Q4 2020 Mueller Water Products Inc Earnings Call
Pandemic.
Im proud of their steadfast commitment to our customers our suppliers our communities and other team members. We continue to improve our procedures to ensure that we maintain high customer service levels and keep our employees safe and healthy remain inspired by our team member sustained efforts during such an unprecedented period.
In our history.
I believe that we will be dealing with the impacts of the pandemic for quite some time as an essential business. We will maintain focus on operating with enhanced procedures to protect our employees customers and communities our.
Our response team has continued to provide leadership at communication throughout this crisis.
Most importantly, we will continue to work closely with our customers to provide the products and services needed to manage and maintain our critical water infrastructure.
Our financial performance significantly improved sequentially in the fourth quarter with net sales close to the high end of our guidance and adjusted EBITDA above our guidance.
These results were due to the strength of our product offerings, our end markets and our improved operational performance.
We generated sequential net sales growth at both infrastructure and technologies, resulting from increased repair and replacement activity in the swift recovery in residential construction.
Our teams executed well during the fourth quarter, evidenced by increasing adjusted EBITDA, 1.2%, even though our consolidated net sales decreased 8.6%.
Our improved operational performance helped deliver 130 basis point increase in gross margin, excluding the crowds inventory acquisition costs in the prior year quarter. As a result, our adjusted EBITDA margin improved 40 basis points in the fourth quarter, our focus on increasing cash flow during the quarter enabled us to further.
Strengthen our balance sheet as we ended September with $209 million in cash outstanding.
In the third and fourth quarters, we shifted our priorities to enhance our cash flow from operations. While also continuing to invest in the business in anticipation of the markets returning to a more normalized level. We continue to be disciplined and believe that we are in a strong position entering 2021.
We will prioritize investing in our business through new product development, executing our capital investments and making bolt on acquisitions.
Given the improvements we have seen to date, we have ended our voluntary suspension on share repurchases that we instituted as a cautionary measure resulting from the pandemic going forward. We will continue to return cash to shareholders, primarily through our quarterly dividend, which our board of directors recently increased by 5%.
In summary, we finished 2020 better than we expected, especially given the pandemic. We also witnessed the resiliency of our business, which provides essential products and services for water utilities to do their planned and unplanned repair and replacement work. Despite the challenges our team stepped up to the task.
Importantly, we believe that the lessons learned during this pandemic further reinforce the imperative of our strategic priorities to become an innovative leader in the water infrastructure industry and position ourselves for sustained long term growth I.
I continue to be excited about our transformation and im confident in our ability to adapt and execute in this environment later.
Later in the call I will address our key strategies and expectations for 2021 with that I will turn the call over to Marty.
Thanks, Scott and good morning, everyone I Hope you and your families continue to be safe and healthy I will start with our fourth quarter consolidated GAAP and non-GAAP financial results and review our segment performance and finish with a discussion of our cash flow and liquidity.
During the fourth quarter, we generated consolidated net sales at $265.3 million, which decreased $1.6 million, 4.6% as compared with fourth quarter last year. The decrease was primarily due to regain shipment guidance related to the pandemic impacting technologies, partially offset by increased.
I am going higher pricing and infrastructure, we did see a sequential rebound in our net sales for the third quarter with an increase of $36.8 million and gross profit this quarter increased $5.1 million or 5.7% to $93.9 million with a gross margin of 35.4%.
Gross margin increased 210 basis points versus the prior year, primarily due to the crowd inventory acquisition costs in the prior year quarter improved manufacturing performance and increased sales at infrastructure. These gross margin benefits were partially offset by the decrease in shipment volumes the technologies and $3.6 million at.
Expenses related to the pandemic.
Gross margin increased by 130 basis points, excluding $2.3 million of cost associated with the crowd inventory acquisition costs in the prior year.
Selling general and administrative expenses of $52.1 million in the quarter increased $3.6 million versus the prior year. The increase was primarily due to higher personnel related costs and it related activities, partially offset by temporary savings related to the pandemic, including reduced travel trade shows and events.
DNA as a percent of net sales was 19.6% in the fourth quarter compared to 18.2% in the prior year.
Operating income of $40.7 million increased $1.7 million or 4.4% in the fourth quarter compared to $39 million in the prior year.
Operating income includes strategically organization and other charges of $1.1 million in the quarter, which are primarily personnel related.
Turning now to our consolidated non-GAAP results.
Adjusted operating income of $41.8 million improved $13.2 million sequentially and decreased $800000 or 1.9% as compared with $42.6 million in the prior year quarter. The decrease was primarily due to lower shipment volumes, the technologies and $4 million of expenses related to the panda.
