Q2 2024 Mueller Water Products Inc Earnings Call

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Unknown Executive: I'll now start with a brief overview of our second quarter performance. We had a fantastic second quarter, reflecting the progress our teams have made in executing our operational and commercial initiatives to deliver long-term, sustainable growth. We achieved record quarterly net sales with a strong sequential increase in volumes supported by our continued enhancements in customer experience. We improved gross margin by 750 basis points to 36.9%, supported by continued manufacturing and supply chain efficiencies, leading to our highest quarterly gross margin in more than seven years.

I'll start with a brief overview of our second quarter performance we.

Unknown Executive: With a record quarter for net sales and a strong gross margin along with SG&A leverage, we delivered over 70% adjusted EBITDA growth compared to the prior year. We also achieved record quarterly adjusted net income per diluted share of $0.30, which increased more than 100% compared to the prior year quarter. Turning to sustainability, I am pleased to report that in the second quarter, MSCI upgraded Mueller to its highest ESG rating of AAA.

Unknown Executive: We had a fantastic second quarter, reflecting the progress our teams have made executing our operational and commercial initiatives to deliver long term sustainable growth.

Unknown Executive: We achieved record quarterly net sales with a strong sequential increase in volumes supported by our continued enhancements in customer experience.

Unknown Executive: We improved gross margin 750 basis points to 36, 9% supported by continued manufacturing and supply chain efficiencies, leading to our highest quarterly gross margin in more than seven years.

Unknown Executive: With a record quarter for net sales and a strong gross margin along with SG&A leverage we delivered over 70% adjusted EBITDA growth compared to the prior year.

Unknown Executive: We also achieved record quarterly adjusted net income per diluted share of 30 sets, which increased more than 100% compared to the prior year quarter.

Unknown Executive: Turning to sustainability I am pleased to report that in the second quarter M. S. C I upgraded meal or two its highest ESG rating of Triple light.

Unknown Executive: This rating is a great accomplishment and a testament not only to the critical products and solutions we provide for our municipal customers in their communities but also to the hard work and dedication of our team members, suppliers, and customers. We look forward to sharing our continued progress in the next annual ESG report, which will be published later this year. We are increasing our annual guidance for net sales and adjusted EBITDA. These increases reflect our strong first half performance and order activity across most product lines, as well as our belief that overall end market demand is healthy. Municipal repair and replacement activity remains very resilient, and the new residential construction end market is improving relative to the challenging 2023.

Unknown Executive: This rating is a great accomplishment and a testament not only to the critical products and solutions, we provide for our municipal customers and their communities, but also the hard work and dedication of our team members suppliers and customers.

Unknown Executive: We look forward to sharing our continued progress in the next annual ESG report, which will be published later this year.

Unknown Executive: We are increasing our annual guidance for net sales and adjusted EBITDA. These increases reflect our strong first half performance and order activity across most product lines as well as our belief that overall end market demand is healthy.

Unknown Executive: Municipal repair and replacement activity remains very resilient and the new residential construction end market is improving relative to a challenging 2023.

Unknown Executive: We are targeting record gross margin for 2024. The significant expected increase primarily reflects benefits from the actions we have taken over the past year to drive efficiencies in our operations. At the midpoint of our updated annual guidance range for net sales and adjusted EBITDA growth, the adjusted EBITDA margin is a 420 basis points expansion, reflecting our expected improved operational performance. Our teams have worked diligently on improving lead times while controlling costs and driving manufacturing, material, and freight efficiencies.

Unknown Executive: We are targeting record gross margin for 2020 for the.

Unknown Executive: The significant expected increase primarily reflects benefits from the actions we have taken over the past year to drive efficiencies in our operations.

Unknown Executive: At the midpoint of our updated annual guidance range for net sales and adjusted EBITDA growth. The adjusted EBITDA margin is a 420 basis points expansion, reflecting our expected improved operational performance.

Unknown Executive: Our teams have worked diligently on improving lead times, while controlling costs and driving manufacturing material and freight efficiencies our execution allowed us to leverage the increased volumes in the second quarter, leading to an improvement in gross margin. This strong conversion included outstanding performance at both our iron.

Unknown Executive: Our execution allowed us to leverage the increased volumes in the second quarter, leading to an improvement in gross margin. This strong conversion included outstanding performance at both our iron gate valve and hydrant manufacturing facilities. We also expect to have an additional tailwind in the near future from the completion of our new brass foundry project and the closure of our old brass foundry by the end of calendar 2024.

Unknown Executive: Gate valve and hydrant manufacturing facilities. We also expect to have an additional tailwind in the near future from the completion of our new brass foundry project and closure of our old brass foundry by the end of calendar 2024.

Unknown Executive: Our commercial teams continue to do a great job working with our customers. We were pleased to see a strong sequential increase in order activity this quarter across most product lines, which was primarily driven by favorable end market demand. We believe some of this water strength was due to the timing of our price increases and positive sentiment moving into the construction season. We believe that net sales growth in the quarter versus the prior year would have been close to flat without the pull forward.

