Q2 2021 Mueller Water Products Inc Earnings Call

Yeah.

[noise] [music].

Welcome and thank you for standing by your lines have been placed on a listen only mode until the question and answer session at that time, if you would like to ask a question you May Press Star. One today's conference is being recorded if you have any objections you may disconnect at this time and now I'll turn the call over to Whit Kincaid.

Good morning, everyone. Thank you for joining us from Mueller water products second quarter 2021 conference call. We issued our press release reporting results of operations for the quarter ended March 31, 2021 yesterday afternoon.

A copy of the press release is available on our website Mueller water products Dot com.

Got hall, our president and CEO and Marty <unk>, our CFO will be discussing our second quarter results market conditions and our updated outlook for fiscal 2021. This mornings call is being recorded and webcast live on the Internet. We have also posted slides on our website to accompany today's discussion and to address force.

Looking statements and our non-GAAP disclosure requirements at this time, please refer to slide two this slide identifies non-GAAP financial measures referenced in our press release on our slides and on this call. It discloses. The reasons why we believe that these measures provide useful information to investors reconciliations between non.

Non-GAAP and GAAP financial measures are included in the supplemental information within our press release and on our website slides.

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.

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 30.

A replay of this morning's call will be available for 30 days at one 880 391190, the archived webcast and corresponding slides will be available for at least 90 days in the Investor Relations section of our website I will now turn the call over to Scott.

Thanks, Whit. Thank you for joining us today I hope everyone listening to our call continues to stay safe and healthy and you were able to be vaccinated as we see the light at the end of the tunnel and emerge from the pandemic.

Before turning the call over to Marty to discuss our second quarter results I will provide a brief overview of the quarter.

We delivered a solid second quarter performance, resulting from our team members focused on satisfying increasing demand. Despite continuing new challenges from COVID-19, and inflation, especially material costs consolidated net sales exceeded our expectations as we reported a three 8% increase in the quarter.

Both infrastructure and technologies increased sales in the quarter, we increased net sales one 5%, excluding the $6 million benefit from the elimination of cross industries, one month reporting lag.

Net sales sequentially improved 12, 7% versus the first quarter and compares with a 10, 1% increase in net sales in the second quarter of last year.

As a reminder, customers place orders ahead of our effective date for price increases and as a result shipments were particularly strong last year.

We believe our end markets improved during the quarter as municipal spending continues to recover from the pandemic and residential construction continues to see strong demand for single family homes.

Similar to last quarter, our project related businesses are still experiencing a slowdown resulting from the pandemic.

I remain impressed with our team members as they continue to do an outstanding job, serving our customers, we experienced accelerating raw material inflation during the quarter, leading us to implement additional price increases during the quarter for the majority of our products, which will help margins as we move forward.

Despite this near term inflation headwind higher sales and improved manufacturing performance in the quarter led to a 50 basis point improvement in gross margin, excluding the inventory write down associated with the recently announced restructuring plans.

I'll address these actions later in the call we.

We generated $57 million and adjusted EBITDA in the quarter with a 19, 4% adjusted EBITDA margin.

Benefits from favorable manufacturing performance and higher pricing, partially offset accelerating inflation and the anticipated increases in SG&A expenses.

I am very pleased with our cash generation this quarter, leading to a $72 $4 million increase in free cash flow through the first six months of the year.

Our teams remain focused on executing initiatives to deliver pricing actions improve efficiencies and improve working capital.

We ended the quarter with nearly $230 million in cash and our net debt leverage ratio remains at one one times versus one six times in the prior year.

Despite the ongoing operational challenges from the pandemic and accelerating inflation, we believe that end market demand will support further growth this year base.

Based on our strong first half performance as well as expectations for our end market sales backlog pricing and inflation for the rest of the year.

We are raising our annual guidance for both consolidated net sales and adjusted EBITDA growth for 2021 for the second consecutive quarter later in the call I will provide more color on some of our key strategies and markets and expectations for the rest of this year with that I'll turn the call over to Marty to review, our second quarter results.

Thanks, Scott and good morning, everyone I Hope you and your families and associates are safe and healthy I will start with our second quarter 2021, 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 second quarter of this year, we generated consolidated net sales of $267 5 million, which increased $9 8 million or three 8%. The increase in net sales was driven by the $6 million benefit from eliminating the one month reporting lag higher pricing and increased volumes of technologies the benefit of eliminating.

Craft is one month reporting lag this quarter reflects net sales with an infrastructure for the month of March note that March was a particularly strong month at crouse benefiting from the repair needs. After the challenging winter weather in February overall Kraus has performed very well since we acquired the business in December 2018.

Gross profit this quarter was $88 $4 million with a gross margin of 33% gross margin decreased 40 basis points versus the prior year.

