Q2 2022 Mueller Water Products Inc Earnings Call
Okay.
[music].
Welcome and thank you for standing by at this time, all participants are in a listen only mode.
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I will turn the call over to Mr. Whit Kincaid.
Good morning, everyone. Thank you for joining us on Mueller water products second quarter 2022 conference calls.
We issued our press release reporting results of operations for the quarter ended March 31, 2022 yesterday afternoon.
A copy of the press release is available on our website Mueller water products Dot Com, Scott Hall, our president and CEO and Marty <unk>, our CFO will be discussing our second quarter results and our current outlook for 2022.
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 forward looking statements and our non-GAAP disclosure requirements. As a reminder, we have changed our management structure and segment reporting effective October one 2021, we.
<unk> filed an 8-K on January that provided the recast our historical quarterly results for 2020 in 2021.
This is our second quarter reporting with our new segments water flow solutions and water management solutions.
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 and discloses. The reasons why we believe that these measures provide useful information to investors reconciliations between non-GAAP and GAAP financial measures are included in the supplemental information within our press release and on our website.
Slide three addresses forward looking statements made on this call.
This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward looking statements.
Please review slides two and three in their entirety.
During this call all references to a specific year or quarter unless specified otherwise refer to our fiscal year, which ends on the <unk> of September .
A replay of this morning's call will be available for 30 days at one 880, 195 739, the archived webcast and corresponding slides will be available for at least 90 days on the Investor Relations section of our website.
I'll now turn the call over to Scott.
Thanks.
Thank you for joining us on the call today I hope everyone is safe and healthy before getting started I would like to comment on the terrible humanitarian crisis in Ukraine, which is having many direct and indirect effects around the world.
While we have no sales to Russia, or Ukraine, we see the effects on our global supply chain and most importantly, our thoughts and prayers are with those impacted by the conflict.
With that I will turn to a short recap of our second quarter.
We achieved record second quarter net sales and delivered our fourth consecutive quarter of double digit net sales growth. Our consolidated net sales growth of 16% in the quarter were supported by both improved price realization and continued strong demand.
We are encouraged that our price realization more than offset inflation for the first time in more than a year we.
We experienced solid order growth in the quarter with end market activity remains robust in both municipal repair and replacement and new residential construction.
With another strong quarter of net sales growth record backlog at the end of the quarter and expected realization for price increases we are again, raising our expectations for annual net sales growth overall I am pleased with the diligence and focus of our teams as they continue to secure materials for production vantage our record backlog.
And serve the needs of our customers during this challenging operating environment.
Our second quarter conversion margins were below expectations, primarily due to operational challenges, which I will address later in the call.
However, we anticipate delivering improved conversion margins in the second half of the year, leading to adjusted EBITDA growth for the year.
While we believe the operational challenges will continue through 2022, we are confident that our teams can execute initiatives to help offset that and to increase margins for the balance of the year and beyond.
Before providing more details on our second quarter and updated guidance I will turn the call over to Marty to discuss our second quarter results.
Thanks, Scott and good morning, everyone I will start with our second quarter 2022, consolidated GAAP and non-GAAP financial results. After that I'll review, our segment performance and discuss our cash flow and liquidity.
During the second quarter of this year, we generated consolidated net sales of $310 5 million.
Which increased $43 million or 16, 1% compared with the second quarter of last year, we increased net sales in both waterflood solutions and water management solutions with both segments benefiting from higher pricing across most of our product lines and increased volumes as a reminder, net sales.
In the prior year quarter benefited by $6 million as a result of the elimination of the one month reporting lag for Crouse.
Gross profit this quarter increased $4 4 million or 5% to $92 8 million compared with the prior year, yielding a gross margin of 29, 9% gross margin decreased 310 basis points compared with the prior year as the benefits of higher pricing and increased volumes.
Were more than offset by higher costs associated with inflation and unfavorable manufacturing performance.
General and administrative expenses of $58 million in the quarter increased $3 8 million or 7% compared with the prior year.
The increase was primarily a result of inflation higher T&D and Tradeshow activity investments and the addition of <unk>.