Unknown Executive: Our commercial teams continued to do a great job working with our customers. We were pleased to see the strong sequential increase in order activity. This quarter across most product lines, which was primarily driven by favorable end market demand.

Unknown Executive: We believe some of this order strength was due to the timing of our price increases and positive sentiment moving into the construction season.

Unknown Executive: We believe that net sales growth in the quarter versus the prior year would've been close to flat without the pull forward.

Unknown Executive: With normalized lead times, we expect this pull forward to impact our third quarter sales, which is reflected in our updated annual guidance. Our team continues to do an admirable job dealing with the impacts of the Israel-Hamas war on our repair products business while also working to satisfy customer demand. As expected, during the second quarter, we experienced higher costs associated with labor, materials, and freight. Our accomplishments this quarter and through the first half of the year are a testament to the progress we've made with our transformation, especially considering the external headwinds our teams have faced.

Unknown Executive: With normalized lead times, we expect this pull forward to impact our third quarter sales, which is reflected in our updated annual guidance.

Unknown Executive: Our team continues to do an admirable job dealing with the impacts of the Israel Hamas War on our repair products business, while also working to satisfy customer demand as expected during the second quarter, we experienced higher costs associated with labor materials and freight.

Unknown Executive: Our accomplishments this quarter and through the first half of the year are a testament to the progress we've made with our transformation, especially considering the external headwinds our teams have faced.

Unknown Executive: I am confident in our ability to continue our momentum as we look to leverage our leading market positions and investments to deliver more consistent execution and drive future sales and margin growth. With that, I'll turn it over to Steve.

Unknown Executive: I am confident in our ability to continue our momentum as we look to leverage our leading market positions and investments to deliver more consistent execution and drive future sales and margin growth.

Unknown Executive: With that I'll turn it over to Steve.

Steve: Thanks, Morrie, and good morning, everyone. For the quarter, our consolidated net sales were $353.4 million, an increase of 6.2% compared with the prior year. Net sales primarily increased due to higher pricing across most product lines, with higher volumes at water flow solutions partially offset by lower volumes at water management solutions. As we've previously mentioned, we believe the lead times and backlogs for iron gate valves and hydrants have normalized.

Steve: Thanks, Marty and good morning, everyone.

Steve: For the quarter, our consolidated net sales were $353 $4 million, an increase of 6.2% compared with the prior year.

Steve: Net sales primarily increased due to higher pricing across most product lines with higher volumes of water flow solutions, partially offset by lower volumes of water management solutions.

Steve: As we've previously mentioned, we believe the lead times in backlogs for Iron Gate valves and hydrants a board based.

Steve: Based on order activity during the quarter, we also believe that valve and hydrant end-market demand was healthy during this period. The differences in year-over-year volumes between iron gate valves and hydrants are primarily related to the timing of backlog normalization and channel and customer de-stocking. In the prior year quarter, hydrant shipments benefited from serving an elevated backlog. In the second quarter, gross profit of $130.4 million increased 33.3% compared with the prior year.

Steve: Based on order activity during the quarter. We also believe evolve in hardware and market demand was healthy human spirit.

Steve: The differences in year over year volumes between Iron Gate valves, and hydrants were primarily related to the timing of backlog normalization and channel and customer Destocking.

Steve: In the prior year quarter hardwood shipments benefited from serving an elevated backlog.

Steve: In the second quarter gross profit of $134 million increased 33, 3% compared with the prior year gross.

Steve: Gross margin of 36.9% increased 750 basis points compared with the prior year and reflects our highest quarterly gross margin in over seven years. The increase was driven by improved manufacturing performance and higher prices. Our continued improvements in manufacturing performance were primarily driven by improved productivity, including labor, material, and freight efficiency. This improvement also includes benefits from lower brass outsourcing.

Steve: Gross margin of 36.9% increased several hundred and 50 basis points compared with the prior year and reflects our highest quarterly gross margin of over seven years.

Steve: The increase was driven by improved manufacturing performance and higher pricing.

Steve: Our continued improvements in manufacturing performance were primarily driven by improved productivity, including labor material and freight efficiencies. This.

Steve: This improvement also includes benefits from lower brass outsourcing costs higher pricing more than offset inflationary pressures, which mainly related to labor inflation.

Steve: Higher pricing more than offset inflationary pressures, which mainly related to labor inflation. Total materials costs were slightly higher, primarily due to inflation related to purchased parts, which was partially offset by lower raw material costs relative to the prior year. For the quarter, total SG&A expenses of $63.7 million were $500,000 lower than the prior year. Lower personnel-related costs, third-party fees, and engineering expenses were partially offset by higher incentive costs and inflationary prices.

Steve: Total materials costs were slightly higher primarily due to inflation related to purchase parts, which was partially offset by lower raw material costs relative to the prior year.

Steve: For the quarter total SG&A expenses of $63.7 million.

Steve: We're $500000 lower than the prior year lower personnel related costs third party fees and engineering expenses were partially offset by higher incentive costs and inflationary pressures operating income of $63.5 million increased 93% in the quarter compared with the prior year operating income includes strategic reorganization.

