Q1 2022 Mueller Water Products Inc Earnings Call
Information identifying important factors that could cause actual results to differ materially from those included in forward looking statements.
Please review slides two and three in their entirety.
During this call all references to a specific year or quarter unless specified otherwise refer to our fiscal year, which ends on the 30th of September .
A replay of this morning's call will be available for 30 days at 18664312903, the archived webcast and corresponding slides will be available for at least 90 days in the Investor Relations section of our website.
Now I'll 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.
I'm very encouraged by the start to our year as our team members delivered strong net sales growth in the quarter, while continuing to face challenges from an extraordinarily difficult operating environment.
Net sales growth of both segments benefited from increased volumes and higher pricing across most of our product lines with healthy demand levels in our primary end markets. We again experienced strong orders in the quarter, leading to record backlog at the end of the quarter. We remain focused on serving customers in the face of the continuing operation.
Challenges from higher inflation labor availability and supply chain disruptions. Despite these obstacles that have increased costs adjusted EBITDA increased six 3% in the quarter.
The anticipated margin compression this quarter, primarily resulted from the lag between the timing of inflation and our price realization.
Due to the ongoing inflationary pressures, we again increased prices across the majority of our products during the first quarter, which along with the pricing actions. We took in 2021, we believe will help improve margins, we have a strong balance sheet and cash position, finishing the quarter with over $200 million in cash outstanding and net debt.
Average of one two times during the quarter, we generated positive free cash flow and repurchased $20 million of common stock. Most importantly, based on our solid first quarter performance, we are raising our annual guidance for both consolidated net sales and adjusted EBITDA growth, while we expect challenges associated with higher <unk>.
<unk> supply chain disruptions and labor availability to continue in 2022, we are confident that we can make progress on our operational initiatives to deliver enhanced results with that I'll turn the call over to Marty to discuss our first quarter results.
Thanks, Scott and good morning, everyone I will start with our first quarter 2022, consolidated GAAP and non-GAAP financial results, then review our segment performance and finish with a discussion of our cash flow and liquidity.
During the first quarter of this year, we generated consolidated net sales of $272 3 million, which increased $34 9 million or 14, 7% compared with the first quarter of last year, we increased net sales in both segments Waterflood solutions and water management solutions, both segments benefited from higher.
Pricing and increased volume as we continue to ship against record backlogs.
Gross profit this quarter increased $9 2 million or 11, 7% to $87 $6 million compared with the prior year, yielding a gross margin of 32, 2%, while gross margin decreased 80 basis points compared with the prior year increased 300 basis points sequentially.
The benefits of higher pricing and increased volumes were more than offset by continued higher inflation and unfavorable manufacturing performance associated with labor challenges supply chain disruptions and our plant restructuring our.
Our total material costs this quarter increased 21% year over year, primarily driven by higher raw material costs, which also increased sequentially.
As a result of the lag between the realization of our price increases and inflation or price cost relationship was negative for the fourth consecutive quarter as expected.
Selling general and administrative expenses of $56 $3 million in the quarter increased $7 $1 million compared with the prior year. The increase was primarily a result of investments in new product development. The addition of <unk> water.
Related activities personnel related costs general inflation and higher <unk> from increased activity relative to the temporary savings last year due to the pandemic.
G&A as a percent of net sales was 27% in the quarter and in the prior year.
Operating income of $28 $9 million increased $1 1 million or 4% in the quarter compared with $27 $8 million in the prior year operating income includes strategic reorganization and other charges of $2 $4 million in the quarter, which primarily relate to our previously announced plant restructurings and the.
Albertville tragedy.
Turning now to our consolidated non-GAAP results adjusted operating income of $31 $3 million increased $2 1 million or seven 2% compared to $29 2 million in the prior year higher pricing and increased volumes more than offset higher costs associated with inflation and higher SG&A expense.
<unk>.
Adjusted EBITDA of $47 5 million increased $2 8 million or six 3%. Our adjusted EBITDA margin was 17, 4%, which is 140 basis points lower than the prior year, yielding an 8% conversion margin for the last 12 months adjusted EBITDA was 200.
<unk> $6 4 million or 18, 1% of net sales.
Net interest expense for the quarter declined to $4 $3 million compared with $6 $1 million in the prior year.
The decrease in the quarter, primarily resulted from the refinancing of our five 5% senior notes with 4% senior notes the effective tax rate. This quarter was 24, 2% compared with 25, 8% last year for.
For the quarter, we increased adjusted net income per share 18, 2% to 13.
Compared with 11 in the prior year.
Turning now to segment performance, starting with Waterflood solutions, which consists of iron gate valves specialty valves and service brass products net.
Net sales of $154 $9 million increased $26 1 million or 23% compared with the prior year, primarily due to increased volumes and higher pricing or.
Iron Gate valves and service brass products experienced double digit net sales growth compared to the prior year.