SG&A as a percent of net sales improved to 18, 7% in the quarter as compared to 23% in the prior year quarter due to the leverage from higher sales.
Operating income of $34 $2 million increased $800000 or two 4% in the quarter compared with $33 4 million in the prior year.
Operating income includes strategic reorganization and other charges of $600000 in the quarter, which primarily relate to the previously announced plant closures.
Turning now to our consolidated non-GAAP results.
Adjusted operating income of $34 $8 million decreased $400000 or one 1% compared with $35 2 million in the prior year higher pricing and increased volumes were more than offset by higher costs associated with inflation unfavorable manufacturing performance and higher <unk>.
<unk> expenses.
Adjusted EBITDA of $56 million was nearly flat to the prior year quarter.
Our adjusted EBITDA margin was 16, 3%, which is 310 basis points lower than the prior year.
For the last 12 months adjusted EBITDA was $206 3 million or 17, 4% of net sales.
Net interest expense for the quarter declined to $4 5 million compared with $6 1 million in the prior year.
The decrease in the quarter, primarily resulted from lower interest expense associated with the refinancing of our five 5% senior notes with 4% Senior notes, we increased adjusted net income per diluted share seven 1% to 15 in the quarter compared with 14 in the prior year.
Turning now to segment performance, starting with water flow solutions, which consists of iron gate valves specialty valves and service brass products.
Net sales of $183 $9 million increased $36 8 million or 25% compared with the prior year due to increased volumes and higher pricing across most of the segments product lines, our gate valves and specialty valves experienced double digit net sales growth compared to the prior year.
However, brass service product shipments were impacted by manufacturing inefficiencies from increased equipment downtime and the ongoing supply chain disruptions.
Adjusted operating income of $35 4 million increased $3 3 million or 10, 3% as higher pricing and increased volumes were partially offset by higher costs associated with inflation unfavorable manufacturing performance and higher SG&A expenses adjusted.
EBITDA of $42 $9 million increase.
<unk> increased $3 3 million or eight 3% leading to an adjusted EBITDA margin of 23, 3% compared with 26, 9% last year.
Despite the operational challenges impacting our manufacturing costs conversion margin was 9% in the quarter for this segment.
Moving on to water management solutions, which consists of fire hydrants repair and installation natural gas metering leak detection pressure control and software products net sales of $126 6 million increased $6 2 million or five 1% compared with the prior year.
Primarily due to higher pricing and increased volumes across most of the segments product lines and the addition of <unk>.
Excluding the prior year onetime benefit from the one month reporting lag net sales for the 2022 second quarter increased 10, 7%.
Fire hydrants, natural gas and repair and installation products experienced double digit net sales growth compared to the prior year. Additionally, sales of metering control valve products continued to be constrained by the ongoing supply chain disruptions in manufacturing inefficiencies.
Adjusted operating income of $11 $8 million decreased $4 $4 million in the quarter as higher pricing and increased volumes were more than offset by unfavorable manufacturing performance higher costs associated with inflation and higher SG&A expenses.
Adjusted EBITDA decreased $4 3 million to $19 $1 million in the quarter, leading to an adjusted EBITDA margin of 15, 1% compared with 25% last year.
Moving on to cash flow net.
Net cash provided by operating activities for the six months period was $800000 compared with $63 2 million in the prior year the decrease.
This was primarily driven by higher inventories and payments, including customer rebates income taxes and employee incentives.
Average net working capital using the five point method as a percent of net sales improved to 25, 8% compared with 28, 6% in the second quarter of last year.
For the six month period, we have invested $26 million in capital expenditures compared with $31 1 million spent in the prior year.
Free cash flow for the six months period was negative $25 2 million compared with $32 1 million in the prior year, primarily due to the cash used in operating activities in the second quarter.
For the full year, we anticipate that free cash flow will be positive and cash provided by operating activities will be positive in the second half of the year. However, we expect it to be below 2021, primarily due to higher inventories, resulting from investments and inflation.
As of March 31, 2022, we had total debt outstanding of $447 1 million and total cash of $164 1 million.