Nick which were partially offset by $3.1 million of temporary SGN, a savings improved manufacturing performance and higher sales it infrastructure.
Adjusted EBITDA of $57.6 million increased $700000 or 1.2% leading to an adjusted EBITDA margin of 21.7%, which is 40 basis points better than the prior year for the full year 2020, adjusted EBITDA was $190.6 million or 19.8 per.
Scent of net sales for the quarter, we generated adjusted net income per share of 17 cents compared with 19 cents in the prior year turning.
Turning now to segment performance starting with infrastructure.
Infrastructure net sales of $242.5 million increased 15.5% sequentially and increased 3.3% as compared with the prior year, primarily due to increased shipment volumes and higher pricing.
Adjusted operating income of $57 million increased $5.8 million or 11.3% in the quarter. The increase is primarily due to improved manufacturing performance and increased sales, partially offset by higher costs associated with inflation and $2.9 million of expenses related to the pandemic. It.
Excluding the two and a half million dollars, a temporary SGN, a savings, which primarily relate to travel trade shows and conferences.
Adjusted EBITDA of $69.8 million increased $6.6 million or 10.4%, leading to an adjusted EBITDA margin of 28.8% and a conversion margin of 85% in the quarter.
Moving onto technologies technologies, net sales of $22.8 million increased 22.7% sequentially and decreased 29.2% as compared with the prior year. This decrease was primarily due to lower volumes related to the pandemic, which continues to impact the timing of some leak.
Action and metering projects and large customer orders for Echologics in the prior year quarter.
Adjusted operating loss was two and a half million dollars as compared with adjusted operating income of $800000 in the prior year. This.
This decrease was primarily due to lower shipment volumes and $700000 of expenses related to the pandemic, excluding $300000 of temporary SGN, a savings, which were partially offset by improved manufacturing performance and lower SGN a expenses.
Technologies' adjusted EBITDA was a loss of $400000 as compared with adjusted EBITDA of $2.8 million in the prior year, leading to a decremental margin of 34% in the quarter.
Moving on to cash flow net cash provided by operating activities for the fiscal year ended September 32020 improved $47.8 million to $140.3 million, primarily driven by improvements in inventory management as a reminder, cash provided by operating activities in the first.
Quarter included the payment associated with the Walter tax settlement, which was $16.6 million net of the tax benefit.
We invested 16 and a half million dollars in capital expenditures during the fourth quarter, bringing the year to date total to $67.7 million as compared with $86.6 million in the prior year the $18.9 million decrease in capital expenditures for the year was primarily due to the timing of spending for our large capital projects.
As we postponed some of the work at our new breast foundry right.
Free cash flow for the year improved to $66.7 million to $72.6 million as compared with free cash flow of $5.9 million in 2019.
At September 32020, we had total debt of $447.6 million and cash and cash equivalents of $208.9 million. We did not have any borrowings under our ABL agreement at year end, nor did we borrow any amounts under our ABL during the year at the end of the fourth quarter, our net debt leverage ratio was one.
0.3 times as a reminder, we currently have no debt maturities before June 2026, our 5.5% notes have no financial maintenance covenants and our ABL agreement is not subject to any financial maintenance covenants, unless we exceed the minimum availability thresholds.
Based on September 32020 data, we had approximately $133.9 million of excess availability under the ABL agreement, which brings our total liquidity to $342.8 million.
In summary, we have a strong balance sheet with ample liquidity, we are well prepared to continue with our capital allocation opportunities as well as to deal with the ongoing challenges from the pandemic Scott back to you.
Thanks, Marty, let's now discuss our end markets key strategies and expectations for full year 2021. After that we'll open the call up for questions.
Overall, our end markets improved sequentially during the fourth quarter municipal customers increased their level of activity from the third quarter prioritizing critical network maintenance from existing infrastructure projects.
The level of repair and replacement and project activity continues to vary significantly across the country.
Regions experiencing faster population growth and smaller economic headwinds are recovering more quickly. Although we continue to see some delays on the approvals or implementation of new projects. We haven't seen cancellations. We continue to expect that the project related portion of the municipal water market will remain challenged.
Barges to adjust to the impacts from the pandemic. This.
This will affect the project related areas of our business, principally metering leak detection and specialty valve products. We remain hopeful that additional federal stimulus efforts will help municipalities get through this challenging period relatively quickly. So they can continue to address their aging distribution networks.
