our tag line of where intelligence meat input.
Restructuring you think about smart hydro in a smart valve.
Informatics diagnostics, we know our Centrix platform.
And those things are all critical to our long term success and.
Leading mueller through the digital disruption of the water space, just as electric coal and gas and all the others have gone through in the years. Before then it gets pretty clear that we have to keep the communications and we have to keep the.
Software piece and software as a service piece at our very core we have to be able to develop sensing and transducer technologies, whether it be around pressure temperature turbidity all of those things that we talked about the thing that I think it's fair and that the team has to face into in of itself a meal.
Peter.
With or without smirks with or without communication radios with or without.
Agnostic has to be economical.
And I.
I think it's up we were living with the the puts and takes of that being a very lumpy business. So sales were really poor.
And the metrology business bought bookings were really good quite well, we won Newport news than we had the.
Now it's been out there and so we'll we'll run for a while where it looked like our bookings were really good until we when the next thing so until you get scale in meters were going to have this lumpiness.
But meters is the window on what's happening on the communication technology and the most information rich point to do Youre.
Data analytics, and so I think we have to be there. So I take the criticism that we have to be more profitable out. It we have to manage it better but I also know that if I'm going to be where I want to be in five years I need that window of the world.
Got it well listen I really appreciate the thorough response, thanks for your time.
Thank you.
The next question is coming from Andrew Buscaglia, appearing Baird. Your line is open.
Hey, guys.
Now do you think that technology comment one step further and talk about.
In this environment I know in lot of people were piloting your echologics products, but can you talk about what the conversations are like there and then.
His echologics physician.
Beneficially.
Kind of a bigger cost savings.
More differentiated big detection product out of this downturn would that be attractive.
As many people piloting.
Yes, I think thanks. Thanks for the question I think yes to answer quite.
And it's not just off so you know they want to sit here and so yeah. We are the only game in town I think in general there is a feeling that through this downturn that those that were technology enabled and those that are technology savvy had better control of their network through the stay at home.
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Piece of the kind of the social distancing it all the rest of it so I think that.
I think Bluefield recently came out and said that they think that the impact of.
The pandemic will be that it will actually aid in the adoption process around things like acoustic leak detection around the electronics around remote monitoring around the Digitization. If you will have the water infrastructure and I believe that.
To be true as well and so to answer the question succinctly. The answer is yes, we do see that and we do believe that the conversations have been.
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So relatively favorable if you can imagine going with your backhaul to fix a week and getting it right. The first time as opposed to Rob.
Punching holes in the ground every five feet I think you can see that.
Attractiveness of at four where our users.
Yeah Okay.
Okay and.
You had yet at all these.
Long term plan the retrofit in both new facilities, where you stand, but that based on the going on.
This downturn now I know you got your Capex, but you could provide some color I thinking about that sure. So I think that.
Thanks for the question something I wanted to get into we've we've talked to our employees and Hammond, Indiana. The announcement is out there we will be closing that plant. So its full speed ahead in.
Kimball, Tennessee, we're going to continue with that capital program.
We're going to continue to consolidate capabilities in there we're going to be able to make.
Big Hydro gates, along with the big valves that hammonds, making so that's still ago. It all of the timetable expenditures and savings on track we've elected to delay spending indicator. If you think about the cater Andrew.
About half of the money or thinking that is half and half about half the money came from.
Improvements to mixing the ability to to have sleeves, the ability to quickly change between.
Business browser brasseur silicon for US all of those things, but then there was a whole bunch of savings or.
Payback associated with the fact that week, we would actually have more capacity the capacity would allow us to serve more markets and so there was a growth element in 2023.
Associated with the cater so we've kind of kept to all of those plans, but we have delayed them and we push the schedule for the caters go live out by delaying.
The.
Purchase of some equipment.
Calculus calculated risk.
On one hand.
You know, we're being told that you'll have to wait.
It's going to push the timeline for the project out, but we also know that on these big capital projects that if everybody is starting to pull awards in the lead times could change and so we have to look at what that recovery curve looks like.
You know if if we need the capacity.
I need to your pullets highlight back in I still think we have some levers left but really what we're doing is delaying the decatur brass foundry.
Think of it as a year, so we'll be pushing some spending out of this year into next year and beyond.
Okay. Thank you.
Yes.
Next question is coming from Joe Giordano of Cowen Your line is open.
Hey, good morning.
Good morning job.
So I certainly keep going on the technology is a little bit.
I appreciate what you said about a critical nature of the communications on the software, but as looking back at the business now back, but Alas I'll call. It six years, it's been an unprofitable Iranians like $80 million to $100 million topline run rate.
Most likely that run rate has to go towards the low end I'd assume in this kind of environmental projects are going to be more challenged.
Yes I.
Understand you're saying you have to deal with more profitably and I guess habit like west.
How does that happen like Weve a lot of what's happened last couple of years has been in pretty good municipal markets. So now if we have a more challenge one let's give you the confidence that.
Sustained profitability at a lower run rate is it realistic for that business like how viable isn't as a going concern.
Well I think the.
The creation and focus on an $80 million.
Well segment.
Versus in a billion dollar business is still one that.
Garners way more attention that it ought to it you should think of it as a 4 million dollar.
Last last year is basically all development costs I mean.