At the end of the second quarter, our net debt leverage ratio was one four 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 March 31, 2022 data, we had approximately $161 million of excess availability under the ABL agreement, which brings our total liquidity to $324 $2 million. We continued to maintain a strong flexible balance sheet with ample liquidity and capacity to support our <unk>.
Capital allocation priorities.
Scott back to you.
Thanks Marty.
I'll touch on our second quarter performance and updated outlook for 2022 after that we'll open the call up for questions.
One of the highlights from our second quarter was pricing, we saw a significant sequential improvement in price realization in the quarter as our teams continued working through our backlog.
Given the level of inflation, we continued to experience we were pleased to see the progress we've made with our past pricing actions and remain encouraged by our team's execution and the market's acceptance level. We again took pricing actions on the majority of our steel products during the quarter to help address the ongoing inflationary pressures and supply chain headwinds.
As referenced earlier, our second quarter conversion margins were below expectations, we faced a variety of operational challenges in the quarter from inflationary pressures supply chain disruptions and unfavorable manufacturing performance at our foundries the.
The indirect effects from Russia's invasion of Ukraine continue to ripple through the global supply chain exacerbating the ongoing material availability challenges and increasing cost for energy freight raw materials and purchase parts.
During the quarter, we experienced the sequential increase in raw material prices, most notably scrap steel we expect to continue to experience inflation in scrap metal brass ingot and other materials throughout the year. In addition to higher material costs, we continue to face challenges with material availability.
As our teams remain focused on serving the needs of the customer and working to meet project timelines, we have paid premiums to access needed materials. The supply chain disruptions have also impacted our freight costs overall the environment remains highly uncertain. However, we are hopeful that some of these costs will not extend beyond 2002.
42.
Manufacturing performance at our foundries was unfavorable this quarter due to higher labor and energy costs as well as increased equipment downtime.
The increased utilization at our foundries led to unplanned equipment failures.
Our teams are counter measuring and have initiated action programs associated with driving up toward improving supply chain logistics and improving operational efficiencies in the near term. We do anticipate that we will continue to experience elevated maintenance costs and increased outsourcing costs for the rest of the year.
We are focused on improving production levels in the second half of the year as we manage our backlog and strong demand levels.
In summary, I am pleased with the diligence and focus of our teams as they continue to procure materials for production manage our backlog and serve the needs of our customers. During this challenging operating environment we.
We expect that higher price realization from our pricing actions will help offset the elevated manufacturing costs and sequentially improved margins in the second half of the year.
We will continue to monitor the inflationary environment closely and will take additional price increases as needed to help offset cost pressures as a reminder, over the entire inflationary cycle. Our goal is to have price increases more than cover inflationary expenses and preserve margins.
I will now briefly review our end markets and updated outlook for 2022.
We saw healthy order activity again in the second quarter with AD market activity remains robust.
<unk> repair and replacement market continues to benefit from healthy budgets, especially at larger municipalities as.
As a reminder, we have not included any benefits from the infrastructure Bill and our assumptions for 2022 guidance the.
The new residential construction end market maintained momentum in the second quarter reflected in the 10% increase in total housing starts.
Our expectations for new residential construction are for activity to return to a more normalized level in the second half of the year, primarily due to higher interest rates.
We are pleased to be again, raising our annual guidance for consolidated net sales growth for the year.
Taking into account, our strong second quarter growth and current expectations for end markets.
We anticipate consolidated net sales will increase between 10 and 12%.
Our record backlog of expected realization for price increases gives us confidence in our second half net sales forecast.
We anticipate delivering improved conversion margins in the second half of the year, leading to adjusted EBITDA growth for the year. We now expect adjusted EBITDA to increase between seven and 10% as compared with the prior year.
Our updated conversion margin expectations assume the challenges associated with the supply chain disruptions.
Inflationary pressures that are favorable manufacturing performance continue throughout the rest of the year.
In summary, I continue to be impressed with the dedication and perseverance of our team members as they navigate an unprecedented operating environment.