Steve: Operating income of $63.5 million increased 93% in the quarter compared with the prior year. Operating income includes strategic reorganization and other charges of $3.2 million in the quarter, which have been excluded from adjusted results. These are primarily related to the leadership transition, severance, and certain transaction-related expenses.

Steve: <unk> and other charges of $3 $2 million in the quarter, which have been excluded from adjusted results.

Steve: These are primarily related to the leadership transition severance and certain transaction related expenses.

Steve: Turning now to our consolidated non-GAAP results for the quarter, Adjusted Operating Income of $66.7 million increased 98.5% compared with the prior year, primarily due to favorable manufacturing performance and higher pricing, which more than offset inflationary pressure. Our adjusted operating margin improved 880 basis points to 18.9% compared with the prior year. This is the highest quarterly gross margin since the third quarter of 2019. Adjusted EBITDA of $82.2 million increased 70.9% in a quarter. Our adjusted EBITDA margin improved 890 basis points to 23.3%.

Steve: Turning now to our consolidated non-GAAP results for the quarter.

Steve: Adjusted operating income of $66.7 million increased 98, 5% compared with the prior year, primarily due to favorable manufacturing performance and higher pricing, which more than offset inflationary pressures.

Steve: Our adjusted operating margin improved 880 basis points to 18.9% compared with the prior year.

Steve: This is the highest quarterly gross margin since the third quarter of 2019, adjusted EBITDA of $82.2 million increased 70.9% in the quarter.

Steve: Our adjusted EBITDA margin improved 890 basis points to 23, 3%.

Steve: Similar to Adjusted Operating Income Margin, this is also the highest quarterly margin since the third quarter of 2019. For the last 12 months, Adjusted EBITDA was $236.8 million, or 19.1% of net sales, a 470 basis point improvement compared with the prior 12-month period. Adjusted net income per diluted share more than doubled in the second quarter, increasing 114.3% to $0.30 per share, which is a quarterly record. Turning now to quarterly segment performance. I'm pleased to start with Waterflow Solutions, where our operations and business teams led the segment to an outstanding quarter.

Steve: Similar to adjusted operating income margin. This was also the highest quarterly margin since the third quarter of 2019.

Steve: For the last 12 months, adjusted EBITDA was $236 $8 million or 19.1% net sales of 470 basis point improvement compared with the prior 12 month period.

Steve: Adjusted net income per diluted share more than doubled in the second quarter, increasing 114.3% to 30 cents per share, which was a quarterly record.

Steve: Turning now to quarterly segment performance.

Steve: I'm pleased to start with water flow solution, where operations and business teams led the segment to an outstanding quarter.

Steve: Net sales of $205.8 million increased 30.9% compared with the prior year, primarily due to higher volumes of iron gate valves and service brass products, as well as higher pricing across most product lines. With normalized lead times, strong net sales growth for Iron Gate valves benefited from a sequential increase in orders, as well as lapping low orders and shipments in the prior year quarter, primarily due to channel and customer inventory destocking. Net sales growth for service brass products benefited from improved manufacturing efficiencies and serving an elevated backlog, which we continue to lower.

Steve: Net sales of $205.8 million increased 39% compared with the prior year, primarily due to higher volumes of iron gate valves and service brass products as well as higher pricing across most product lines with normalized lead times strong net sales growth for iron gate valves benefited from a sequential increase in orders as well.

Steve: Lapping low orders and shipments in the prior year quarter, primarily due to channel and customer inventory destocking.

Steve: Net sales growth for service brass products benefited from improved manufacturing efficiencies and serving an elevated backlog, which we continue to lower.

Steve: Adjusted operating income of $52.6 million increased 246.1% in a quarter. The benefits from increased volumes, favorable manufacturing performance, and higher pricing more than offset increased costs associated with inflation and higher SG&A expenses. Adjusted EBITDA of $62.4 million increased 171.3%, and our adjusted EBITDA margin also improved significantly to 30.3%. This is the highest quarterly adjusted EBITDA margin the Waterflow Solutions segment has ever achieved. Turning to quarterly results for water management solutions, net sales of $147.6 million decreased 16% compared with the prior year. This was primarily due to lower volumes across most product lines, partially offset by higher pricing across most product lines. However, net sales for hydrants were down double digits compared with the prior year quarter.

Steve: Adjusted operating income of $52.6 million increased 246, 1% in the quarter.

Steve: The benefits from increased volumes favorable manufacturing performance and higher pricing more than offset increased costs associated with inflation and higher SG&A expenses.

Steve: Adjusted EBITDA of $62.4 million increased 171, 3% and our adjusted EBITDA margin also improved significantly to 33%.

Steve: This is the highest quarterly adjusted EBITDA margin the water flow solutions segment has ever achieved.

Steve: Turning to quarterly results for water management solutions net sales of $147.6 million decreased 16% compared with the prior year. This.

Steve: This was primarily due to lower volumes across most product lines, partially offset by higher pricing across most product lines net sales for hydrants were down double digits compared with the prior year quarter.

Steve: Although our lead times are now normalized, and we saw a sequential increase in orders, the prior year quarter's sales benefited from very strong hydrant shipments as we served an elevated backlog. Adjusted operating income of $29 million decreased 9.1% in a quarter. The benefits from higher pricing, improved manufacturing performance, and lower SG&A expenses were more than offset by lower volume. Adjusted EBITDA of $35.7 million decreased 9.8%.