Specialty valve shipments were impacted by the ongoing facility consolidation. In addition to supply chain challenges primarily related to extended lead times adjusted operating income of $31 $3 million increased $8 1 million or 34, 9% in the quarter as higher pricing increased volumes and favorable.
Manufacturing performance were partially offset by higher costs associated with inflation and higher SG&A expenses.
Adjusted EBITDA of $38 $7 million increased $8 1 million or 26, 5% leading to an adjusted EBITDA margin of 25% compared with 23, 8% last year moving.
Moving on to water management solutions, which consists of fire hydrants repair and installation natural gas metering leak detection crusher control and software products.
Net sales of $117 4 million increased $8 8 million or eight 1% compared with the prior year, primarily due to increased volumes and higher pricing fire hydrants, and repair and installation products experienced double digit net sales growth compared to the prior year.
Sales of meter and control valve products were constrained by a variety of headwinds, including shortages of electronic components extended lead times and production challenges adjusted.
Operating income of 11, 5 million decreased $5 $5 million in the quarter as higher pricing and increased volumes were more than offset by higher costs associated with inflation higher SG&A expenses and unfavorable manufacturing performance adjusted.
Adjusted EBITDA decreased $5 million to $19 2 million in the quarter, leading to an adjusted EBITDA margin of 16, 4% compared with 22, 3% last year.
Moving onto cash flow.
Net cash provided by operating activities for the first quarter decreased to $19 8 million compared with $34 1 million in the prior year. The decrease was primarily driven by higher inventories, which increased 13, 5% in the first quarter.
Average net working capital using the five point methods as a percent of latest 12 months net sales improved to 25, 4% compared with 28, 8% in the first quarter of last year.
We invested $11 million in capital expenditures during the first quarter compared with $15 $6 million spent in the prior year free cash flow for the quarter was $8 8 million compared with 18 and a half million dollars in the prior year during the quarter, we repurchased $20 million of common stock in the open market and as of the end of.
The quarter, we had $115 million remaining under our stock repurchase authorization.
At December 31, 2021, we had total debt outstanding of $446 9 million and total cash of $207 3 million at the end of the first quarter, our net debt leverage ratio was one two times.
We did not have any borrowings under our ABL agreement at the end of the quarter, nor did we borrow any amounts under our ABL during the quarter. As a reminder, we currently have no debt maturities before June 2029, or 4% senior 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 December 31, 2021 data, we had approximately $133 8 million of excess availability under the ABL agreement, which brings our total liquidity to $341 1 million. We continue to have a strong flexible balance sheet with ample liquidity and capacity to support our capital <unk>.
Location priorities.
Scott back to you.
Thanks, Marty I will touch on our first quarter performance ESG and markets and updated full year 2022 guidance. After that we'll open the call up for questions.
We sequentially improved our gross margins in the first quarter compared with the fourth quarter of last year.
This improvement was primarily driven by one time items experienced in the fourth quarter as our margins were impacted by many of the same challenges we discussed last quarter due to continuing higher inflation labor availability and supply chain disruptions gross margin was lower compared with the prior year quarter.
Although raw material inflation for brass and scrap steel appears to be stabilizing overall material inflation increased again sequentially in the quarter, partly due to the ongoing challenges with the supply chain disruptions.
In order to meet customer demand our supply chain team is focused on acquiring parts from alternative suppliers, where needed and in some cases using alternative parts or materials to help ensure availability for production.
These decisions to acquire imports to maintain production led to significantly higher input costs for certain components. Additionally, labor availability at the plants continues to be a significant challenge, especially in the southeastern part of the United States.
Absent theism remains elevated at many of our plants due to the ongoing impact of COVID-19. In addition to hiring challenges.
To address labor availability, our manufacturing teams are offering enhanced benefits and incentives.
Finally, similar to last quarter, we continued to experience higher freight and energy costs, which impact our foundries as.
As noted earlier, our price cost relationship was negative in the first quarter. It has been negative for four consecutive quarters to help address the ongoing inflationary pressures, we again increase prices across the majority of our products. During the first quarter of this year record backlogs were extending retiring for the price realization.
Benefits so much of our most recent price increases will not benefit us until the fourth quarter of this year. However.
However, multiple price increases from last year should drive sequential improvements in price realization in 2022.
As a result, we expect price realization to improve sequentially in the second quarter, resulting in nearly a flat price cost impact.
We anticipate the price cost will be positive in both the second half of the year and for the full year, which will help improve margins with this outlook. We are also assuming that raw material cost and other inflationary pressures do not continue to worsen as a result of the timing and magnitude of the inflationary cycle starting in early 2000 <unk>.
One as well as record backlog, we do not expect price cost to be breakeven over the inflationary cycle until 2023.
However, as a reminder, over the entire inflationary cycle. Our goal is to have price increases more than cover inflationary expenses and preserve merger.
I'll now turn to ESG and.