While they continue to prioritize serving our customers. They also remain focused on executing our strategic initiatives to grow and enhance our business.
We are creating a stronger foundation for future growth and have the right strategies in place to expand our presence in the market as we become a technology enabled solutions provider to water company.
We continue to innovate bridging the gap between infrastructure and technology, keeping sustainability and responsibility at the forefront of our engineering design and manufacturing processes.
Our ESG goals are aligned with our business strategies and I am confident that together, we will contribute to creating a safer environment and a more sustainable future.
We have delivered net sales and adjusted EBITDA growth over the last 12 months, including four consecutive quarters of double digit net sales growth our product portfolio is well positioned for continued growth given accelerating impacts from aging infrastructure government stimulus focused on repair reward or networks and improving.
<unk>, including benefits from our capital investments, we have a strong balance sheet liquidity and cash flow, which support our strategies.
We continue to take a balanced and disciplined approach to our cash obligations 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 deliver further sales and adjusted EBITDA growth.
And with that operator, please open this call for questions.
Our phone lines are now open for questions if you'd like to ask a question over the phone. Please press star one and record your name.
I would like to withdraw your question cluster too. Thank you.
The first question in the queue is from Jake <unk> with Baird. Your line is now open.
Hey, good morning, everyone I'm, sorry, Mike today.
So first question just on.
And then the implied sequential margin improvement here.
Looks primarily attributed to price cost just continuing to to normalize and start to turn positive.
Is that accurate and then second are there any notable divergences here in terms of the sequential improvement by segment.
Yes, no I think that as I said in the prepared comments.
We do anticipate that the initiatives we have around uptime around.
Supply chain logistics to ensure that material is out of machine when machines available variety of mature of the matter is that the machine, where it's available things like that.
Have implied in the sequential improvement.
Improvement from our Q2 performance, which I think was as I said in my prepared comments, a little disappointed that the conversion margin liked to have had a little better manufacturing performance certainly we view there'd be some challenges, but implied is the price cost as you said, but it's also.
It's also some manufacturing improvements in second half of the year.
Got it. Thank you and then so in terms of free cash flow here.
The lower capex that the higher Capex this year wed.
We anticipate and we knew that and then obviously inventories here has had become a headwind. It's just thinking directionally into next year with the lower Capex theory inventory should should swing in your favor.
Is the expectation right now you should return to kind of normal conversion levels or is there a chance we see maybe that swing a little more positive. There is history and then the second part of the question would be with some of these equipment downtime and things like that did materialize had to potentially maybe increased visibility to some other modernization.
Opportunities out there outside of what you already have planned.
Any color on those two would be great.
Okay, well I'll, let Marty handle the cash flow question, when we come to it.
But.
Just two.
Reiterate what I said about the equipment downtime.
And some of the operating challenges I think that.
If you think about.
And what the causes are is the machine operable or is a broken down maintenance costs things like that as demand there or is it a labor shortage issue.
Those all got better in the second quarter.
From the first sorry, the downtime was worse in the second quarter, but the staffing levels.
I think have smoothed out from things I've said in the past and so that really were focused on do we have the material there. So.
So that it can be processed have we got supply chain logistics issues with having material on hand, and do we have equipment with its preventative maintenance schedules in place. So that it can operate when we expected to operate I think those are the two bigger challenges and as I said in the first question there there.
Some implied improvement in our guidance.
In the second half as for the free cash flow Marty yes, so looking at our free cash flow. When you look at where we stood for the first six months of six months of the year. We were about 57 million below prior year and as I said that was largely due to the higher inventory levels.
We have as well as the certain payments that we made when we look out for the full year, we do anticipate that free cash flow will be positive. We think that cash provided from operating activities will be positive in the second half of the year. However, when we think about where we will be for free cash flow for the full year <unk>.
<unk> 22 as opposed to 2021.
We think will be low will be below the 2021 levels.
And with some of the reasons being the higher inventory levels, resulting from some of the.
Investments that were making in and around purchase parts et cetera, as we as we discussed as well as inflation. Additionally, when we look at where our current expectations are for capital expenditures for 2022, those are higher than where we came out in 2021.