However, we believe that the break fix portion of municipal treatment collection and distribution budgets will be much more resilient as a reminder, we estimate that approximately two thirds of our net sales relate to the repair or replacement activities of utilities.
The residential construction end market continued to show signs of strength in the fourth quarter as evidenced by the double digit increase in housing starts primarily for single family residences.
We believe that residential construction will continue to outperform primarily based on low mortgage rates relatively low lot inventories and elevated demand levels develop.
Developed lot inventories have remained relatively low since the great recession. So given the backdrop, we expect builders to increase their inventories to meet the higher demand.
However, the pace of residential construction is highly dependent on a number of factors, including the pandemic and the seasonality of construction activity, which could restrain some builders heading into the winter months.
Regardless of the current external environment, we have made progress on our key strategies to strengthen and grow the business new product development and commercialization efforts, especially for our digitally enabled products remain an important part of our strategic priorities, even with the ongoing challenges we have some exciting new products in the late.
Eight stages of the commercialization process, we're looking forward to a number of key launches in 2020 warm and we'll also continue to add products to the product development funnel.
We believe the digital solutions, which account for a relatively small amount of utility budgets will receive greater retention going forward as the pandemic highlights the need for and motivates utilities to increase investments in network workforce and asset management tool.
Today, we have several digitally enabled products addressing their needs and we continue to make progress with our smart hardware, which is being piloted by customers.
Our new product development and commercialization efforts, we will prioritize digitally enabled products and solutions that focus on addressing utilities. Most critical problems, we will increasingly incorporate technology into our existing product portfolio to leverage our centrix software platform and our extensive installed base of infrastructure.
Dr products.
Additionally, we will expand the capabilities of centrex to allow utilities to identify and prioritize leaks measure and control network pressures assess water quality view metering data remotely flush water lines and utilize data analytics to manage their network assets remotely give.
Given the progress we made this year, especially amidst the pandemic I have confidence that our teams will deliver on this vision, while we navigate the challenging operating environment.
We are making significant progress on our multi year effort to drive operational excellence and modernize our manufacturing facilities. We are committed to improving our culture of execution to become a world class manufacturing organization achievement of these priorities will provide a strong foundation for future growth and enable us to generate attractive.
Returns on our capital investments.
As we have discussed previously three transformational projects are expected to account for approximately $130 million of capital spending together, we believe they will drive approximately $30 million of annualized incremental gross profit through a combination of efficiencies and sales growth.
This is after all of the projects are completed and production is fully ramped up we completed the large foundry expansion in Chattanooga, Tennessee and are focused on ramping up production. This year, the two still underway or the new facility in Kimball, Tennessee, and the new brash foundry indicator, Illinois.
As a reminder, we decided to defer the timing of the construction of our Decatur facility to help preserve cash after the declaration of a pandemic or.
Our fiscal 2021 annual guidance for capital expenditures of $80 million to $90 million is above our long term target primarily because of two of the large capital projects that I mentioned remain on our way.
Our annual guidance for 2021 is the same guidance. We originally had for 2020 prior to the pandemic once the new breast foundry is complete which is expected in 2023, we anticipate the capital expenditures as a percentage of consolidated net sales decreased to less than 4% further.
Enhancing our free cash flow.
I'll now discuss our expectations for 2021 in more detail.
We are sharing this outlook to provide a framework for how we expect to grow the business this year.
Clearly we remain in a time of unprecedented uncertainty for both national health and economic perspectives, which will impact our performance. The overall level of covert infections in the communities in which we live and work will be a factor in our ability to increase sales and improve profitability.
We believe that continued strong growth in the residential construction end market will help offset any challenges in the project related areas of our business. Our expectations also take into account our current backlog new product initiatives and channel strategies. This.
This outlook includes the strong bookings we saw technologies in 2020, the backlog for the metering business is $30 million higher compared with last year, primarily due to new customer wins at Newport News, Virginia in Newport Beach, California.
For the full year 2021, we currently anticipate that consolidated net sales will be between flat and 3% higher than the prior year.
We saw a great variability in our quarterly net sales performance throughout 2020, where we generated strong organic sales growth in the first half of the year prior to the pandemic.
For the first quarter of 2021, we expect consolidated net sales to increase versus the prior year, resulting from fourth quarter orders and our shippable backlog at the end of September in the second quarter, we anticipate that the net sales will decrease versus a 10.1% net sales growth in the prior.
Your quarter, which benefited from stocking orders.
We anticipate than in our third quarter net sales growth could be the strongest since we are lapping the beginning of the pandemic.