In January of this year, we released our second ESG report highlighting our strategy initiatives annual performance targets and goals, our long term environmental goals for waste disposal and greenhouse gas emissions are aligned with our business strategy is to create a safer and more sustainable environment.
We are very excited about our new brass foundry, which is scheduled for completion in 2023, the new foundry will enable us to support a new lead free brass alloy, which is a noteworthy advancements in sustainability for our customers and end users as we strive to become a sustainability leader in our industry. We are committed to.
Delivering smart products that are safer for the environment and more efficient for our customers. While also minimizing our water and energy footprints turning to our end markets overall in our first quarter. We continued to experience healthy order activity relating to both the municipal repair and replacement and new residential construction.
The end markets, we believe distributor inventory levels have increased due to higher inflation anticipated end market demand and extended project delivery time lines due to the supply chain constraints and labor availability for the new residential construction end market inflation and supply chain disruptions are extending builder timelines.
However, builder confidence remains high due to low inventories in borrower demand for the municipal end market repair and replacement activity is extremely healthy.
However, we continue to see some municipal project delays related to the pandemic or supply chain constraints. Most importantly, we are not seeing any cancellations or customers are providing feedback or broke a new federal infrastructure bill and its impact on their plans. We continue to be excited about the long term positive impact, but we believe the bill.
We will have on the aging water infrastructure in the U S.
As a reminder, we have not included any benefits from the bill and our assumption for 2022 guidance.
I'll now discuss our current expectations for 2022.
Based on our solid first quarter performance, we are raising our annual guidance for both consolidated net sales and adjusted EBITDA growth for fiscal 2022, we believe that our current backlog pricing actions and strength of our end markets together support our growth and expectations. We anticipate the consolidated net sales and adjusted <unk>.
<unk> will both increase between 6% and 10% for the year. This outlook assumes the following price realization continues to improve sequentially, we achieved nearly a flat price cost impact in the second quarter.
Price cost is positive both in the second half of the year and for the full year and finally raw material cost and other inflationary pressures do not continue to worsen.
<unk> had a solid start to the year for free cash flow generation, while our annual guidance for capital expenditures points to an increase in quarterly spending for the rest of the year, we expect to generate positive free cash flow for the full year <unk>.
In conclusion, we remain focused on executing our strategic initiatives to grow and enhance our business. These initiatives include accelerating new product development driving operational excellence executing key capital projects, developing and expanding our centric software sensing and control platform and implementing sales and channel strategies.
We are excited about our new management structure and reporting segments. We believe they will help promote the execution of our strategic initiatives and position us for improved long term growth and increased margins, while helping to accelerate the commercialization of our technology enabled products and software platform, our commitment to advancing our ESG goals.
We will remain at the forefront of how we operate our business as we strive to positively impact our world. Finally, we will continue to take a balanced approach to our cash allocation strategies focusing on reinvesting in our business accelerating growth through acquisitions, and returning cash to shareholders through our quarterly dividend and.
Share repurchases, we are confident that our growth strategies capital investments and operational initiatives will enable us to drive sales and adjusted EBITDA growth and with that operator. Please open this call for questions.
Phone lines are now open for questions. If you would like to ask a question over the phone. Please press star one and record your name if you'd like to withdraw your question Press Star two.
First question in the queue is from Deane Dray with RBC capital markets. Your line is now open.
Thank you and good morning, everyone.
Good morning, Good morning, Hey, I really like the new segment reporting it's intuitive.
And thank you for getting all of the restatements too because that was a big help.
Although I might just go on record, saying I will Miss having technologies as a separate segment, we still like that what that business was these important startup technologies and Smartwater. So I know you still have those businesses, but I do like the new segment reporting.
Thank you.
Alright.
Yes, let's start with the top line and demand.
Yes, significantly and waterflood better than we were expecting.
Was there any kind of budget flush that you benefit from and then also on the utilities, we had heard some grumblings that utilities.
Given the infrastructure Bill, we're going to be a bit hesitant about that what they were going to be spending in terms of projects until they got better line of sight, whether the government was going to be handing them. A check. So has there been any delays that you've seen in project spending along those lines and just kind of what's driving this.
This nice upside demand this quarter.
Yes, I think that the.
Demand profile I think annuities are relatively flush with cash right now as a result of cares Act nevermind the infrastructure Bill I do think that.
Early days, there will be a pause on job less by municipalities municipal water as a result of the.
<unk>.
Bill being passed you'll remember back in the American reinvestment and recovery at <unk>.
We basically saw install them and win when we first had the new administration in 2017 take over they talked about infrastructure I think that pause the market as well.
We think people want to understand how they they make there.
There are projects qualify for some of this.
Sterling I also think that.
The longer term view, though from infrastructure Bill.
Should be a cause for people would be excited about the long term positive impact when you think about aging infrastructure and do you think about what elements have been allowed in this thing in particular.
The reauthorization for the existing infrastructure projects.
At $550 billion to the new federal spending over over the next five years and so all in all I think those things are good but to get back to your original quest.