It is are you going to stop developing software and equipment for Echologics are you going to stop development of.
Hydrographic are you going to stop development of sampling stations transducers Centrix all of that stuff. If you are then yeah. You can sit there and say, yes that $3 million isn't worth it that $4 billion whatever it was is it worth it.
No I want out and I want to see profitability, there, but if you take a longer view of the business and you say that theyre, all merging and that you do believe theres, a digital disruption taking place in the water space that.
You've got to look at the business Holistically and if you look at the business Holistically I think you'll say you've got a 20% EBITDA business.
And how you protect your share of that profit pool in five years in the way you do that is to make sure that profit pool.
Doesn't get eaten away by the people who come in and provide the data analysis on a go back Joe and say exactly what I said two years ago, which is if you look at every industry. That's gone through digital disruption and then you take the profit pools and you look at how much of the profit pools shifted from the ICD.
Shipment manufacturer to the information provider.
The insights and solutions provider, you will see that the bulk of the profit pools overtime move towards information not just the utility of the product.
And we have a very profitable business, a great business with an iconic brand.
And this investment that we're making in technologies.
Is what will ensure that that 20% remains viable in the future and we will maintain your profitable and so I don't think of it as as you said standalone entity I see it as just the if you were taken automotive example, it's like on site.
Our or or Audi connect it's it's.
Good to see link whatever it is you want to use its providing users information on their car so that it does more than.
Than it used to do to to get you from point data point B and that's what we're doing and I take the criticism I understand if you want to say you know they should make money on meters in enough themselves I am not going to argue with you I agree we've got to get scale, we've got to continue to have.
Better operating performance, which I would point out in the quarter, we had better operating performance from from operations again.
At the meter business.
But we can't just give up on the digitalization of valves hydrants and brass products going to happen.
So if we let me.
We disagree with each other our where to go with this but I am not Dol I'll keep saying I am not concerned that we had whatever it was $4 million negative EBITDA for the quarter because I do believe that team is making huge progress.
With Centrix with Echologics with analysis with the development of transducers with the development of hydrocarbon with the development of sampling stations.
As fuel.
All of our new products come from and I feel good about it.
And then discussion internally as well like I don't know if this is all one segment and then Thats has considered like R&D for the core business rather than as a standalone segment loses money, but the to digest variable.
Look I appreciate your question.
And with a few years.
Correct.
That we made the determination to break technologies out into a separate segment as much as anything it was a desire to provide more.
Transparency through for investors.
There's certainly a lot of considerations when you go through and you determine what the segments are but that was really a lot of the thinking behind that.
In terms of Wiley broke it out, but certainly it's something that I would say in terms of segments. That's something that we do continue to look at.
Going forward, but appreciate that any changes have.
Require require a lot to get there, but that was the reason that we did at several years back. Let me also say that one of the things that we end the board our board of directors committed to is you know Frank brands parent robust discussion of issues and trying to tie something or not.
When I came in I said look however people think about the business if theres a technology won an infrastructure one that's fine.
We will we will deal with it.
Frankly openly and in a transparent manner and so this is one of the downside to that is gosh, Scott your Wow, what a lot of money into this technologies thing with not a lot of sales coming out of infrastructure, but if you don't buy my premise. Then you should say this is not a good idea, but if you do believe.
That water infrastructure is going to digitize that we are in early stages of digital disruption in the water utility space that I think you'd see this is prudent investment.
Appreciate that thanks, guys.
Thank you.
Oh, you don't before.
We wrap up I wanted to just cut up say a couple of things.
I.
Thanks, I wanted to touch on that that Didnt come up when I look at our long term positioning our remain comfortable that we're still moving into right direction I think the large casting foundry in Chattanooga is going to play very well into this renewed sense of by America.
The fact that were vertically integrated.
The ability to move castings into a nearby facility and Kimball that's coming online as expected.
I think.
Our ability to rapidly adopt digital technology, an integrated into the core products that are very important in delivering clean safe drinking water to the public.
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Continues to leave us in a leading position. So we can punch above our weight in our discussions with large utilities about where they go next I think they recognize the work from home and shelter in place is going to change the nature of their.
Business model as well and they have to phase through.
Just a commercial water delivery aspects of it but you know what the.
The premium is going to be on water quality and more just let's think about it as more points a light.
So I.
I think that we have long term flexibility I think that we have a great technology roadmap I think that we're at a good position.
To come out of this.
You are going to see a Bob I believe.
Once we turn the country back on you know, we're probably sitting at 18 year 16, 18% to 20% pick your number unemployment, but what we when we come back and we opened restaurants will get up up when the state start to open up the how much will that impact.
Resi construction muni it all the other aspects of the economy remains to be seen we have driven for Max flexibility, we understand what it does in the near term our Q3, but frankly, we're not running the business for just Q3, we're running the business for the long term and so I like where we are.
And I like the flexibility we have.
I want to say that Im very excited that we are on the right path. This is going to be a temporary near term vault.
It doesn't.
I think need to be a serious.
As we have started to make it so with that as my final, though I think that you should think that we have opportunities.
I was a nation when we get through this healthcare issue and we're back on the on the horse rotting, we're going to get ready for the next normal and Mueller will be well position to be ready for the next normal and on that note operator, I would like to.
Have you end the call.
This concludes today's conference all parties may disconnect at this time.
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