Excluding the $2 4 million inventory write down associated with recently announced restructuring plans gross margin increased 50 basis points. This increase was driven by benefits from favorable manufacturing performance higher sales and eliminating the one month reporting lag, which were partially offset by higher costs associated with inflation and.

The $1 2 million of additional expenses related to the pandemic, our total material costs increased approximately 10% year over year in the quarter, primarily driven by higher raw materials or price cost relationship was negative this quarter given the rapidly rising inflation, particularly for raw materials, we expect additional price increases will help offset and.

<unk> inflation in the second half of the year, Scott will provide more commentary on inflation and pricing later on.

Selling general and administrative expenses of $54 $2 million for the quarter increased $4 9 million versus the prior year. The increase was primarily due to higher personnel related costs and an additional month of results due to the elimination of the reporting lag, which were partially offset by reduced expenses related to travel trade shows and events as a result of the <unk>.

Debit SG.

SG&A as a percent of net sales was 23% in the second quarter compared to 19, 1% in the prior year.

Operating income of $33 4 million decreased in the second quarter compared to $35 8 million in the prior year operating income. This quarter includes the $2 4 million inventory write down mentioned earlier, a $1 $4 million benefit from eliminating the one month reporting lag and $800000 of strategic reorganization.

In other charges.

Turning now to our consolidated non-GAAP results, we generated $35 2 million of adjusted operating income compared to the prior year higher costs associated with inflation and higher SG&A expenses were partially offset by benefits from favorable manufacturing performance and higher sales the.

The estimated expense impact from the pandemic was a benefit of about $600000 in the quarter.

We reported adjusted EBITDA of $50 7 million as compared with $51 $8 million in the prior year quarter with an adjusted EBITDA margin of 19, 4%.

For the last 12 months adjusted EBITDA was $196 8 million or 19, 8% of net sales for the quarter. Our adjusted net income per share was <unk> 14, as compared with 15 in the prior year.

Turning now to segment performance, starting with infrastructure infrastructure.

Infrastructure net sales of $246 $9 million increased $7 million or two 9% as compared with the prior year, primarily due to eliminating the one month reporting lag in higher pricing adjusted operating income of $52 9 million increased $2 2 million or four 3% as compared with the prior year.

The increase is primarily due to favorable manufacturing performance and higher pricing, partially offset by higher costs associated with inflation, primarily for raw materials. The estimated expense impact from the COVID-19 pandemic was a net benefit of $500000 in the quarter as $1 $5 million of lower SG&A expenses attributed to.

Reduced travel and trade show expense were partially offset by $1 million of additional manufacturing expenses.

Adjusted EBITDA of $65 6 million increased $2 8 million or four 5% leading to an adjusted EBITDA margin of 27, 2% and a conversion margin of over 200% in the quarter, excluding the net sales associated with the one month reporting lag.

Moving on to technologies Technologies' net sales of $20 6 million increased $2 8 million or 15, 7%, primarily due to increased volumes and higher pricing.

Adjusted operating loss of $4 6 million was flat in the quarter as higher sales were offset by unfavorable manufacturing performance higher SG&A expenses and higher costs associated with inflation. The estimated expense impact from the pandemic was a net benefit of $100000 in the quarter. This benefit resulted from $300000.

Of estimated lower SG&A expenses, which were partially offset by additional manufacturing expenses in the quarter Technologies'.

<unk> adjusted EBITDA was essentially flat with a loss of $2 6 million as compared with a loss of $2 $5 million in the prior year quarter.

Moving on to cash flow.

Net cash provided by operating activities for the six months period improved $66 2 million to $63 $2 million, primarily driven by improvements in working capital management. Additionally, cash used in operating activities in the first quarter of the prior year included the $22 million Walter energy tax payment.

We invested $31 1 million in capital expenditures during the six months period, compared with $37 $3 million in the prior year period free cash flow for the six month period improved $72 4 million to $32 1 million compared with negative free cash flow of $40 3 million in the prior year period.

<unk> is a $54 million improvement, excluding the Walter energy tax payment in the prior year at March 31, 2021, we had total debt outstanding of $447 6 million and total cash of $228 2 million.

We did not have any borrowings under our ABL agreement at quarter end, nor did we borrow any announced under our ABL during the quarter at the end of the second quarter, our net debt leverage ratio improved to one one times from one six times at the end of the prior year quarter. As a reminder, we currently have no debt maturities before June 2026 or <unk>.

Five 5% notes have no financial maintenance covenants and our ABL agreement is not subject to any financial covenants, unless we exceed the minimum availability thresholds.

Just on March 31, 2021 data, we had approximately $154 4 million of excess availability under the ABL agreement, which brings our total liquidity to $382 6 million. We continue to focus on maintaining a strong balance sheet with ample liquidity, which supports our capital allocation priorities Scott.

Back to you.