Question Deane I think in the short term the pricing activities, we've taken the resilience.
New construction new home market.
And the fact that beauty is half.
Relatively for Walsh coffer still from the July money that was objective as a result of the cares Act.
So.
Confident that.
With the second half of the year will feel too much too bumpy as a result of people.
Not having jobs qualify for.
For federal infrastructure dollars.
Yeah, our orders.
<unk> were greater than our shipments so we grew backlog again.
In the quarter.
Well I'd, rather have you be in a position of trying to explain stronger demand than otherwise. So that's good and then second question on price cost you gave really good specifics on the raw material increase sequentially.
Not a lot of specifics on pricing just yet.
What was price realization in the quarter what are you baking in for the year.
That's a tough question because the announced increases versus who is booking or is it mostly distribution.
Retrospectively.
Think between 5% and 7% I think is where the first quarter looked like him and realization.
And as you know we've taken a series of price increases over the past 15 months and several of those orders depending on the timing of them they get compared to a reference period of the quarter from the previous year. So sometimes it's unknown.
What youre going to realize.
And your comp the comp if you will from what's in the backlog versus.
What you ship.
So the way we're thinking about it.
We've got.
A fairly good handle on what brass steel and components look like in our Q2.
We won't know what the near term load is from our.
Our Q2 shipments and so that's why we're.
Saying that we need this to be around breakeven, we need to get a lot of these older orders that are in our backlog at lower prices purged through the system.
So to answer the question directly I think for the first quarter was.
Between five 6% something like that realized I would expect that to improve a couple of hundred basis points or so in the second quarter.
But ultimately by the time, we get to 2023 and I'll say to all of US are as I think we if you follow the previous comment we have about $20 billion that we have to go get in price to get this.
$40 million of price will get back to kind of breakeven before we offset the dilution effect.
As a result of the quarters that were negative price cost in 2021.
Alright, Thats really helpful and just a last one is a clarification.
And it sounds as though you cannot reprice backlog wouldn't there be some escalators.
Tied to CPI something like that that would give you some flexibility or are you just stop with.
The terms of the original order.
So that's kind of two different answers to that one so things like our AMIA orders things like our multiyear supply for projects that have long tails on them.
Have price escalators in them and indexes that allow us to.
To go back into these windows and reprice.
The jobs based on indexes that we've agreed to with customers.
The problem. We have is the majority of our backlog is in the short cycle business. It's in the distributor order business and that is not being repriced and I'll remind everybody that it's been our experience.
Yes through the inflationary cycle. This is.
There's a little bit painful.
But on the other side of it.
And once you see stabilization, where you start to see.
Raw materials and components start to fall back from there from their peaks generally that becomes margin increases for us in our conversions go up as we're not giving that price back.
Our price increase.
Philosophy for the past 30, or so years has been to be measured supported through and to retreat.
From price increase levels now obviously is something shock the system.
There could be a difference, but we anticipate all of the price we put through in these past.
Price increases, including the ones that we did in the fourth quarter that we will we will be better factors. If you will once once the inflationary cycle has brought back under control.
That's real helpful. Thank you.
Thank you.
Next question is from Bryan Blair with Oppenheimer. Your line is now open.
Thanks, Good morning, everyone.
Good morning, Brian .
I was hoping you could offer a little more insight into the specialty valve operating trends, obviously some challenges there.
Last quarter then.
I suspect extended into this quarter.
Has there been a catch up on shipments added productivity metrics the impact of temporary cost compare to Q4, and how should we think about those variables over Q2 Q3.
Okay. Great question, Thanks, Brian , Yes, I think.
The way people should think about it is yes, we've had some marginal improvement we've had.
An uptick probably in that 5% to 7% range in productivity from the labor, that's there and we're getting more throughput than we had in the fourth quarter.
The headwind that we saw in Q4, when we innovate at the plant with volume and we were still trying to close the Aurora plant.
<unk> plant is still open and so basically you have got those double costs in our Q1.
The results and that will continue into our Q2 results and so as I said.
Our fourth quarter call.
We got the one timers out of the way.
We had some sequential operating improvement in specialty but.
The headwinds of the five or $6 million that we that we outlined in Q4.
Four or so of that is still around and that that will get better over time as we as we reduce head count and reduce reliance on our own facilities.
Yes, I appreciate the color.
And in terms of the infrastructure Bill we know thats not factored into your fiscal 'twenty. Two Avalon you mentioned customer feedback on the potential or likely lift in terms of their spending plans. If we look to your fiscal 'twenty three and beyond.
Does your team is thinking about.
And what that will mean for Neil or <unk> business.
In which of your individual businesses should we expect the most meaningful catalyst.
Alright.
I think it's going to be broad based I mean, if you look at a $12 billion each for drinking water clean water stay revolvers 15 billion for led side the lead line replacement 10 billion.
The modernization.
Underserved or lower income communities better access.