Steve: Although our lead times are now normalized and we saw a sequential increase in orders the prior year quarter sales benefited from very strong hydrant shipments as we serve an elevated backlog.

Steve: Adjusted operating income of $29 million decreased nine 1% in the quarter.

Steve: The benefits from higher pricing improved manufacturing performance and lower SG&A expenses were more than offset by lower volumes.

Steve: Adjusted EBITDA of $35.7 million decreased 9.8%. However, adjusted EBITDA margin improved 170 basis points to 24, 2%. Despite the decrease in net sales.

Steve: However, the adjusted EBITDA margin improved 170 basis points to 24.2% despite the decrease in net sales. Moving on to Cash Flow. Net cash provided by operating activities for the year-to-date period was $62.2 million, an increase of $84.4 million compared with the prior year. The increase was primarily a result of higher net income and improvements in working capital compared with the prior year, which included a smaller increase in inventory. During the quarter, we invested $10.1 million in capital expenditures and invested $15.8 million through the first six months.

Steve: While spending through the first half of the year is $4.7 million lower than the prior year period, we do expect spending to be higher in the second half of the year. Our free cash flow for the year-to-date period increased $89.1 million to $46.4 million compared with the prior year, driven by higher cash from operations and lower capital spending. Free cash flow as a percent of adjusted net income was 70.1 percent for the first half of the year.

Steve: Moving on to cash flow net.

Steve: Net cash provided by operating activities for the year to date period was $62 2 million, an increase of $84.4 million compared with the prior year.

Steve: The increase was primarily a result of higher net income and improvements in working capital compared with the prior year, which includes a smaller increase in inventories.

Steve: During the quarter, we invested $10 $1 million in capital expenditures and invested $15 $8 million through the first six months.

Steve: While spending through the first half of the year is $4.7 million lower than the prior year period, we do expect spending to be higher in the second half of the year, our free cash flow for the year to date period increased $89 1 million to $46 $4 million compared with the prior year driven by higher cash from operations and lower capital spend.

Steve: Free cash flow as a percent of adjusted net income was 71% for the first half of the year.

Steve: During the second quarter, we repurchased $10 million in common stock, and as of March 31st, we had $80 million remaining under our share repurchase authorization. At the end of the second quarter, our total debt outstanding was $448.7 million, and we had cash and cash equivalents of $179.2 million. Our balance sheet remains strong, with our net debt-leverage ratio at 1.1 times a quarter end, no debt maturities until June 2029, and our $450 million senior notes at a 4% fixed interest rate. We did not have any borrowings under our ABL agreement at the quarter end, nor did we borrow any amounts under our ABL during the quarter.

Steve: During the second quarter, we repurchased $10 million in common stock and as of March 31st we had $80 million remaining under our share repurchase authorization.

Steve: At the end of the second quarter, our total debt outstanding was $448 $7 million, and we had cash and cash equivalents of $179 $2 million.

Steve: Our balance sheet remains strong with our net debt leverage ratio at 1.1 times, a quarter and no debt maturities until June 2029, and our $450 million senior notes at a 4% fixed interest rate.

Steve: We did not have any borrowings on our ABL agreement at the quarter end, nor did we borrow any amounts under our ABL during the quarter.

Steve: In March, we amended our ABL, which extended the maturity date to March 2029 and lowered our applicable margin. I will now review our updated and improved outlook for fiscal 2024. Based on our strong first half performance and current expectations for the rest of the year, we are increasing our guidance for both consolidated net sales and adjusted EBIT. We now anticipate net sales will be between flat and down 2% as compared with the prior year. We believe municipal and new residential construction and markets will continue to be healthy in the second half of the year.

Steve: In March we amended our ABL, which extended the maturity date to March 2029, and lowered our applicable margins.

Steve: I will now review, our updated and improved outlook for fiscal 2024.

Steve: Based on our strong first half performance and current expectations for the rest of the year, we are increasing our guidance for both consolidated net sales and adjusted EBITDA.

Steve: We now anticipate net sales will be between flat and down 2% as compared with the prior year.

Steve: We believe municipal and new residential construction end markets will continue to be healthy in the second half of the year.

Steve: In addition to raising our net sales expectations, we are significantly increasing our guidance for adjusted EBITDA as a result of our strong first-half operating and margin performance, coupled with our current expectations for favorable end-market demand. We now anticipate that our adjusted EBITDA will increase between 23 and 27 percent compared with the prior year. This includes an expected increase in our total SG&A expenses, reflecting higher incentive compensation and personnel investment. Additionally, we expect our free cash flow as a percentage of adjusted net income to be more than 75% for fiscal 2024, as compared with 62.7% in fiscal 2023.

Steve: In addition to raising our net sales expectations, we are significantly increasing our guidance for adjusted EBITDA as a result of our strong first half operating and margin performance, coupled with our current expectations for favorable end market demand.

Steve: We now anticipate that our adjusted EBITDA will increase between 23 and 27% compared with the prior year.