For the full year, we expect that adjusted EBITDA will increase between four and 7% as compared with the prior year driven by the anticipated volumes and improved operational execution fine.
Finally, we expect to generate positive free cash flow for the full year without the large working capital benefit we generated in 2020.
Our expectations assume that the Pandemics impact has not significantly changed from what we experienced in the fourth quarter.
We also expect that we will continue to incur some level of expenses associated with the pandemic, which will largely impact our results in the first half of 2021.
Most importantly, our focus remains on keeping our employees safe protecting our communities delivering exceptional products and support to our customers and generating strong cash flow are.
Our strategies are supported by our strong balance sheet liquidity and cash flow, we will maintain a balanced approach to capital allocation to strengthen and grow the business through capital investments and bolt on acquisitions. Additionally, we will continue to return cash to our shareholders primarily through our ongoing quarterly dividend and we will.
We continue to prioritize flexibility primarily for potential acquisitions, our teams remain well prepared to face the ongoing uncertainty relating to the pandemic and im confident in our ability to adapt and execute to any changes in our environment before.
Before moving to queuing today I want to briefly discuss our view and approach to sustainability, we recognize the important role that we play in ensuring water is delivered more safely and efficiently than ever before for many years Mueller water products as hadn't environment health and safety program, including a dedicated board committee to provide.
Oversight.
Safety and environmental stewardship, our top priorities and are included in our annual executive incentive targets, we will further elevate and showcase our sustainability initiatives through our inaugural DSG report to be published in December we look forward to discussing our key strategies for becoming a leader in sustainability and we.
With that operator, please open this call for questions.
Thank you Sir at this time, we will now begin the question and answer session. If you would like to ask a question. Please first on mute your phone and then press Star. One you will be prompted to record your name and as necessary to ask a question.
If at any time your question has been answered.
Removing a request by pressing star then too.
Once again, if you would like to ask a question at this time.
Please press Star then one now.
One moment please for our first question.
And our first question will come from Deane Dray of RBC capital markets. Sir Your line is open.
Thank you good morning, everyone.
Good morning, Good morning, Hey, maybe we can start just to confirm.
The that what's behind the delays in the <unk> and the the projects that lays in the approvals. So I would imagine just getting access and workers out too.
To the facilities.
And into homes for the meters Thats, just a cold that delay so kind of take us through that frame for us how much has been if you could quantify how much of that has affected the quarter and when might we see those released and then anything on the approvals. When you said theres delays in approvals is this just is there a lot.
Action uncertainty is it's still cold business area.
Budget constraints any further color there would be a big help thanks.
Sure. So I think yes on the first part for sure you know if you look at the technologies business.
$39 million increase in the in the backlog for for the metering business continued strong bookings in the leak detection business really the the fourth quarter performance for US is in access issues others. There's a fairly healthy book of installs for meters at a fairly healthy book of pipe condition assessment and weak install.
As for for Echo and so.
We think that is a timing issue kind of moving between quarters as a result, the covance.
For the project business, though I would say, it's really more budgetary related.
Recall Dean that when I started in 2017 and adjust spin the the election and we saw pretty good frees up as.
There were some economic uncertainty is there going to be a stimulus package and you know I think there was a whole lot of questions around should we spend the money right now what the receipts look like.
For us as a utility and I think you have some of that same dynamic going on right now I would say the capital budgets are somewhat in flux.
As a result of the pandemic and that uncertainty has led to.
Kind of this you know we're not we're not saying no to this project. We know we have to do it are.
I'm going to push the decision down the road a quarter.
Kind of discussions when we start talking about this stuff that's already been tendered I think you'll see some reticence on the part of some of the municipalities to to commit to a path right now as they wait to see how both the election funding situation and frankly, the rone receipts from our discussions.
There are there is some concern that the two water utility level.
But what does the economic.
Basis look like and how much of their business or commercial if you will a water receipts are going to be impacted by the economic downturn is it going to be for longer not so I think a lot of those things are kind of.
Getting pushed into their discussion model.
That's helpful and can you expand on the point regarding the dialogue with utilities regarding these new digital offerings like your smart hydrant. When you presented at our RBC water conference in September that was one of the themes that we heard from the other utility.
Is that they were now finally, beginning to look at these opportunities.
To both leverage.
The technology network as a service type applications and specifically smart hydrants came up so what's the dialogue now as I said is called that a turning point because utilities just need this.
Additional technology capability of not to send the truck out if possible but.
How did those conditions look today.
Yes, I think coveted definitely accelerated the adoption of allow you know the.