Got it I appreciate it I'll jump back into queue. Thank you.
Thank you.
Our next question is from Brian Lee with Goldman Sachs. Your line is now open.
Hey, everyone. Good morning, Thanks for taking the questions I might have missed this but did you call out what what you actually saw.
On price in the quarter, and then with respect to.
And the future pricing actions can you give us a bit more detail on kind of the timing and magnitude.
And then also if you saw any pull forward on demand ahead of the pricing actions and if that impacted Q2 at all.
And just as a reminder, we don't announce prospective price increases without first having published with customers.
But I can retrospective we say that during Q2.
We took a couple of pricing actions one worth related to brass and then two separate actions actually related to steel as the impacts of the pig iron shortage.
Bled over into the scrap steel.
Market pricing as a result of the Russia, Ukraine and so.
But none of those price actions really manifest themselves in a current quarter I mean, our backlog is such that the lag is.
Anywhere from three to four months out so I think price realization stepped up sequentially due to the previous quarter announced price actions I think realization was down high single digits about half of Q2 Q2 organic net sales growth.
We continue to have order growth.
Which resulted in another quarter of record total backlog end of Q2, both pre and post price increase which I think is encouraging I think.
This realization will continue to improve throughout the year as we ship against older orders that are in our backlog and we've heard some of those.
All of our orders that we will have an ever increasing price realization environment I think the team managing the backlog with a lot of progress in some areas and less so in a couple of others.
But obviously, we continue to monitor the inflation environment closely and if we need to take additional price increases we will help offset cost pressures I think I want to remind everybody over the entire inflationary cycle. Our goal is to have prices more than cover inflation.
And preserve margins so no dilution effect and so were.
In this climate market, we're in that lag period, but I do believe that.
We're getting through a lot of the back and Thats why we remain bullish on the second half of the year.
Alright, that's super helpful. And then just on that point the second half of the year if I just.
Scott, Let me look at the guidance.
Thank you.
You guys basically grew first half of the year kind of mid mid teens.
On the top line on a year on year basis.
And your guidance for the rest of fiscal 'twenty, two youre going to youre going to kind of grow half of that sort of seven 8% in the second half versus second half of last year I know the comps are a little bit different but.
With price reading out kind of at those levels does it imply youre seeing.
Volumes starting to slow in the back half just trying to reconcile sort of the second half trend versus what you saw in the first half with price still being kind of at your back it sounds like.
Yes, I think that that's a good observation I think we expect the operating environment to remain challenging I think for the rest of the year plus we're going to be lapping one of our strongest Q3s that we've had.
Well frankly ever when you think about our Q3 last year.
I think the anticipation of shipment volumes in the second half.
With these uptime challenges in these more complexity in the supply chain second half is a little bit lower than actual units in the prior year due to strong volumes in the second half last year and these ongoing operational challenges and so I think in 2020, what our Q3.
I was with one of our better <unk>.
Because we had virtually no operational.
Headwinds.
You'll recall that we actually had more units on the shelf. So if you were to inflation adjust inventories.
For these increases you would realize that we actually sold more than we actually produced in the second half of last year as a result of having.
Bigger inventories of finished goods as we went into it.
So while we will be lapping a challenging Q4.
2021, I think the material availability is a much bigger challenge for us.
This year that it will be for last year, and so basically as you have correctly surmise most of the volume.
In the second half is really price related.
Our guidance implies that we're going to continue.
Have some of these.
Supply.
And maintenance issues in front of us and we will sequentially improve that is not to say that <unk> have any improvement, but it will be.
As strong as the previous year in units.
Okay Fair enough. That's helpful. And then maybe just last one in terms of seasonality.
You mentioned kind of sequential improvement obviously from Q to Q2 to Q3, Youll see that but should we expect normal seasonality where.
Q4 is a little bit softer than Q3 or because of some of the sequential improvements around uptime and what have you we could actually see abnormal seasonality, where Q4 is better than Q3. Thank you.
While Q4 is always lots of seasonality. It's also how many.
<unk>.
People and phase availability, we have you know we have our summer.