Steve: This includes an expected increase in our total SG&A expenses, reflecting higher incentive compensation and personnel investments.

Steve: Additionally, we expect our free cash flow as a percentage of adjusted net income to be more than 75% for fiscal 2024 as compared with 62.7% in fiscal 2023.

Morty: With that, I'll turn it back to Morty for closing comments.

Steve: With that I'll turn it back to Marty for closing comments.

Morty: Thanks, Steve. I want to highlight a few key items before opening it up for Q&A.

Morty: Thanks, Steve I wanted to highlight a few key items before opening it up for Q&A.

Morty: I am excited about what we've accomplished so far this year, especially given the uncertainties in the external environment. I am thankful for our talented and committed employees who are doing incredible work focusing on serving our customers and driving manufacturing material and freight efficiencies while also executing our large capital projects. There is still work ahead of us, and we are primarily focused on executing initiatives in four key strategic areas. We will continue to drive operational improvements to deliver the benefits from our capital investment.

Morty: I am excited about what we've accomplished so far this year, especially given the uncertainties in the external environment I am thankful for our talented and committed employees, who are doing incredible work focusing on serving our customers and driving manufacturing material and freight efficiencies, while also executing our large capital projects.

Morty: There is still work ahead of us and we are primarily focused on executing initiatives in four key strategic areas.

Morty: We will continue to drive operational improvements to deliver the benefits from our capital investments.

Morty: We are making changes to accelerate sales growth and capture the benefits from favorable long-term end-market growth trends through product innovation and service. We are also increasing collaboration and teamwork throughout the organization to create a culture of talent development, enabling us to execute on our targets and make Mueller a preferred place to work. We are well-positioned to execute on our strategies to improve margins and increase free cash flow to support future investments. I am confident in our strong foundation of talented and committed employees, industry-leading brands, and deep distribution channel and direct customer relationships. That concludes my comments. Operator, please open this call for questions.

Morty: We are making changes to accelerate sales growth and capture the benefits from favorable long term end market growth trends through product innovation and service. We are also increasing collaboration and teamwork throughout the organization to create a culture of talent development, enabling us to execute on our targets and make Mueller.

Morty: Deferred place to work.

Morty: We are well positioned to execute on our strategies to improve margins and increase free cash flow to support future investments I am confident in our strong foundation of talented and committed employees industry, leading brands and deep distribution channel and direct customer relationships.

Morty: That concludes my comments operator, please open this call for questions.

Operator: Thank you. At this time, we'll begin our question and answer session. If you'd like to ask a question, please press star, then 1 on your phone. Please remember to unmute your phone and record your name clearly when prompted. If you'd like to withdraw that question, you may press star, 2. Again, to ask a question, please press star, then 1. And our first question comes from Bryan Lee with Goldman Sachs. Your line is open.

Speaker Change: Thank you at this time, we will begin a question and answer session. If you'd like to ask a question. Please press Star then one on your phone. Please remember to mute your phone and record your name clearly when prompted if you'd like to withdraw that question. You May Press Star two again to ask a question. Please press Star then one and our first question comes from Brad.

Operator: Ian Lee with Goldman Sachs. Your line is open.

Bryan Francis Blair: Hey everyone, good morning. Thanks for taking the questions and kudos on the impressive execution here. It may be a big picture question for you, Marty. You've had quite a tenure at Mueller. You've seen a lot of change at the company over the years, and you're not necessarily new to the CEO role. As it becomes your full-time responsibility, though, how are you thinking about the strategic priorities? I know you touched upon a few here at the end of the call, but what's changed here as you take on the role?

Bryan Francis Blair: Hey, everyone. Good morning, Thanks for taking the questions and kudos on the the impressive execution here.

Bryan Francis Blair: And maybe a big picture question for you Marty you've had quite.

Bryan Francis Blair: Quite quite a tenure at Mueller he's seen a lot of change at the company over the years.

Bryan Francis Blair: And youre not necessarily new to the CEO role is it.

Bryan Francis Blair: It'll becomes your ear full time.

Bryan Francis Blair: Possibility, though how are you thinking about kind of the.

Bryan Francis Blair: The strategic priorities I know you touched upon a few here at the end of the call, but you know what.

Bryan Francis Blair: What's kind of changed here as you're taking on the role obviously the company is in a different spot, but as you think about strategic priorities in that role can you kind of.

Bryan Francis Blair: Obviously, the company is in a different spot, but as you think about strategic priorities in that role, can you speak to what you think you can change or enact change going forward? One thing in particular I'd be curious to hear your take on is that you mentioned sales growth and product innovation. Can you elaborate a bit more on where you see Mueller headed and where the best opportunities might be when it comes to that particular piece of the stool? Thanks.

Bryan Francis Blair: Speak to to what you think you can change or enact change going forward and then one thing I think in particular I'd be curious to hear your take on as you mentioned sales growth and product innovation can you elaborate a bit more on kind of where you see mueller headed and where the.

Bryan Francis Blair: The best opportunities might be when it comes to that particular piece of the store. Thanks.