Digital solutions kind of model and I think that.
Almost without reservation that.
Utilities feel like through skated they have good visibility as are pumping stations and their treatment centers.
If there are any of my customer they have a single data point to tighter out at the end of the network, but the blind spot between the treatment center and the delivery point is the the infrastructure distribution network, whether it be manger or even the smaller six and eight inch inch pipes.
They recognize also that their their likelihood of getting the work force to be enlarged over the next 510 15 years is very very limited and so you see that they are going to have.
The same amount of labor, but they're going to the nature of work is going to have to change our instead of dispatching a truck to go flush.
Our hydrants.
Instead of dispatching a truck to go see and do hunting for for leaks are contacting a.
Subcontractor to clean up Manholes at all of those kinds of things they realize that they need some level of automation in the network.
Not because they they have.
And the last work, but because the fact that the infrastructure is aging because the fact that water quality is becoming more important in society and there's more contaminants in more things like that they need that workforce to do different kind of work they don't need them finding leaks, they need and fixing leaks they don't need them.
Flushing hydrants, they need them.
Fixing treatment centers and adjusting chemical levels. So there is a whole bunch of stuff. It's a nature of work for the water utility employees is got to change over the next 10 to 15 years and certainly this has been a.
You know an accelerator.
That's your question about the smart hybrid absolutely I think that if you think of it not as a hydro, but really as an information collection hub for whatever it is you want to know and that you know the the number of centers that could communicate with is only limited by your imagination.
Then you can see that they see the value add some density of putting these information collection points in their network so that they can.
I have visibility whether it be pressure temperature turbidity.
Whatever it is they want to know at that point and so I think there is a great deal of interest and as I said in our prepared comments.
I'm hopeful that the trials that we have undergoing our other have ongoing story.
Ill.
Give us something to report to you back.
In a year so that the.
We will give us province for widespread adoption.
That's all very helpful. Thank you.
Thank you Dean.
Thank you. Our next question will come from Walter Liptak of Seaport, Sir Your line is open.
Hi, good morning.
Good morning.
Hi.
I ask one about on the residential side it seems like there's better activity going on and you mentioned the lot development.
I wonder what kind of visibility you debt.
Two.
Residential lot development.
There.
Up projects that you'd see through your distribution channel and through new sales channel.
We'll provide some visibility into 2021.
Yes, I think that our year.
You're absolutely right, we get some visibility on some of the developments that.
Yes in our large enough for lack of a better word that they get from profile from a homebuilder illico, D.R. Horton or pulte or something like that and so yes. There is a piece of it that fact, but I think in the aggregate.
Residential construction end market continues to show signs of significant strength in Q4.
I think the double digit increase in housing starts in Q4.
I think it was 11% overall, 17% for single family.
Bodes well for us because I think that as you know worksite.
We're kind of early in the cycle of Provence sewer goes in with the hydrants and the water supply.
When the house.
Building permit gets pulled but several several weeks or in some cases months ahead of that and so we use housing starts as our proxy.
To kind of give us the leading our trailing indicator. If you will of what lot inventories look like and then we scour.
The homebuilders that are that have public information out there to look at what bear a lot development looks like and given what we've heard given what we talk about where we are thats why we have this kind of remain bullish throughout.
Certainly the first three quarters.
Of the year as we think about.
And where interest rates are our visibility, though to answer the question precisely I would say is mixed we take a big trends, we know the big projects, we know who the big developments and where those lot inventories are going those big let's call them.
Neighborhood development projects, but they're often.
Only 40 or 50% of the market. So there is a piece that we don't have visibility to to be clear.
Okay are you get any getting any visibility from the.
The distributors and then sort of the inventory channel build thats, maybe uncharacteristic for this time of year.
Yes, I think we've seen.
We talked about it obviously with our key channel partners and.
I would say that if you recall, our Q3, we were down 17%.
And we think the market was probably down 5%, that's an aggregate thats muni and resi.
So there was certainly a piece of the inventory a large piece of inventory that came out in our Q3 as we look at Q4, and we had a very strong booking quarter certainly our backlogs grew across the business.
And then a couple of full reasons, one probably getting some inventory back into level certainly not to the level.
It was prior to Q3.
But you know maybe a modest return of inventory in our Q4, and I think theres capacity for the channel to take inventory.
In 2021 and beyond because I think that they took a big slug out in Q3. So I think there is inherent in that.
Inherent in that that number for Q4 is a little bit of inventory bill.
Okay got it thank you.
Thank you.
Thank you. The next question will come from Brent Thielman D.A. Davidson. Your line is open Sir.