Our summer shutdowns, we got very hard at our foundries.
We've looked at absence dealing with a whole bunch of internal reasons.
But I think that the.
General just of your question as backlogs are so strong it's really now about.
What we can produce and what sales focus needs for <unk>.
Getting projects completed during our peak construction volumes and so I expect you'll see the seasonality muted in the second half.
But I think that Q4 is always the quarter ending September 30.
We will have.
From production days.
The majority of our vacation time et cetera.
Take place in that period, and we will have.
Comparatively lower throughput.
Alright makes sense, thanks, guys I'll pass it on.
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.
Question is from Deane Dray with RBC capital markets. Your line is now open.
Thank you and good morning, everyone.
Good morning Deane.
From our perspective, the positive price cost this quarter.
Does the significant upside surprise I know that's something you all have worked really hard on.
And if we could and I was really interested in your comments about how much of this was reading through.
From backlog.
And it sounds like so what's the.
Give up.
Active on implied margins in the <unk> and.
The current backlog.
And that should be helpful for us in terms I know you don't give implied price but.
Implied margin.
Backlog versus where it was let's say this time last year.
Yes, I don't know that I have.
Have the exact number but I do know that the.
Last quarter, when we had the call being we thought we would get to breakeven.
Price inflation on the right side of the ledger for the first time in more than a year was good news.
The backlog.
Margin assuming.
The lapping that we have in our guidance I believe it takes us from this high single digits in the low double digits in the second half of the year is what you would get as the imply.
Improvement.
I think that the margin.
<unk> Thats implied mathematically in the second half from our Q2 actual as partial price and then partial improvement in the manufacturing performance line, which saw.
The costs associated with outsourcing it saw the costs associated with frankly scrambling to get.
Scrap metal as a result of.
Russia invaded Ukraine, I don't know Youre aware, but about 60% of the world's pig iron gets produced in those two countries and so it was a bit of a.
Mad Dash, we think we have secured supply now we think certainly we've got those increased costs.
But that manufacturing performance and price will yield all of the improvement in implied margin in the second half.
How much is on the raw materials, how much of the scrap steel and brass and yet have you.
Pre purchase or committed to the demand do you expect for the current quarter.
Yes, so I think we're well covered for the current quarter.
Brass all the way home, so leased 80% of it.
Scrap steel.
Virtually three days.
Visibility to three to five days right now.
And so every day.
This is an interesting point you got to get philosophical, but we've taken organizations has been focused on cost out focused on <unk>.
<unk> in our supply chain, we have a team of very capable professionals, whose whole reason for existence for many years of their career was to get the price lower tomorrow than it was today and.
Savings and logistics savings and carriers and all of that kind of thing and now everyday the meetings about when do we run out of steel and where do we get more steel.
I'd imagine.
Some of your steel is.
Since you can't get scrap you have to go to Virgin.
Yes, we've been using some pushing here theyre now thankfully the Bush Ling utilization in Q2 was minimal, but we have been able to get shred and plate.
But as you know.
<unk> cost as much as Virgin pig.
And by the time, you're afraid it from.
The rail yards.
Yes.
Can we be a premium so.
We've got the pig iron and we think we've got a source to keep us in good shape for the Virgin material for about 90 days and for everybody's benefit that's about 15% of the valve mix is needs to be pig and hybrid mix and then the balance is.
There needs to be scrapped and high quality plate.
As opposed to some of the thinner spreads that creates a lot of slag in the.
The label.
Alright, and then just I'd like to revisit the commentary about equipment failures.
And just if we keep it simple.
For me inefficiencies are when you have start up some changeovers and staffing level issues, but it also sounds like you've actually had machines broken.
And is that being is it outdated equipment is.
Maintenance problem.
And maybe differentiate what is just manufacturing inefficiency versus actually machine failures.
Yeah, Okay. So the <unk> was poor for the quarter at two facilities in particular I won't name names, but.
One of them is the old brass foundry, obviously thats.
100 years old it's got some very old equipment, I think the equipment issues, primarily have been due to increased utilization at all the foundries.