Marty: Great, yes. Thanks, Bryan, and thanks for the question. Look, I think one of the most important things I'm going to say is, look, we have been continuing to lead change, not just today going forward, but I think, you know, even looking at the last eight months. And, you know, importantly, as we look ahead, we are a water-focused company. We do have a long history within the business, but I think, in many ways, the time has never been better for us to really leverage many of the products that we have together.

Speaker Change: Great, Yes, thanks, Brian and thanks for the question look I think one of the most important things I'm going to say is look we have been.

Marty: Continuing to lead change not just today going forward, but I think even looking at the last eight months.

Marty: And importantly, as we look out we are a water focused company, we do have a long history within the business, but I think in many ways at the time has never been better for us to really leverage.

Marty: Many of the products that we have together and importantly, as we say when we look at the.

Marty: And importantly, as we say, when we look at the opportunity as we have aging infrastructure and as we have continued focus on water-starved areas, and importantly, particularly how different regions are going to need to focus on improving their ability to provide water and provide water at a reasonable cost to all their customers. We have, over the years, looked to broaden our portfolio. We're a full service provider as we look across valves, hydrants, and certainly brass products, and I can emphasize brass products here because with the emphasis on the infrastructure bill and the designated funds for the lead service line replacement, I think our role with the service brass products that we provide is important and importantly with the additional capacity that we have just brought on with our new brass foundry and the echo brass product that we have, which has many sustainability benefits.

Marty: Opportunity as.

Marty: As we have aging infrastructure as we have continued focus on water starved areas and importantly, particularly how different regions are going to need to focus on improving.

Marty: There their ability to provide water and provide water to reasonable cross to all of their all their customers. We have over the years to broaden our portfolio. We're a full service provider as we look across valves hydrants.

Marty: Certainly brass products than I can emphasize brass products here because with the emphasis with the infrastructure Bill in the designated funds for the lead service line replacement I think importantly, our role with the service brass products that we provide and importantly, with the additional capacity that we have just brought on with.

Marty: Our new brass foundry.

Marty: And the eco brass product that we have which has many sustainability benefits I think that is one of the additional products and services that that plays well as we look forward.

Marty: I think that is one of the additional products and services that will do well as we look forward. The other piece that I want to talk about is an area where we have, I think, re-energized ourselves, and that's really in and around our focus on the customer experience. We have focused on improving our delivery lead times. We are looking to even further deepen the relationships that we have with our customers and overall enhance that customer experience, which we think will also further promote. In and around the area of technology, I certainly think that the areas that we focus on with our leak detection, with our pipe condition assessment, looking to get into pressure management, and again, looking to bridge ways for the municipalities to gain more intelligence in and around what their systems have and the solutions to help them better manage it.

Marty: The other piece I don't want to talk about and you know, it's an area, where we have I think reenergized ourselves and that's really in and around our focus on the customer experience. We are focused on improving our delivery lead times. We are looking to even further deepen the relationships that we have with our customers and overall.

Marty: Enhancing that customer experience.

Marty: That we think will also further to promote ourselves in that and the breadth of products and services that we offer I think it is helpful.

Marty: In and around the area of technology.

Marty: I, certainly think that the areas that we focus on with our leak detection with our pipe condition assessment looking to get into pressure management and again looking to branch ways or the municipalities to gain more intelligence.

Marty: In and around what their systems have and the solutions to help them better manage it and that's where I think increasingly you're going to see us look to link the infrastructure products that we have and how they can be used and we can bring more intelligence to those products and I think we will absolutely continue along.

Marty: And that's where I think you're going to see us increasingly look to link the infrastructure products that we have and how they can be used, and we can bring more intelligence to those products. And I think we will absolutely continue along those lines as well. With that, I'll hit on one other thing because I think it's important and I really appreciate the longer-term question that you have asked. When we look, I think as Steve talked through, when we look at the capital structure that we have, that we put in place, when we look at the capacity that we have and the flexibility that we have, we are positioned to look to broaden our product portfolio and or deepen our product portfolio, and I will say that we will continue to look for those right opportunities at the right valuations to allow us to continue to grow not only organically but inorganically.

Marty: Those lines as well.

Marty: With that I want to hit one other thing because I think it's important and it really appreciate the longer term question that you have that when we look I think Steve talked for it when we look at the capital structure that we have that we put in place when we look at the capacity that we.

Marty: And the flexibility that we have we are positioned to look to broaden our.

Marty: Product portfolio and deepen our product portfolio and I will say that we are going to continue we will continue to look for those right opportunities at.

Marty: At the right valuations to allow us to continue to grow not only organically, but inorganically as well.

Speaker Change: That's all Super helpful piece that I think you've sorry, you're saying, but I wanted to hit on the operation.

Marty: That's all super helpful. Sorry, you've seen, but I want to hit on the operation. Well, because with some of the internal realignment that we have recently done, part of that has been a further investment in and around our operational capabilities and, importantly, I think, a real forward vision in terms of how we can continue to improve our operational performance, so that our margins continue to grow. Yeah, maybe that's a good segue into just the second question I had, a little bit more mundane and less big picture, and then I'll pass it on.