Hey, great. Thank you good morning.
Good morning.
Scott the crack from foundry scheduled to be completed I guess this year quite coin are you expecting any incremental gross profit benefit from that.
I mean like online I guess into fiscal 2021, I can't recall that was.
And a smaller portion of getting to that $30 million.
You talked about.
Yes so.
If I understood. Your question, Yes, we are now focused on the Ann.
Bringing large bar.
Bodies and pieces into the large casting foundry in Chattanooga.
We've had some.
I would call them more a drag in the first three months on manufacturing.
Manufacturing performance as we go through our people processes.
We make tools and we.
We get our.
You know let's call them.
Debugging systems Dahlman, especially on some of the automation we put in place.
And so if you look at our forecast.
What's inherent in that assumption is that the kind of lets call them the first half.
Inefficiencies associated with people costs associated with the debugging.
Will be offset by improvements.
Improvements in the second half as we start to get the benefit of the incremental volume and start to get the benefit of the incremental absorption and so it's basically neutral in our 2021 and then starts adding maybe.
Manufacturing performance dollars margin et cetera, 2022, and then its fully operational by 2023, they are carrying its own load in that $30 million of incremental gross profit we talk about when we talked about the three capital projects.
Got it okay thats great.
And then the.
The larger backlog and the collagen.
With that I'll convert ended fiscal 2021 or is that spread out over a number of years.
So no it shouldnt all convert.
I guess the.
One of the most people know about the Newport News I believe is a four year install project Newport Beach is a three year install project we.
We have some other projects that are going to go end of life. So you know really strong performance as a remote disconnect technology.
Starts to get adopted.
Excitement around centrex, we expect that we will continue to be able to have a fairly healthy.
Order book.
For the meter business continued acceptance of the the leak detection solution. The fact that both will be on a single platform in centrix integration of hydrocarbon some other things.
On the sand trucks as well and so we think we have a fairly compelling growth story coming in the technology segment.
But I think it's going to be dependent on kind.
Kind of a rate of adoptions and be access to manholes and access to and close working.
Spaces and access to consumers homes.
So I think the the real increase this year is going to be what the shippable backlog.
In our R&D valves, and hydrants businesses, which I think.
We had a really strong booking.
In our Q4.
Backlog grew in valves and hydrants and there was one thing I Didnt say in my prepared comments that are.
I would say now too is around this notion that.
We had some absenteeism issues in our Q4 as as we weren't able to ship everything that we booked as a result of of Covance, but all in all I thought the quarter was extremely strong for the manufacturing group given the challenges they had and so you know on the whole I feel feel really good about where the.
Backlog is I feel really good about where our Rob.
Where our service levels are going as as manufacturing et cetera.
Sure Yep.
Yes, and maybe a follow up to that with you.
Seems like.
They said leasing costs American liberation or hesitation.
At the onset of it and then Nick.
It seems like that you separate that and I'm speaking specifically to the technology create I'm wondering if the time timing to make a decision or an award to yearly.
Is narrowing a bit at least from what.
There were several months ago.
The onset of this.
Yes, I wouldn't say the award process has been.
Has been delayed for the meter business as much as it's been for the really large capital project business. You know when you think about our specialty rental business in particular so.
These municipalities growth the higher the consultants say they evaluate ticket requests for proposals and negotiations I think thats remained relatively intact I think what's delayed is even once they've made the decision in the meter business than gaining access to your home or to buy a home.
Especially if in in the early stages of the pandemic. So yes, I expect that things now that we know how to take safety precautions. We know how to keep people have I still don't think were going to be doing any any basements installs anytime soon.
But anything Thats curbside arena in a hand hole.
I think we'll start to see some normalization of that activity.
As the year goes on.
Okay, and then one more for me you had this very defined kind of internal.
Capex plan over the next few years here and you did talk about.
Our willingness or appetite to look at some bolt on M&A I'm just curious if.
The discussion today.
Starting to pick up on your end.
Yes, I mean, we're looking constantly every month, we have process around our M&A pipeline who's in who's out is it actionable all of those things where do we think so we have our eyes, obviously on a several companies and.
We're disciplined about how we approach it and I think our track record is that we're disciplined about how much will pay.
No I don't think that we're going to have interest rates at these levels in perpetuity. So.
I don't allow the team to do use discount rates that are.
Assuming that you're going to have access to really really cheap debt money in perpetuity, So I think that.
We we we have strengthened our balance sheet to the point, where we could definitely do something that I have the appetite to do something but.