Thanks Marty.

I'll review some of our key strategies and markets and expectations for full year 2021. After that we'll open the call up for questions.

As Marty mentioned raw material inflation accelerated during the second quarter impacting our gross margins.

Due to the magnitude of the inflationary increases, especially raw materials and the lag between pricing actions and realization, we experienced an unfavorable price cost impact during the quarter.

We've taken additional pricing actions beyond our initial price increases in December which will help our price cost position in the second half of this year.

The magnitude of the inflation will impact our conversion margins for the rest of the year, we do expect to get more price realization in our third and fourth quarters, which will carryover into 2022.

Our teams remain focused on improving our conversion emerging through both price realization and productivity initiatives to help offset the expected continued inflation in the second half of the year.

Similar to the 2017 2018 inflation cycle, we expect to benefit from the multiple pricing actions after the cycle peaks.

Our goal is to get price to more than cover inflationary pressures over the entire cycle, which we expect to continue into 2022.

At the end of March we announced additional restructuring plans to close two facilities in Aurora, Illinois in Surrey, British Columbia.

Most of the activities from these plants will be consolidated into the new facility in Kimball, Tennessee.

Kimball facility, which focuses on specialty valves includes the operations from three previously announced plant closures.

The facility is strategically located between our foundries in Chattanooga, Tennessee in Albertville, Alabama.

We've already begun to implement this restructuring and expect to substantially completed by the third quarter of fiscal 2022. These.

These actions in addition to our previously announced multi year investment to modernize our manufacturing facilities will help accelerate product development drive additional operational efficiencies reduce duplicative expenses and aid us in advancing our environmental initiatives.

As a reminder, the Kimball facility is one of the three transformational projects. We have previously discussed along with the new brass foundry indicator is the large casting foundry in Chattanooga.

Due to the pandemic impact on the project related portion of our valve business, we have reevaluated the timeline for the sales ramp up of existing and new products.

New restructuring initiative will help us to achieve our overall gross margin expectations. Upon completion of the three large projects. Once they are at full run rate in total we continue to anticipate these three projects will contribute $30 million in cumulative gross profit benefiting from cost savings and increased <unk>.

<unk> after all are complete and at full run rate.

Over to our first quarter, our end markets improved during the quarter as municipal spending continues to recover from a pandemic and residential construction continues to see strong demand for single family homes.

For the first half of the year, we increased consolidated net sales six 1%, excluding the one month reporting lag, which compares to a 10, 2% net sales increase in the first half of last year.

While our distributors increased inventory levels during the first half from this year, resulting from both anticipated demand and the timing of pricing actions. We believe that overall end market growth is in the mid single digit range.

This growth has been driven by the residential construction end market, which was again very strong in the quarter.

Single family housing starts increased 20% in the quarter, leading to over 1 million starts over the last 12 months.

While we believe that the residential construction end market will continue to experience strong growth. This year, we do anticipate that the level of growth will start to moderate later this year as we lap the strong growth in the prior year and supply challenges pushout, new lot development. Our view on the municipal end market is similar to last quarter.

We are seeing some delays in the project portion of the market, which we expect to continue to varying degrees.

An infrastructure Bill mentioned the water investments is a positive for our industry. We believe that it will take some time for the final bill to be approved in a number of years for the federal dollars to reach the municipalities.

Additionally, since over 90% of water utility funding comes from state and local sources, we expect the pace of recovery for large capex projects to move more slowly than the repair and maintenance portion of utility spending which remains relatively resilient.

Over the long term, we believe that any federal infrastructure funding efforts will help municipalities address their aging distribution networks at a faster pace and importantly helped to highlight the need for investment in our aging infrastructure.

Now moving on to our current expectations for 2021.

As mentioned earlier consolidated net sales growth from the second quarter exceeded our expectations.

Demand remained strong throughout the second quarter, and we finished the quarter with an all time high backlog for.

For the remainder of 2021, we continue to expect a strong growth in the residential construction end market will more than offset any temporary delays in the project related portions of the municipal end market caused by the pandemic.

Based on our expectations for our end markets sales backlog pricing and inflation for the rest of the year. We now anticipate the consolidated net sales growth for 2021 will be in the 8% to 10% range as compared to our previous guidance for net sales to increase between 4% and 6%.

Our expectations for adjusted EBITDA growth for the year are now between nine and 12% as compared to our previous guidance for adjusted EBITDA to increase between five and 8%.

Finally, we continue to expect to generate healthy free cash flow for the rest of the year in.

In summary, our top priorities remain focused on keeping our employees safe protecting our communities delivering exceptional products and support to our customers and increasing cash flow at the same time, we continue to execute our strategies to reinvest in our business to drive efficiencies advance our ESG goals accelerate growth.