Marty: Well, because when somebody internal realignment that we've recently done part of that had been a.

Marty: Further investment in and around our operations capabilities and importantly, I think our real forward vision in terms of how we can continue to improve our operational performance for our margins to continue to grow over time.

Marty: Yeah, maybe that's a good segue into just the second question I had a little bit more mundane.

Marty: And less Big picture and then I'll pass it on when you think about this kind of seven year high in gross margins.

Marty: When you think about, you know, this kind of seven-year high in gross margins, you mentioned specifically price and manufacturing improvements. How sustainable do you see those two pillars? It seems like, you know, you still have some outsourcing benefits that are still to come, and then price sounds like it's something that's moving into your wheelhouse in terms of something you can leverage. But can you kind of speak to sort of the impacts on gross margin this quarter between the two buckets and then how you think about them going forward as having sustainability? Thank you.

Marty: You mentioned, specifically price and manufacturing improvements.

Marty: How sustainable do you kind of see those two pillars are it seems like you still have some.

Marty: Outsourcing benefits that are still to come and then price sounds like it's it's something that's moving into here.

Marty: Into your wheelhouse in terms of something you can leverage but can you kind of speak to sort of the impacts on gross margin this quarter.

Marty: Between the two buckets and then how you think about them going forward as having sustainability. Thank you.

Marty: Okay.

Marty: Absolutely. So in and around price, I think when you look over, certainly a longer term period, I think we have generally benefited from price over the longer term. And our objective, as we said, is always for the price to more than cover any of the inflationary costs that we are experiencing. Not to delve too much into the history, but I think with the level of inflation that we had, coupled with some of the challenges with COVID and demand levels, that, you know, it was a challenging period.

Speaker Change: Absolutely so in and around price I think when you look over certainly a longer term period. I think is a we have generally benefited from price over the longer longer term and our objective as we said as always for price to more than cover any of the inflationary cost that we are experiencing.

Marty: Not to delve too much into the history, but I think we're sort of the level of inflation that we had coupled with some of the challenges with COVID-19 and demand level that.

Marty: But I think, you know, we've gotten back into, you've seen this quarter, we're probably sort of mid single digits in and around pricing. I think we told you last quarter that we had implemented a price increase across most of our product lines in February. And as we called out in our script, we do think, as a result of the price increase that we announced in February and, importantly, our ability to manufacture and ship products with shorter lead times, we think that caused a little bit of a pull-forward of some of the shipments into our second quarter.

Marty: It was a challenging period, but I think we've gotten back into you've seen this quarter, we're probably sort of mid single digit in and around pricing I think we told you last quarter that we had implemented a price increase across most of our product lines in February and as we called out in our script, we do think.

Marty: As a result of the price increase that we announced in February and importantly, our ability.

Marty: To manufacture and ship product with shorter lead times, we think that.

Marty: Caused a little bit of a pull forward of some of the shipments into our second quarter. So I think pricing I would say, we would expect to continue to benefit covering inflationary.

Marty: So I think pricing, I would say we would expect to continue to benefit from covering inflationary costs and preserving margin as we go forward. I think with respect to gross margin, I think we will continue to challenge ourselves. To improve our operational efficiencies where we can, we did see some of that benefit during the quarter. I know we also called out some of the lower Outsourcing costs that we had, I think we'll be at a point where we'll pretty much anniversary that as we're moving into the second half of our year, but I think that was a benefit where we look to improve our overall cost structure. But I would say we do continue to see opportunities to improve our material, labor, and freight efficiencies, and certainly, volume leverage can also help us as we move forward as well.

Marty: Costs and preserving margin as we go forward I think with respect to gross margin.

Marty: I think we will continue.

Marty: Continue to challenge ourselves.

Marty: Or two.

Marty: To improve our operational efficiencies, where we can we did see some of that benefit during the quarter. I know, we also called out some of the lower.

Marty: Outsourcing cost that we had I think we'll be at a point, where we're pretty much.

Marty: Anniversary that as we're moving into the second half of a year, but I think that was a benefit where we look to improve our overall cost structure, but I would say, we do continue to see opportunities to improve our material labor and freight efficiencies and certainly volume leverage can.

Marty: Also help us as we move forward as well.

Bryan Francis Blair: All right, very helpful. I'll pass it on. Thank you.

Speaker Change: Alright, all Super helpful. I'll pass it on thank you.

Joseph Craig Giordano: Thank you. Our next question comes from Joe Giordano with TD Cowell, and your line is open.

Bryan Francis Blair: Thank you and our next question comes from Joe Giordano with TD Cowen Your line is open.

Joseph Craig Giordano: Hey, good morning, guys, Hey, good morning, Joe.

Marty: Hey, so I wanted to just ask on like, if you look back over the last year, there's just been huge volatility in the guides, both directions. I mean, we're happy to see it in the positive direction this time, but both directions have been huge up and down moves. And then also, the actual performance relative to the guides has been with huge volatility. So you've had quite extenuating circumstances over the last year with what's going on internally and the inventory situation and channel partners, but like, can you kind of talk through the internal modeling process and how you feel the comfort level you have about the ability to forecast the businesses from here?