Doesn't matter, whether you are baked in.
A fire hydrant, or you're making a gate valve or.
Are you, making something smart I think there's 6 billion set.
Set aside for Smartwater initiatives, so I think the whole.
The whole thing is going to be good, but obviously the greatest need is going to come in the distribution network underground and so I believe that the the water flow solutions business.
When you look at the size of dollars in size of needs, even though technology.
Ill start from a smaller number and you think about our smart hydrants and you think about it.
Things like Flushing technologies of all of that they will get benefit from it but yes, I think that the.
The power Alley of the business and the distribution network.
We'll be the biggest benefactor over the next eight years that more dollars will funnel into it in aggregate.
Because of the nature of the breakdown of the quality of the infrastructure. There is no about Av technology.
Technology, that's going to get us away from meeting pipes and valves and reroutes.
Infrastructure.
Aging at that 70, 75 year stood at 75 year Mark.
That all makes sense.
And then circling back on your recast segment structure, the rationale and the shift in external reporting certainly makes sense internally what changes have been made in terms of leadership our operating structure.
And how have those changes impacted the day to day of Mueller, so far and what's expected going forward.
Okay, great. Thanks.
Look.
I think that the team did a really good job before the reorganization trying to put all of their big Mueller water products had and do the right things.
But it was it was a little bit about what you would expect so if you thought about.
Flushing technology like our Hydro guard.
Using what was in the technologies teams some of their circuits the software interfaces their resources to right.
The problem in any problem kind of operating structures.
The team was working back and forth well be.
Tween.
The old infrastructure kinds of products and the technologies kind of products I think what really brought it to a head for me was I didn't feel like the the rate of deployment and the rate of adoption of improvements in our new smart hydrants was happening fast enough so things like bought at Reed.
Design, so that you can house.
More electronics things like the the hollow stem for housing the batteries and housing the Bluetooth circuits and things like that and you realize the team was.
Still trying to do their day jobs and be responsible as a product manager for making sure that.
This customer got their five and a quarter inch Super Centurion and kind of other side also make sure. They were doing the right thing for smart hydrant.
But they werent being incentive on that they were being measured on that because that was an infrastructure at all with technology enabled products were in technology. So I wanted to get all of the.
Alignment, if you will of the management incentives.
Into common channels for carbon products and.
So when you think about Hydro guard when you think about smart hybrids when you think about <unk>.
Transducer enabled repair products like our like our coupler that one day, we will probably have a flow meter on it certainly a temperature probe or maybe even a pressure monitoring point when you think about our control valve.
Now going to vary pressures dynamically based on what flows are based on what what pressure drops are up the line and you start putting some of these smarter.
Abilities into traditional infrastructure products I wanted to get all of those families into a signal management structure. That's why we did it we didn't do it for the financial reporting.
Reporting didn't drive the decision what drove the decision is the rate at which we will hold people accountable to develop products and bring them to market.
That's really why we changed the structure Thats why you see control valves hydrants, and hydro guard coming out of the old traditional infrastructure product line and putting them firmly in the management stack.
The guys responsible for software and have the guys, ladies and guys that are responsible for.
All of our AI initiatives are the analytics initiatives.
So yes that was what the restructuring was as a matter of fact, we've contemplated the restructuring is an ERP. That's what Marty came along and said Hey look if we're going to run the business like this I've got to look at what our reporting it looks like I think.
She did a good job of saying this is what the management structure. It looks like if this is the information you are looking at to make decisions. Then we're going to have to do the reporting this way.
Okay helpful color. Thanks again.
Thank you.
Next question is from Brent Thielman with D. A Davidson your line is now open.
Alright, Thank you very much congrats on a good quarter.
Scott, maybe just on the new residential market.
You talked about certainly turn some of the disruptions builders have had to deal with.
As well just in terms of getting kind of new homes to completion I guess a question.
<unk> been relatively isolated from that though just because I would think they don't want to wait to start that next development, which is really where you are coming to play.
<unk> seen that process.
Now as well.
So I don't think we've seen a slow like I think what inventories ready for everybody on the call should be reminded that.
We're early in the development process.
We go in when the curb and sewer goes and not when the house pulled the permit we use that kind of as a surrogate for the health of.
Construction market, but I think what inventories.
<unk> inventories are low and so.
I think if anything its the opposite that we're enjoying maybe.
Maybe a little bit better.
Development environment in this last couple of quarters than perhaps you've seen in sell through for the builders because I do believe they are trying to build.
Develop a lot inventories.
Over these past six months.
They have seen it as a constraint to entering into new contracts.
I do think we saw a pause there was there was a short time there were.
Think consumers were unwilling to get into variable priced.
Housing construction contracts, where are they didn't know what the lumber cost we're going to be or they didn't know what they are spent cost is going to be but for the most part that seems to have passed now it seems like the builders are able to get.
Orders and contracts in place and so I think they are bullish remain bullish on developing lots.