Both and provide more technology enabled products and services to increase the resiliency of the aging water infrastructure. We have now spent a full year operating in the midst of the pandemic. Our team members have stepped up in their role as essential workers meeting our customers' needs.

We have adjusted to the new processes put in place to help ensure their safety and health of our focus on working capital management and cash flow has yielded improvements as we have increased our free cash flow in the last 12 months by about $98 million, excluding the Walter energy tax payment.

We are learning new ways of managing our business with more remote training and new products seminars for our customers importantly, we see the clear need for more digitally enabled products and services to allow for municipalities to manage their operations remotely as they plan for accelerating talent challenges with the expected retirements due to an aging workforce.

Yes.

We continue to successfully convert existing customers to our centric software platform, which will provide more opportunities for us to expand our technology portfolio with existing customers.

During the second quarter, we completed smart hydrant pilots with two large water utilities and a third pilot is scheduled to be completed in early summer. Additionally.

Additionally, we're seeing smart hydrant order growth in our sales pipeline as water utilities begin to allow sales teams back into their facilities for in person meetings.

I am confident that we are well positioned to strengthen our leadership role in the water industry and benefit from the enhanced attention from water industry is receiving with a strong balance sheet and cash generation supporting our strategies, we're well positioned to benefit all of our stakeholders by becoming a world class manufacturing company and <unk>.

<unk> industry leader, bringing technology to our water infrastructure products and services and with that operator. Please open this call for questions.

Thank you we will now begin the question and answer session. If you would like to ask a question. Please <unk> your phone from.

Star one and record your name clearly to withdraw your question you May Press Star two again from Star one to ask a question and one moment. Please for our first question.

Our first question comes from Brian Lee with Goldman Sachs. Your line is open Sir you May ask your question.

Hey, everyone. Good morning.

Thanks for taking the questions.

I guess just jumping into the guidance real quickly Scott and Marty can you quantify a bit how much.

Is price and then how much is volume if you're thinking about kind of a quantification of the increase growth outlook here for the year and then what.

What are the specific assumptions around price and then separately price cost spread.

Embedded in the outlook.

But what's embedded versus what the guidance guidance understand that there is a range of outcomes that could happen.

To do with later inflation I don't think that the copper market or frankly, the scrap steel market are going to remain flat Brian.

We have a range of cause and effect if you will.

But what I will say about that is that.

We now have a backlog that.

Is basically price.

About 60% prior to the February March price increase.

We won't see the benefit of that.

Those price increases until about 45 days.

After the.

After they were effective so we will be through april's volume still.

Still at previous pricing and as you know we have a 60 to 90 day lag.

On average.

What we do do is we don't announce price increases on the investor call, but what I will say is that the market has been rational in the past I expect that the.

If the continued pressure on copper, resulting in higher brass if that continued pressure and scrap supply.

Pressure in pig iron all of those raw materials continues then I think that we should expect the market.

To react in that we will have to recover those costs.

But as to why.

Foods in the forecast specifically.

We have a range of outcomes I think if you were to say that.

No shocks and inflation are contemplated bought that some steady increases from here could be could be handle then we could still.

Meet the guidance, but that's basically how we think about it what I'm most concerned about.

I can't remember, where we are I think we got as high as $4 60 and copper but.

No five dollar copper is contemplated how's that.

I understood Okay fair enough.

And then just a follow up question I had was around the.

Some of the commentary you made around conversion margin Scott that was helpful. But if we if we think about the bridge here I think your.

Insinuating, it 20% or so EBITDA conversion margin for 2021 based on the updated guidance is the historical 35% to 40% long term targets still intact for that metric and then is that something we could see.

Exiting calendar 2021, given the pricing actions that are being contemplated and theyre going to be pass through here moving through the year or is that more of a 'twenty 'twenty two event.

Well I think nearly way we can answer that Brian is for you to look into the Crystal ball and say, what's going to happen with price cost through the last six months per year.

To be clear I believe in a stable market with.

Stable commodity prices and stable material prices no massive moves in the value of the U S dollar.

<unk> seen recently.

That we are a 35% to 40% long term flat conversion margin business and we do that when you see.

Flat and falling.

Commodity prices.

Through a period like this where price cost is going to have this lag depending on how long that lasts I think you're accurate in the implied conversion margin, so that kind of 20% to 30% range as we play catch up.

And we purge the backlog at.

At the pre price increase.

Levels.

I think the other.

The thing that we have to watch is where we are especially with those project based businesses I mean, we can live with some delays.

I don't want those delays.

Stretching out into non 12 14 months, while we're in an inflationary period, we'll have to we'll have to take actions.

And haven't subsequent negotiations on those where we can so I think youre right in the near term, it's probably in that 20% to 30 range once we get back to stability.

And the price cost World I think we can go back revert back to the 35 kind of number.

Okay. Thank you appreciate it.