But we're going to remain disciplined and thats been our mantra for four years and is not going to change.
Yes.
Great well, thank you for taking the question.
Thank you.
Thank you. Our next question will come from Joseph Giordano of Cowen. Your line is open Sir.
Yes, Hi, good morning. This is Frank is going for Gil can.
Can you maybe put some numbers or a range around municipal budgets patients for both Capex and Opex next year any sort of incremental color over there would be helpful.
Yes, I think we are where we ended up as I think capex is going to be down slightly year over year I think opex. If you got to kind of split into two pieces. The planned opex on the unplanned we expect the unplanned to continue to grow kind of that by lets call. It 10, even present rate, but the.
Planned unplanned the plan piece, probably planned right now or.
Zero to three and I would say that what's going to happen is because I have a much higher unplanned budget I expect that that is going to shrink as time goes on.
So we expect kinda.
Yes, flat I think what's going to happen and has been happening for a while want to be clear with everybody on the call about that is that the unplanned spend the frequency of pipe breaks the frequency of pumps sees the frequency of a lot of these things going wrong in especially the post World War two installed.
Part of the infrastructure is taking more and more dollars from the plan part of the Opex budget and moving it into kind of emergency response.
Along with the increase in variability in our weather pattern.
Disasters, whether you go back to Houston spend after the hurricane Harvey and those kinds of things, they're taking more and more dollars every year I expect that trend to continue.
So you know overall.
I would expect that that muni budgets are going to try to be managed to flat to low single digits.
As they kind of right at what is going to be a little bit of an economic downturn and that's that's kind of a collective view I don't believe that that.
And the only.
Mueller view of the World I think you know if if you listen to what people are saying out there. There is a great deal of uncertainty and so people are kind of just.
Holding back if you will.
Okay. Thanks, Thats helpful and for my follow up what kind of impact do you expect on the single family housing market. It has exceeded dotcom towards the end of the here.
That's great question and I think it's I think it's going to continue I think one of the outcomes of the pandemic and the reason is almost a.
Our rebalancing if you will of the preference for single family over multifamily dwellings.
You know I'm guessing here there is no theres no causation data, but certainly it's grown faster since the pandemic started and I think people now appreciate the idea of having a single family house little space in their own little onto the road a little distance from the neighbor and not have to worry about hitting elevator buttons and then grab in your hands and.
Sizes, I think there is some underlying trends and demographics going on there that.
Leads me to believe that that will will have continued strength in the single single family dwelling going forward as long as interest rates.
The economic recovery give reason.
If people reason to believe that they can afford it.
Great very helpful. Thank you.
Q.
Thank you.
Once again, if you would like to ask a question. Please press Star then one on your phone keypad.
And our next question will be from Andrew Buscaglia of Berenberg, Sir Your line is open.
Good morning, guys.
Wanted to follow up on SMS for your guidance for next year and that I can see the conservatism in the top line.
Everything you said, but.
On on your EBITDA line can you talk about I guess, what you expect for pricing next year.
I think first off because I would think that given the actions we've taken this year.
I think the low end is pretty conservative and even the high end.
Is achievable or you could exceed it if pricing seems to be holding up.
So yeah, so to start off but as we said were got a range on net sales by about zero to 3%.
As we look at that I think in terms of pricing I would say, we do expect to continue to benefit from from pricing into our 2021 I'll give you. A reminder, that we did have some periods in our 2020, where we had the benefit of a couple of pricing increases and have lapped that.
Additionally from a from an inflationary perspective, we had a tailwind on some of our raw material costs in our fiscal 2020 and as we look out right now to 2021.
We think that will be experiencing inflation there but.
But we'll obviously look to continue to balance that price cost ratio as we look for you know all that said as you hear from the outlook that we gave we are expecting improved performance as we look at our EBITDA.
EBITDA as we gave guidance of a 47% increase with that and certainly I think performance as we look out into 2021 some of the investments that we've made and.
The continued focus on operational excellence, we do expect that we will get some benefit from improved performance as we look out to our our 2021.
Leading to what we expect to be EBITDA growth.
And do you expect your your typical annual price increase that you mentioned that.
I've always made it a really we don't we don't talk about price.
Until we talk to our channel partners and our customers first and.
Certainly there is a lot of dynamics going on in the market right now from a you know the.
Underlying raw material movements that will put some inflationary pressures on there, but but we're not going to announce a price increase on.
On the Investor call, we'll do that with with our with our channel partners, but I would say this that whenever we have had an inflationary environment. We have had a corresponding price increases through the channel and into the market as a result.