Okay I appreciate that.
And I think about this in context of the guidance Scott or Marty.
Does it reflect I.
I guess the cost assumptions.
Our center with raw material cost assumptions, it looks like pricing for some of your variable inputs and rolled over a bit recently, but then you've got things like fuel and switching back to foundries major growth.
Et cetera kind of moving higher how do you look at the net impact.
Various cash today, we sort of topped out for now or on a net basis, our costs still moving up maybe from a quarter ago.
Yes, so I think you've laid out some things.
A part of what we're looking at I think we spend I'll say, a fair amount of time talking overall about inflation.
Related specifically back to the raw materials as well as our as well as our purchase components and.
We've probably seen scrap creep up a little bit more but.
Expectations are that we start to see some stabilization in the market with respect to that but I think calling out for example, energy I know you called out energy and the higher cost for us.
Our fourth quarter.
Even our production, particularly at the foundries, we were producing as we were incurring some of the peak level.
Energy costs.
And I will tell you that is something again, we experienced first quarter and our expectation is that yes.
Overall higher energy cost is something that we will continue.
Continued to experience will also call out price cost I think.
In combination with that I think we have seen an expectations that will continue to see.
Higher freight costs.
Certainly with.
Reflects back as well on a lot of what we're seeing with supply chain disruptions with the.
Challenges of labor.
Timing of need to get material et cetera. So I would expect that we'll continue to see.
Higher freight costs as well I'll also call out higher labor costs, I think again, the inflation that we're seeing our expectation is our labor costs.
Will will be higher going forward as well.
None of those get the magnitude.
Raw material and product inflation that we've seen but.
Some of what we think about as we look into our 2022 is that we'll see some generally higher inflation around those.
And plus as well.
Okay.
Maybe just lastly, I mean with all the price initiatives.
You've had to implement as well as the industry.
Kind of the overall upward cost pressures in the <unk>.
Construction market overall, I guess I would think your municipal end users would be more sensitive to that.
Any kind of feedback to the channels about what they're saying is they sort of try to manage budgets on a go forward basis.
Yes, I think that.
That.
No.
As there are sophisticated municipalities out there with supply agreements both with OSM with.
With.
Distributors that we use in those supply agreements were.
Using the negotiating with those using the index language things like the four four increases.
When I was talking to the driver I think the rest of the people in the spot market, which I would say is the majority of the sale markets. So it's either spot job or.
Yeah.
Spot usage for most of the utilities.
They are infrequent.
No.
But there are enough.
There is nobody out there screaming and they all understand the challenges and so their expectation is that.
They will pay tomorrow.
A little bit more than what they would pay yesterday.
Think that.
We've managed as an industry those expectations well because we have been transparent about what things look like both in the scrap market what happened when the tariffs get put in place by China are by our government for Chinese products.
The drivers of course, one is the cost of a container being held off the coast in long Beach now and so all of those things I think are well understood are well documented and so when we're talking about what the impact on prices and what the impact on price going forward needs to be.
I don't see a lot of resistance.
And I believe that the market is rational and we will continue to behave that way.
Thank you for taking the question I appreciate it.
Next question is from Walter Liptak with Seaport. Your line is now open.
Hey, Thanks, good morning, guys and good quarter.
I wanted to you guys have talked about this a little bit already but.
I wonder about the distributors just pulling forward inventory just to get ready for the.
The construction season, it seems like.
The revenue this quarter was a little bit more are seasonally high.
And I wonder like in next quarter.
You have a.
The expectation sort of a normal seasonal uptick from here.
Or do you think there was a little bit of pull forward in this quarter.
Well look I think that.
What we've seen and when you listen to the ones that are public anyway.
You have to kind of ground yourself, Walt and go back to.
Pre pandemic post pandemic and look at what inventories were at pre pandemic and look at what inventories are now take the inflationary impact out and say are they able to service their customers as well as they were servicing them pre pandemic.
Again, it's all rough math, but you get all those indexes kind of pull together and say okay. We've had this kind of increases.
In price so their inventory would be up this much just just on price alone.
And I think what you conclude is I wouldn't call it.
Buy ahead as much as I would call their service model, leading to get back into stock positions that they depleted just as we depleted the whole industry basically pause when the pandemic started we took inventories down we took labor labor head count down we took.
The capacity out of the system and then basically what was our fiscal Q4, there was a V recovery.
Construction market and we've been running and playing catch up as an industry ever since then and so.
I don't believe there is a loss of buy ahead, I think as our lead times creeped out.
They were forced to then place orders for those Windows and Thats why the backlog has almost become a little bit of a self fulfilling prophecy as a result of lead times going out.
But I do believe that there is enough underlying demand in the distribution channel for them to utilize what they have on order and I believe that the.
<unk>.
Municipal and market environment as such.
Hot enough that they won't have any problems burning off the orders or burning off inventory. If there is any excess there.
Okay, alright, great that sounds good.