Thank you.

Thank you. Our next question comes from Ryan Connors with Boenning and Scattergood. Your line is open Sir.

Great. Thanks for taking my question this morning.

Scott My question I wanted to keep on the stable pricing for a second and the pass through and I think about the different types of sales that you make.

Is it from me to understand how a builder in this environment.

But then that infrastructure. It has no problem kind of embedding that into the cost of $1 million house that kind of sales right through.

But that I think about the average municipal water utility kind of operates at breakeven a lot less wiggle room to sort of accept price. So can you kind of talk about the different dynamics, you're seeing in those different markets and sort of the.

How you are faring in each of those in the outlook and risk.

In that context.

They were great and thanks for the opportunity to kind of delve into it a little bit Ryan. So Ryan is absolutely right for everybody on the call that we have kind of multiple pricing structures you have everything from supply agreements where prices are fixed from for 12 months.

And then you have renegotiation periods and you can renew.

After 12 months of that will go back to bed that we have the spot market, which is really where most of the.

The contractor work is done.

And so as the developer decides he is going to.

Develop some loss.

You'll get a bid you probably have 90 day window, where the distributor will be holding prices to the contractor, which is why the distributors get a 30 day notice on when were doing price increases for the spot market and then you have.

Let's call it the.

The structure of the water utilities, where where there is channel power.

They can enter into supply agreements.

And kind of force a fixed.

Fixed price for a period of time, but then when there isn't channel power. So.

If it's.

If the math you think about Ryan knows this that 50000 water utilities out there.

The distributors that ourselves. So we are not going to enter into supply agreements with the bottom 49000.

Water utilities are probably 49500, so the vast majority of the market.

The contract per market and the water utility market operate.

In the spot market with supply agreements and Thats why you often hear us talk about price increase amounts and then we talked about yields because obviously, we can't just unilaterally increase prices.

<unk> got a lead DWP are a new York City, we have to wait from negotiating window to open and so.

Yields generally.

Or in that 40% to 60% with 50% being the most likely outcome.

Of announced price increase so yields end up being you know if you have a.

3% price increase yields will tend to be about 1.4 to one 7% range depending on what your mix.

<unk> supply agreement to spot market is.

That explains it okay.

It does is it safe to say that debt.

Again paraphrase that it is a bit more of a there's more complexity and challenge in the municipal.

Side than in say the developer side I mean is that a fair statement.

Absolutely because I think there is a lot of.

Guessing as to what the volumes will be from which part of the water utility side is buying spot in which part is borrowing under our supply agreement.

Yes, yes, okay.

That's very helpful and then my other one.

Got it alright.

One thing I want to make clear though is that.

When we have distributors.

Enter into supply agreements and we are not part of the agreement we do not honor.

The supply agreement that the distributors risk at that point.

Got it okay interesting.

And my other one is.

It seem like small potatoes, but.

It was material enough that you called out of the press release and I have already talked about it in her remarks.

<unk> and trade show events.

Those expenses down how do you see that new normal emerging there.

The big industry events going to be as important as they used to be and those expenses will ramp back up or are we going to be in more of a virtual.

Kind of world in terms of those events going forward or those events are smaller and toward extensive debt stuff creep back versus maybe a structural change there.

I am hopeful that they creep back because frankly I think that the.

The interaction of multiple water utilities with each other at these tradeshows at these conferences.

Talking about what is possible, especially as we are trying to accelerate the digitization of the water utility industry.

Critically important I know you've been too.

A lot of them GWI and others and I think that the the coming together of the mines to talk about what's possible and how applications and what different problems or is invaluable and frankly the richness in the virtual world.

While it's been very very good it's not the same as.

The in person meetings, and so im hopeful, especially as it relates to the digitization of the water industry.

That the technology leadership kind of.

Events get back to in person, but I think that the number of travel days for sales calls or for.

Some of the more routine things that we've learned.

How to effectively do will be reduced so I think the snapback costs will be at a percentage.

Their historical level.

I don't think we will ever get back to exactly where we were but.

So a little bit lower but I really do hope that the things like ace and water world and things like that do get back to you in person.

Yes, and agree more hopefully and I look forward to seeing and Irwin and when they do thanks for your type of day, Okay. Great. Thank you Ruth.

Thank you. Our next question comes from Deane Dray with RBC capital markets. Your line is open you May ask you may ask your question.

Thank you and good morning, everyone.

Good morning before net.

I'd just like to finish up the thought here on price cost.

And.

Frankly learned a lot and Scott your explanation about the mix.

It's not until you are in a situation like this where some of those nuances really do come through so I appreciate the explanation.

And when you referenced the yield of the 40%, 50% on the price increase.

And you said it really does depend on the mix is there any consideration of elasticity of demand I mean, do you have customers going elsewhere and is that part of the idea that you get a lower yield because of comp.