So as Mel times increase as we are making time for preventative maintenance in a more constricted window.
We're starting to see unplanned failures increase.
Particularly at two plants I think the teams have been briefing on the counter measuring and have initiated actual programs are around improving uptime and all of that includes.
More structure to the preventative maintenance program some outsourcing of.
Maintenance to third parties, so that we can get faster turnaround times.
Workforce arrangements to ensure coverage on Sunday, and we try and do.
Some of the more critical process maintenance, so that Monday mornings.
We're hopefully going to get the week from it.
We anticipate as I said in my prepared comments continued elevated maintenance costs because some of the critical things that dean normally would take like a gearbox that firm machine might take.
Eight hours.
To fix we were having to increase our spare is across the board.
Cause the reliability of getting spare parts in an awful lot of these machines, which used to be a 24 hour overnight delivery is now several weeks and so we've gone back and examined all are critical to success.
Spares and increase those inventories dramatically in the quarter.
So we have a lot of.
Different ways of thinking so that.
We can ensure that not only does the rate.
Get done, but when does when something does go down on an unplanned basis, the cycle time to get it back up and running is back near.
Usual norms as opposed to some of the outliers we've seen.
As a result of the difficulties in the supply chain.
That's real helpful. Thank you.
Thank you.
Our next question is from Joe Giordano with Cowen. Your line is now open.
Good morning, this is Michael in for Joe.
Perfect.
Yes. Thanks for taking my question I realize you haven't included any infrastructure bill impacts.
However, it is there any color you could provide related to pockets of opportunity on this front.
I think in 2022, they are all very very muted there is some rumblings that.
Some people are going to qualify and that the projects are being evaluated.
The lead copper rule looks like it's going to be the one that's easier for municipalities. It's got the most pressing visibility as to what the rule. So that's going to be but I think even what are we sitting at.
And here it is made.
Maybe the third or fourth or whatever it is and so we got seven months to have the project approved allocated and for shovels. The growth go into ground for fittings and things like that are actually being used I think it's highly unlikely that you will see.
Much in the way of meaningful impact too.
Demand in.
The current year from the infrastructure Bill I think 'twenty three and beyond is where these things start to.
And I would remind everybody on the whole.
One two trillion when you take away the reauthorization dollars you get to the real stimulus dollars, which maybe six or $700 million of the bill.
Everybody that it is back loaded in years five six and seven so it's an eight year program and used $5 $6 seven have the bulk of the funding.
Thanks, that's helpful and just one more if I may.
As we look toward the housing market cooling.
I was thinking about new construction are there any other kpis on the resin front.
That seem interesting to you.
Yes, I think that the resi in and of itself is going to be interesting.
The next four five quarters as we see what happens with inflation and what the response to interest rates will be.
Remind everybody, though that we are we're really early in the cycle and we use.
As a proxy, but really our products get deployed in large numbers.
When lots are being developed so we didn't see any signs of slowing in Q2, which I think was reflected in our Q2 orders I think the new residential construction end market maintained momentum in the second quarter as a result of a 10% increase in total housing starts.
Family starts were $1 1 million units over the last 12 months through March.
Well I think future rate increases can have play a strong play a role in the strong quarter. We had I believe the develop lot inventories remain relatively light when many many of the key markets, where consumer demand has been especially strong.
I think as I said, we're early in the cycle. So when the lots get developed not necessarily when the perfect gift polled.
Do we start to see our impact in that light.
Light what inventory.
All of us there.
Makes it difficult.
For builders to sell.
Homes, and so we think a lot of subdivision development is still in the future and so we remain relatively bullish.
<unk> are part of <unk>.
Irrespective of what we start to see with interest rates. Although this morning's wall Street journal articles and things like that we're certainly aware of more Washington, very very close.
I think the residential construction activity could remain above pre pandemic levels.
<unk> 2022 for us I think due to that low lot inventory and what seems to be really really good fundamental consumer demand even though.
6% interest rate levels.
Great. Thank you that's very helpful.
Your next question is from John Ramirez with da Davidson. Your line is now open.