Yes, I wonder too about the.
With the stock price down you guys did a little bit more share buyback than we thought I think.
Sure.
You're going to do about $10 million for the full year and it looks like you got $20 million.
You have that authorization out there what's your expectations on share repurchase for the rest of the year.
Look I think when we really take it back to our capital allocation I think we characterize it as being.
Disciplined and balanced we look at it along different lines, certainly returned to shareholders, which encompasses our dividend as well as share repurchase.
Our board did increase our dividend.
Last November .
Share repurchase has clearly been <unk>.
<unk> of that as well, we certainly have the reinvestment in the business from a capital expenditure perspective.
As well as certainly looking at M&A opportunities for growth. So I think going forward. We had we have $115 million authorization at the end of our first quarter and I think as we continue to look at capital allocation. We will continue to look at across those.
Three opportunities.
Okay, great. Thank you.
Our next question is from Joe Giordano with Cowen. Your line is now open.
Good morning, This is Michael Anastasio in for Joe.
Hi, Mike.
I believe it's safe to say your results this past quarter were higher than most of us probably anticipated.
How should we be thinking about cadence over the next few quarters and potentially exit rate into 2023.
Yes, I think.
<unk>.
<unk>.
The way, we've put the guidance Michael is 6% to 8% and kind of unity if you will.
On EBITDA and sales growth as we're not going to get back on the plus side of the negative price cost.
Just for everybody's benefit if your if your costs.
Increase of one dollar.
And your margins are 30% I think you need $1 33, or something like that in order for.
And price in order to maintain your margin not half.
Just the costs increase recovery become dilutive and so.
I think we were looking at timing, we're looking at what we expect our throughput to be we are looking at what the individual price in each order and the backlog is and that is why I think that.
While we were we had.
No leverage and fixed cost.
And no operating leverage in our results in the first quarter, even though we had.
Really good.
Flow through on the increment.
That we've been kind of.
Cautious about what the second half looks like from a flow through perspective and so.
I am not sitting here say.
Excuse me.
So I'm not sitting here, saying that we haven't got.
All of the inputs under control, but I think that there is enough.
Variation coming in the second half and there is enough unknown about both the demand environment in our Q4, and where we are going to be in throughput and labor costs.
I think that we have in front of us a challenging operating environment. So I would say the cadences.
Second half ought to be better on flow through than the first half Q2 going to be.
From a margin point of view when you when you think about how inventory revaluations from high inflationary periods kind of impact the income statement in Q1 as that gets amortized in Q1, I would expect a little margin compression in Q2, and then back to expansions in three and four I think that thats the cadence.
<unk>.
That you would that you.
You would expect to see over over the next three quarters.
And one more if I may.
Previously mentioned our commitment towards inorganic growth to expand the portfolio can you give us any insight into.
<unk> end markets, you see as most favorable and if there's any.
Geographic considerations there. Thank you.
Yes, so I think that.
For sure I think.
Marty's prepared comments show wide that.
The products associated with infrastructure or distribution network like gate valves hydrants, and then the repair and return our repair and installation market all experienced double digit growth. We expect them to continue to have these growth numbers and I think youll see the valves that are used in the distribution network into hydrogen distribution network.
We'll experience a lot of growth.
As you as you see what happens in 'twenty, three and beyond resulting from the infrastructure Bill. So I think there'll be a lot of.
Tailwind there on demand for your geographic question you. All you have to do is look at the migration of people in the country American Southwest American Northwest American Southeast.
Where all of the growth is that's where all of the.
Population movement <unk> I think we have pockets in the northeast like New York City like Boston.
Parts of Vermont, New Hampshire that are experiencing some population growth, but the vast majority of.
New construction in the <unk>.
Nashville market in that.
Utah Denver.
Kind of corridor those were all of the.
Builders are clustering and certainly that's where you see a lot of our growth.
Thank you.
Thank you.
Our next question is from Brian Lee with Goldman Sachs. Your line is now open.
Hi, everyone. This is miguel on for Brian Thanks for taking the question.
I just wanted to be.
Touch on the new segmentation.
When youre thinking about.
I guess this.
This year, but mainly beyond when we kind of get out from the.
The special inventory and cost dynamics happening. This year is there anything notable or new on what we should expect in terms of.
I guess, a more normal seasonality for each of the new segments versus what we've seen historically for thank you.
The old infrastructure and technology segments.
Well I don't think its going to change that much because I think the spending patterns for the industry tenant.
For our.
Our.
Patterns, which is.
Sure.
Our months between April and November or when the vast majority of.
Water utility work, that's done and Thats because so much of it is done.
<unk> underground.
I think that Youll see a lot more winter work for lack of a better word and things like water treatment.
Pumping centers, but the long and the short of it is is the bulk of the investment.
Our customer base is going to be made.
Disproportionately in the summer months and the spring spring early fall. So that you haven't got the deal with frozen Brown.
I expect we will have less seasonality in the.