Competition.

And just any any context or color there would be helpful.

Yes, I think we've been fairly successful.

It's drawing conclusions from from past.

Price increases, where we've been the only person out there with a price increase.

And watch what happens with demand and I feel like sticking.

Sticking stickiness of our products.

With utilities is really really high so I think that.

You really have to kind of be egregious in your in your treatment either on price or delivery of a utility before they just kind of throw up their hands and say, okay. We're going to start buying from one of your competitors with that said.

When we go in and we have a reason discussion about what's going on with cost we have a reason discussion about going on with.

What the drivers of price increases and inflation are.

The market has been very rational and so I think that the.

No.

Recent events. The American dollar is theres two pieces here one is real inflation demand is is actually growing and we see shortages.

Increased prices for scrap and other things, but the other thing is a lot of these commodities or global commodities and the value of the U S. Dollar has declined and as a result in U S dollars theres been kind of as double whammy, one real price inflation into.

One dollar not going as far as it used to causing.

Got a stack on inflation and so.

<unk> customers.

Customers understand that and yes, I think there is a fair deal of price elasticity.

But we believe that most of our customers have bought into the value proposition there will always be an element of the market the net.

So as everything on price I think the bigger risk.

And where it's not as elastic in the competitive situations or more.

Keene, if you will is on the project base business Big.

Big public bids big projects with.

With lots of scrutiny.

Sure that's really helpful.

Alright, so separate question on debt $30 million of gross margin benefit with the new plants I get that there would be cost savings just because of the efficiencies of the new operations, but you are assuming some higher sales are these new products that you would be some of the.

Larger castings that you can do yourself.

That might be an issue, but just if you could flesh out maybe size what the new sales opportunity is with these plants.

Yes, sure I think the biggest driver of sales growth. When you think about the $30 million is where we finished the new Decatur plant it will be.

More capable than the plant that we built in <unk>. So.

It will actually have a lot more mill capacity a lot have a lot faster changeover from materials that we will have a lot of.

Our ability to expand the kinds and types of alloys that we that we melt and as a result, we'll be able to enter new product areas as well. So there is of course more capacity and Kimball than say an Aurora there is more capacity as a result of the large casting foundry.

But the bulk of the sales increase comes from the new capability associated with the brass foundry.

And I don't want everybody to get too focused on that I mean, there is there is a piece that sales, but if you think about the elimination of.

The Hammond, Indiana, Surrey, British Columbia Aurora.

Lind, Washington, five plant managers go to one five controllers go to one so it's really a lot of it is the reduction of the duplicative costs associated with running five relatively small facilities as opposed to reporting.

Five facilities into a single.

Operating structure, which Kimberly can handle that's where the bulk of the $30 million comes from.

That's helpful and just last question from me and be from Marty.

Just some context of the crouse that elimination of the one month lag I don't know if its shame on me for not knowing there was always a one month lag, but how did that happen because you acquired it back in 2018.

Just.

Are there other components are businesses that are that are on a different calendar.

Yes, no great. Thanks for that question day, and so you're exactly right going back to when we acquired <unk> in December of 2018, we made the determination at that time.

Given given the business given that its headquarters in operations where in Israel.

Made the determination from an accounting perspective, two reported on a one month reporting lag.

And very pleased that after two years.

Of our ownership that we were in a position to eliminate the lag crowd and put it on the same reporting schedule as the rest of the company.

Team's done a very good job just to get us up to that place. So really what that means is when we look at the quarter.

Second quarter of this year, we are reporting four months for crouse, rather than the usual three that you would report. So we've got the months of December January February and March that reported in the second quarter of this year and Thats why I guess from a transparency perspective, we wanted to make sure that we called out what the impact of that was.

So in essence this is going forward because if you will we were short of mud.

After acquiring it and we've added that month back.

Since this quarter so.

Anyway, you call that out and we should it'll be if you will on a regular basis going forward.

If I may.

<unk> team has done a great job the business was a sole proprietorship in not necessarily closing monthly kind of more of a quarterly close probably to close at the end of the month became something that we evaluate it in.

We made the call to put it on the lag and her team has done a tremendous job to put the systems in place that they can close within our $6 seven day timeframe with EBITDA.

I had forgotten that that wasn't a Israeli company and so I fully appreciate the accounting challenges in getting that done and just if I could sneak one other one day and since we're on the topic are there are there kraus like deals out there because it seems like fixing water main breaks is going to be a.

The industry for a long long time, and Krauss has been such a home run there. So hopefully there is some other adjacencies for you. Thanks.

Yeah, No look I, absolutely agree just to spend a moment commenting on crowd. If you go back to the strategic rationale that we laid out for Crouse I think very pleased with the performance that we've seen over the last couple of years from a manufacturing from a customer and importantly from our expanding our product line.