And that is that being long before I got here, it's been like that since.
The Eightys and Ninetys.
Okay.
And I was pleased to see you're talking about <unk> of our EPS Gi and Europe in your press release and your prepared remarks.
Can you just high level what are your some of the early findings. Your you are you starting to talk about more are and maybe how do you stack up against some of your water peers in terms of EPS year.
I think thats one area that Mueller.
Deserve some credit for and just curious what your initial thoughts are.
Yes. Thanks, Thank you Andrew I think that.
We've always been very very conscious of what the principles of SGR and I think I heard.
Our investment base basically say, yeah, you guys did a great job around getting you know like TR IR under under two and in the you know the 1.1 rates you've always told US that you are measuring things like.
Your greenhouse gas emissions or pounds, the landfill and things like that on the manufacturing side plus the actual products trying to find water leaks.
Conserve precious resources, so we've always done.
And I think that since we went public on before I got here the environment Health and safety Committee of our board has been very very conscientious around.
Making sure this business and its people understand it's always best to do the right thing in your community.
You will never ever get any retribution for for being safe or for for keeping our environment clean.
With that said I think.
Our method of disclosing.
And saying those things so that it's easy to access for our investors.
You know we've heard that it's not easy enough and so that boss, we're going to do our first.
Inaugural if you will you report and and I think that.
We now understand.
Out of the framework and Weve got in front of Us a.
I think a really really good first level out there as it relates to.
Governance, social and environmental or environment, and and so I think that we are well on our way.
With with our kind of manufacturing background, you could expect that we have a real employee and and.
Environments focus, but as we learn more and as we become bigger parts of our community and we continue to increase our.
Our employee pool, we're definitely picking up on the social so this this first one I would say, we'll be social socially not as heavy as we would expect in the future. The I know, there's a lot of talk around.
Gender equality in pay and things like that and I would expect that people are free to have those discussions with us, but we don't have all the data yet and there'll be things, we get into in the future, but I am proud of this team and I am proud of the progress. We've made every year, reducing the number of pounds, we take the landfill every year, reducing or improving our electricity official.
And see the board investing in the latest technologies. So we don't have.
You know any any impact on our environment and and it's something that we hold very dear and so I'm very happy to have that out in December and just to add on a couple of things, yes for a number of years as you can see in our proxy we have incorporated as part of the metrics that we use.
For incentive compensation, we have had metrics in and around safety and in and around environmental stewardship. So that has been in I'd say sorry, the fundamental piece of our program for a long time.
The other as we talk about technologies as we talk about looking to integrate war.
Digitally enabled information through our infrastructure products I think the other piece that you will see in our sustainability report is really talking about how we are ensuring that with a lot of our new products. We are looking to address.
Address sustainability issues and opportunities that our customers and others will have in the marketplace as well. So I think thats. Another piece that we've certainly been talking about a lot here and well highlighted as well and a report that's coming up.
Great. Thank you guys.
Thank you.
Okay, operator, we're almost near the end and if there are no other questions I would like to finish with.
You know I think it's a really good quarter, we had some challenges as I mentioned in my comments, we had some absenteeism issues as as we quarantined or people to make sure we kept the disease out of our plants.
We had really good manufacturing performance in spite of that we saw.
Pretty good sequential improvement in our order book activity.
We booked some big.
Technology projects, we booked some big infrastructure.
Infrastructure projects and so all in all I took it as a really really good quarter and I feel like we have now going into 2021, some momentum I think we've got some uncertainty as well as a result of the pandemic, but all in all I think that the thing I want to get through to everyone is.
After you get six months into kind of having your world turned upside down and they kind of look around the.
Zoom room for lack of a better word and everybody's messed up and you're managing through a crisis and you all know we have been for prices before.
For different reasons, you start to get a sense of.
Where the team is I want to assure you I have faced this team is ready to adapt and ready to do what needs to be done in order to look after employees in order to look after communities in order to look after customers and.
Fuel that we we will adapt as we go and.
We've we've learned a lot about each other over the last four years and I expect us to learn even more next year, but I do have faith that we will be able to adapt to deliver the best results that we can as a management team and to deliver clean safe drinking water.
The population who depend on us so feel good about feel good of both the quarter and I just want to make sure everybody understands it. Thank you very much operator.
Thank you Sir we have no further questions at this time.
And we will go ahead and.
Yep.
Go ahead Sir.
Hey, we'll we'll just say goodbye. Thank you.
Thanks, everyone for your participation on today's conference call at this time all parties may disconnect.