Electronics.
Software driven business, but.
I think even in the most aggressive.
<unk> forecast for growth in that particular area.
We will still only be less than 20% of the spend.
It's getting associated with with water utilities, So I would expect the seasonality to to remain pretty constant.
Awesome. Thanks, It's very helpful. And then second one if I can pass it on.
How do we think about margins after the new segments just based on the.
Based on the historical is that you guys put out for the two segments. It looks like water flow with higher margins in water management and water management noticed that adjusted operating margins.
We're just a little bit down this quarter.
So when does I guess when does water management.
Kind of get back to I think I saw a 16% operating margin.
In 2020.
<unk>.
Water flow at 20% adjusted operating margins, there's water management kind of.
Grow to be in line with water flow just trying to think about the two in relation to each other.
Yes, I think in the long run it will grow but I think in the short term.
Supply chain challenges, we were referencing in the production control valves.
Along with supply chain and labor challenges associated with the meter business were the two big detractors.
And in water.
And water management for the quarter. The other dynamic that we have going on there that we think is going to be.
<unk>.
Let's call it rectified here in during the second quarter, maybe some bleed on impact into the third quarter.
This notion of substitution.
Shred and plate scrap market have been very tight and we have been substituting some unfortunately scrap for.
Fortunately a lot more expensive.
Then.
And then played and tread so that also impacted the Albertville facility. So.
We have large capex.
Waterfall, that's paying some dividends, but yes to answer your question, we will get back to parity and hopefully at some 0.3 to five years from now you will see.
The applications business be more profitable than the corvus.
<unk>.
Okay. Thanks, that's very helpful. Thank.
Thank you.
And just a reminder, if you would like to ask a question over the phone. Please press star one and record your name.
Next question is from Andrew Buscaglia with Bahrenburg. Your line is now open.
Good morning, guys just one for me.
You can talk about capital allocation and M&A and now that you got this new segmentation I guess, if you if you.
Whereas the interest lie with M&A in terms of if we do see your next deal being more of like a kind of a crowd like deal or something like in technology that will benefit the water management side I guess, what's your Hangzhou.
And based on maybe like what the what the pipeline looks like at the moment.
Yes, I think that the.
The bolt ons in the.
The valve business areas that we don't have geographic expansion those are all viable strategies for for what you.
You would define as the water flow business and we have a fulsome.
Pipeline, there that we would consider.
<unk>.
Sensing side and on the.
The tech.
Technology software workforce management.
Try to integrating supply chain, if you will for water utilities.
So that when you identify the right repair equipment gets there those kinds of enabling technologies.
All things we're interested in on the on the.
The acquisition side for sure.
For that side of the business and of course geographic expansion.
There as well and so long story short I think we have a lot of people.
That we're interested in we've got to find the right fit at the right price and it's got to work for who are requiring it worked for US I think there are suites out there that.
That we do cover it and that we're going to have to think long and hard about where the sources of synergies can come from so we can meet some of these multiples.
And are you sensing any meaningful change I guess in the last few months with.
I don't know.
In your conversations.
And all the challenges we're seeing across the.
Yes, just the supply chain issues in.
Just wondering if that I was wondering if this year ends up being a year, where you see kind of a break breakout in M&A.
I don't know just based on your tone when you are.
Yes.
Don't think so I think it's I think that it's exactly what you said is that if anything that the the complexities that have been introduced this year as a result of supply chain complications as a result of some of the geopolitical stuff going on.
<unk> has made and certainly a little bit higher and so I think that as far as breakout years ago for M&A.
<unk>.
Where we are with nine months.
There are eight months left in our fiscal year I think that.
The pipeline is full but we have we have our operating challenges as well that are also going to take management time.
Yes, Sir okay. Thanks, Scott.
Great. Thank you.
Alright, Thanks, operator, I would like to thank everybody for joining us on the call today I think if I haven't said I want to make sure everybody understands I am pleased with the solid start to our year as well.
Through our ongoing operational challenges I think while price cost has been challenging for the last four quarters. We are in a great position to improve margins as we embed a fit from the steps we took in the price increases in previous quarters.
The teams continue to focus on improving our operations on a daily basis.
Very customer focused very much into where they are from a operational needs absenteeism labor coverage those kinds of things that are taking the right step.
And believe we are well positioned for continued growth given the accelerating impacts from aging infrastructure. The government stimulus focused on repairing water networks and improving operations, including the benefits from our large capex investments and I'm excited about the path we're on to become a sustainability leader as evidenced by our second ESG report, which showcases our rapid progress.
It improves includes the long term trends of goals that I think that that we need to.
I think in closing we're confident we're creating a stronger foundation for our future growth and then we have the right strategy in place to expand our presence in the market. So I.
I would like to thank everybody for joining us again and I'd like to thank you for your continued interest and with that operator, please conclude the call.
Thank you. This concludes today's call. Thank you for your participation you may disconnect at this time.