We saw it as a great opportunity and I think even despite pandemic and other things we've been very pleased with the performance that we've seen out of Christ Kraus describe nicely probably on average.

About 10% on a compound growth rate so.

I would say.

Comparable acquisitions from a crowd will be great going forward.

The decline of things that we would.

Ideally like to continue to bring into our portfolio.

And Scott at the crowd is out there.

Yes, I think that there are other people involved in.

Our repair I think theres a materials.

Going on saying, how do you how do you splice in.

This kind of pipe if your infrastructure this and Theres I think theres a lot of activity there and as you know.

Im very bullish that the break frequency is going to continue to increase.

And so there are many companies out there that are on our radar and that certainly that break fixed part of the business and certainly something we would invest in if we could find the right asset from the right price.

Thank you.

Thank you.

Thank you and as a reminder, if you'd like to ask a question from dollar one. Our next question comes from Joseph Giordano with Cowen You May ask your question.

Hey, Good morning, guys is this from Cisco on for Joe.

I wanted to ask about.

What you guys are seeing on the Muni spending side, maybe talk a little bit about where you see the budget's going both in terms of Capex and Opex.

Yes, so I would like to start by saying I think that the budgets.

Are one thing, but anybody who has been listening to me for a while.

Those that I believe that what we'll call the planned budgets.

Are going to continue to get squeezed by water municipalities I think that.

There is a fixed amount of money.

As we've seen the break fix part of the business you saw it in Tulsa with the freeze we saw it in Texas when they had the weather in February.

More and more of the budget is going to have to go to kind of fixing what breaks because of the frequency of breaks continues to increase.

And so I think that the water utilities.

If they want to increase or do their planned capex.

There are emergency emergency spending budgets are going to have to increase or theyre going to have to be willing to live with going over budget.

Think that the federal stimulus.

Could help them with some of their big Capex, so that they can devote more of their let's call it operating budget to break fix but.

I still think.

In front of US the same thing I've been saying for the last three or four years is that budgets by necessity will have to increase I think we will have some timing bumps over the next five to 10 year horizon.

<unk> water water infrastructure.

Based water wastewater infrastructure storm water and storm water management and retention of storm water.

Paul are going to face.

100, 150, 200 basis points better than GDP spending into.

Into the foreseeable future to kind of fix the mess. We've created so I think youll see a dip in the near term but in the.

Five to 10 year Windows, five Antonia windows budgets have to increase in all three of those.

Thank you that's helpful and then as a follow up in terms of the technology segments. It's nice to see the increase in sales can you maybe talk about.

Longer term, where you see it going and when it turns to profitability.

Yes.

<unk> gotten out of the Crystal ball game with that I think that.

We've seen operational improvements at the plant so I think this.

This quarter, we saw sales growth it didn't translate into EBITDA I think a lot of that had to do with.

Other market conditions, where we spent money too.

Retain and to gain customers.

But notwithstanding that I expect the business to continue to improve operating margins as a result of manufacturing and pricing actions in the meter business.

Take the meter business and put it to the sides and technologies I expect the ecological business the smart hydrant business.

Hydro guard business the sampling station business I am looking for those businesses to start to fuel the growth of technologies, because all of those new products.

Everything that we have introduced over the last three years and electronic enablement.

Adoption for those will be critical and I expect them to be successful and I expect them to start.

Turning a profit.

And contributing to the technology segments.

In the years to come 22 through 25, and so will it be enough to get the whole segment profitable we shall see.

But I am on.

Im continuously.

Encouraged by the progress the sales team is making with introducing these new products to our customers and I think.

As a reminder to everybody all of our <unk> customers are now looking at acoustics on centrex.

All of our customers that are on contracts. We have data analysis services that are being done in Toronto, and so we'd like to see.

More and more of that happen as we put more sensors in the market and I believe that the long term.

Annuity if you will for the data services after that we'll continue to grow.

Thanks.

Thank you.

Thank you and our last question comes from Walter Liptak with guidance.

Is open you may ask your question.

Alright. Thanks, Thanks for taking my question I wanted to ask one about the to the factory relocations and.

Aye.

Wondering about some of the timing of the move and the cost related to that how are we going to see that show up in the financials.

Well I think that the.

Most of the activities from the two facilities, we just named Aurora story.

That are going into Campbell, they were not part of the original plan announced at the end of 2019, when we acquired.

Facility.

As you know, we're constantly evaluating our footprint and we will always communicate any actions we take to our employees first profit sharing it with the public.

But the biggest change in the operating landscape has been the pandemic.

I think the pandemic impact from the project related portion of the business.

Value added some of the timelines for the sales ramp up of existing products and some of the new products as well and in order to stay on track with our financial targets.

We elected to close.