Good morning, This is John Mitchell Greenfield.
For taking my questions.
Good morning.
Thanks.
So jumping to the first question.
Higher natural gas prices impacted margins and hedging costs for your facilities.
Yes to the extent that we have natural gas power generation, none of our foundries or gas are all corliss. So theyre all induction. So all electricity. So natural gas has had some knock on effect in our energy costs, but I think that.
<unk>.
It's a really small number in our operating.
Most of our melt capacity is.
As in the Tennessee Valley Authority District, So the Albertville, Alabama plant in the Chattanooga, Tennessee, Platte fairly electricity intensive but.
Not a lot of natural gas generation from those two power generation and then our amarin facility.
Caters served by Amarin.
And that those substations.
I'm not familiar enough to know what the main source of generation is but I believe they do buy some.
After.
Exelon power off the.
Illinois, New so not a lot of exposure to natural gas to answer the question directly.
Okay. Thank you.
Sorry, the second question.
The theme.
I mean coffee tilted to look at the solutions more or budgets are constrained and more break fix work is being prioritized.
I think most of the municipalities are fairly flush with money.
And I think it really started with the cares Act grants.
$5 $5 billion into a lot of municipalities Hasnt, so those larger municipalities.
I think are examining more.
The solutions kinds of things just to touch on it I know that we'll be running some of our hydro trials in boulder in coming days.
We have some active in Mckinney, Texas.
No.
Larger communities.
Looking to see how they can make their workforce efficiency a little bit better.
<unk>.
I think that the.
There is more receptivity out there, but with that said I think there is.
Very cautious industry as we've talked about many many times.
Putting their big toe in the water versus full scale adoption I think is a few things that we have to watch for and look for those road signs with pellets is ready.
But.
Other part of your question break fix continues to be on track and I will go back to say, we talked about for the for those on the call that have been talked about break fix with me.
The last several years.
As we talked about the <unk>.
The accelerating failure rate of a 70 year old infrastructure.
Is tracking.
We anticipated three or four years ago with kind of the double digit increases so both parts of <unk>.
The perfect storm revenue is good.
Munis have Marty for.
Operations and maintenance and brake friction is increasing thats why.
Postop.
16% sales growth would be double digits for four quarters in a row.
Okay.
Great. Thank you I appreciate it I'll jump back in the queue.
Okay. So.
Thank you. Thank you.
Thanks to everyone for joining today's call I think we were very pleased with where we are through the first half of the year given the external challenges and kudos to the team for managing through what has been.
So pretty pretty.
Unprecedented challenges both in the supply world in.
This post pandemic operating environment we're in.
I really think the team's ability to get price in the market.
Will help offset any further inflation it gives me confidence that.
Even if there are a few more heart curve balls coming that we can.
We can manage through it but I think that the processes will replace the people are in place to.
To make the right decisions I think even at the ground level, we're starting to see good traction with.
With customers as it relates to getting trials in place as it relates to having meaningful business discussions around the economics of.
What's going on out there I think the continuation of net sales and order growth is a testament to the health of our end markets.
And believe our spec position and our products are well positioned in the market.
We're very pleased to be raising annual net sales guidance again, I think the challenges and uncertain environment are keeping us from increasing the annual adjusted EBITDA guidance in lock step with the net sales growth this year, but I do think as we purged backlog and get into some more of the.
The current <unk>.
Order environment showing up in our P&L.
We will then have the reversal of that and that is that EBITDA will have the opportunity to grow a little faster than sales and some of those out quarters end and we will get back to normality in equilibrium.
I think we're focused on countermeasures to offset the operational challenge positioned to sequentially improve margins for the rest of the year with the support from.
Price realization.
We're foundation continues to improve and remain bullish.
For next year, so really looking beyond this year are excited about our growth potential of the water infrastructure market I think the benefits, we'll see from our large capital investments in the path. We're on to become a sustainability leader from the water infrastructure all leave us in good stead and so thank you for your continued interest and operator I would ask that you. Please conclude.
The call.
This concludes today's call. Thank you for your participation you may disconnect at this time.