It's two facilities now how is it going to work financially, let me say that both of those projects payback for just like the others kind of solved.

<unk>.

Four years three years in that range, but it is kind of.

Improving the $30 million.

Adjusted or let's call it jumping off point.

Sure.

For sales force.

<unk>.

The others incremental incrementally, though we are not changing our capex outlook as we have explained in the past and so youll see that we found the capex.

For these two closures.

Basically by removing the capex, both plants water probably spreads.

And in the future anyway, and so I see it as being Capex guidance neutral.

And alright basically.

Gross margin.

Improvement neutral.

Yes.

Maybe just expand on the other piece, we've estimated that yes. It could be total expenses running around $14 billion I think as you saw we called out this quarter.

Specifically $2 4 million.

That was an inventory write down and that was part of our cost of sales with an.

Infrastructure.

Additionally, we had some other expenses that we called out under and our restructuring and other charges line and I would say going forward.

We said, we expect that to be complete by our third quarter of fiscal 2022, and as we look at the other cost going on going forward, which will be termination benefits and some.

Decommissioning costs moving costs et cetera, I think by and large you will see those flow through other restructuring charges, but we will generally try to ensure that your understanding of the financial statements going forward as well.

Okay are you building any inventory or are kind of trying to protect against any.

Any kind of disruptions related to these moves are they small announced where where we couldnt get any of that.

No I think it's fair to say that it will be in a mid term kind of inventory build anybody who's done. This knows that while you do your double-breasting in the new plant is coming up running it's P. Perhaps the old plant is continuing to look after customers that when you go to that final shutdown period that inventory will.

Will be somewhat higher.

As as you protect the new plans processes to get up the learning curve.

I think anybody who is.

Gone through multiple plant consolidations.

You have Walt.

Probably.

Know that we will have <unk>.

Slight increase in inventory for 90 or 120 day period as you lived through the learning curve.

Okay, Alright, great and then.

I enjoyed the discussion of the different pricing structures too.

One of the questions I had those.

With the distributors what percentage of your sales flows through your distribution channel partners.

I think the number to use there in general is around kind of a 60 40 number I think in our Q, we say exactly.

What our split is but my recollection is in that 60, 40 kind of range and our key what we get as we call out our net sales to our largest distributors right.

But please understand on this pricing thing just to be clarifying that is there are some district distribution sales that are fixed price. So we walk hands, where the corn made are we locked hands with FERC for instance.

And the meter contract we have an agreement.

With Newport News with Ferguson, it's a three way agreement, where the pricing structures.

Our agreed to and what the negotiating windows are what the Max increases can be those kinds of things. So not all distribution sales are spot sales and I don't want anybody to get.

Fused about that sorry.

Okay.

Alright, great. Thank you.

Well. Thank you. Thank you operator.

Book.

Really very happy with our second quarter results.

Guided in the past I expect this to be our toughest quarter due to the strong comp from a previous year and frankly due to the fact that a year ago on this call.

The call, where we took away guidance from <unk>.

Rolled back.

Some of our accruals because the uncertainty was tremendous and here we are a year later.

Into the into the pandemic I think the team at the plants has done a great job satisfying the strong demand.

I think that the housing market has been a pleasant surprise.

I think that the thesis that we had is an investment that continue to focus on this break fix part of Muni.

Has been rewarded as I think when you book around water.

Like ourselves.

Certainly some of the pipe guys and others have done very very well through the pandemic and when you consider that we are.

Kind of first two quarters of this year.

Post pandemic compared to the first two quarters of last year, which were virtually all prepaid debit.

The post up 6% growth.

Feel like the team has done a great job and it would be even higher if the backlog having growth in the first half from so I'm very bullish and that's.

That's why we basically take our guidance from.

Four to six to eight to 10.

That.

We've seen good resiliency among our customers among our.

Distribution partners and I think that in general we're starting to see a fairly much more bullish.

Environment as we go forward.

Reflecting on the past 12 months I think we're clearly in a different frame of mind than we were last may and I think I think we're approaching the next 12 months in a great position with a lot more confidence to get through the external challenges and continue to focus on executing our key strategies I think the engineering team going to remote.

Work.

You do the project reviews to see where they are or product development you remain.

Impressed with the resiliency of that team to continue to collaborate to use all these new virtual tools and to keep schedule is on track to keep budgets on frac and so I'm encouraged by that.

And I think.

Just finishing with a strong balance sheet, our healthy cash generation.

We're really well positioned to benefit all of our stakeholders.

On our path to becoming a world class manufacturing company and an innovative industry leader, bringing technology to water and continuing down the profit that we set two years ago. So I. Thank you for your continued interest in our company and I look forward to talking about next quarter.

With you in 90 days or so so with that operator, we will close the call.

Thank you. This does conclude today's conference at this time you may disconnect your lines.