Joseph Craig Giordano: So I wanted to just ask on like if you look back over the last year, there's just been huge volatility in the guides both directions. I mean, we're happy to see it in the positive direction. This time, but both direction has been huge up in downloads and then also like the actual performance relative to the guidance has been huge volatility so you've had quite extent.

Marty: Extenuating circumstances over the last year with what's going on internally in the inventory situation in the channel partners, but like can you kind of talk through the.

Marty: Our internal modeling process and how you feel the comfort level you have the ability to forecast the businesses from here.

Marty: Certainly. So, overall, you know, one of the areas that we're certainly going to try to do is to give you the explanations for why we have the guide that we have, as well as to provide you with insights into what our performance was and why our performance was what it was. Look, I think as we take a look at our outlook for 2024, I think importantly, as we move from our first quarter, and I will remind you, we did see our net sales down about 18% in the first quarter.

Speaker Change: Certainly so I would say look overall.

Marty: One of the areas that we're certainly going to try to do is to give you. The explanation for why we have the guide that we have and as well as to provide you insight into what our performance was and why our performance was what it was.

Marty: Look I think as we take a look at our outlook for 2024, I think importantly, as we move from our first quarter and I'll remind you we did see our net sales down about 18% in the first quarter.

Marty: And certainly, the explanation that we provided then was that we were still experiencing in our 2023 servicing a very elevated level of short cycle backlog, which was a situation that I will say we had not experienced at the company. I think as we look at where we are today, most of the destocking that we felt had been done largely with distributors was behind us. Our short cycle backlog at this point in time, with the exception of service brass, we would call it pretty much back to the normalized level.

Marty: And certainly the explanation that we provided then as we were still experiencing.

Marty: Hearing and seeing in our 2023 servicing a very elevated level of short cycle backlog, which was a situation that I will say, we have not experienced that the company I think as we look at where we are today.

Marty: The most of the Destocking that we felt had been done largely with distributors was behind us our short cycle backlog at this point in time with the exception of service brass, we would call pretty much back in the normalized level now I'll remind you on a year over year basis hydrants was still.

Marty: Now, I'll remind you on a year-over-year basis, hydrants were still elevated in our prior year, and that's why you're seeing some of the differential in the net sales performance between our water flow solution segment and our water management solution segment. But I think as we move through the year, it was pretty much towards the end of the third quarter and the fourth quarter of 2023 by the time we'd gotten that hydrant backlog down.

Marty: Elevated.

Marty: In our prior year and that's why you're seeing some of the differential in the net sales performance between our water flow solutions segment, and our water management solutions segment, but I think as we move through the year.

Marty: It was pretty much towards the end of the third quarter and the first into the fourth quarter of 23 by the time, we got in that Heidrick backlog down, but I think as we look at where we are today a lot of those disruptions from supply chain from Covid.

Marty: But I think as we look at where we are today, a lot of those disruptions to the supply chain, from COVID, from the very elevated and fast rise in inflation, I think a lot of those factors caused some of the challenges that we had, but I'd say de-stocking is largely behind us. The service brass backlog is still higher than what we would call normalized, but importantly, we continued to reduce that short cycle backlog this year.

Marty: From the very elevated and fast rise in inflation I think a lot of those factors.

Marty: We're.

Marty: Caused some of the challenges that we had but I'd say destocking is largely behind us.

Marty: The service breadth.

Marty: Backlog.

Marty: Is still higher than what we would call a normalized but importantly.

Marty: Continued to reduce that short cycle backlog. This year I would say our delivery times are back to normal with respect to our iron gate valves and hydrants and we have continued to reduce the delivery times across most of our service brass products.

Marty: I would say our delivery times are back to normal with respect to our iron gate valves and hydrants, and we have continued to reduce the delivery times across most of our service brass products. So I think we are seeing some of that return, and I would say the guidance that we have just provided for our 2024 certainly reflects what we have seen in the order patterns as they have progressed through the first six months of our year. I hope that answers your question, Joe. Thank you.

Marty: So I think we're seeing some of that return and I would say the guidance that we have just provided.

Marty: For our 2024 odd shortly reflects what we have seen in the order patterns as they have progressed.

Marty: Through the first six months of our year I hope that answers your question Joe.

Joseph Craig Giordano: Thank you. And just to follow up on the portfolio question from earlier, I mean, you know, we're bringing in new board members, and there's a refresh going on. I'm just curious, is like, you know, as you think about where to go as a company, should we be on the lookout for kind of departures or kind of pivots anywhere? I know we talked about linking infrastructure with your technology, with your technology products, and we've talked about that in the past.

Speaker Change: And just to follow up on the portfolio question from earlier, I mean, and we're bringing in new board members and Theres a refresh going on I'm just curious is like.

Joseph Craig Giordano: As you think about where to go as a company.

Joseph Craig Giordano: Should we be on the lookout for kind of departures or kind of pivots anywhere I know you talked you mentioned linking infrastructure with your technology.

Joseph Craig Giordano: When Youre technology products and when we've talked about that in the past I think the reality of that is probably been slower than people would like to see Im just curious as to how you think about like now that youre in the permanent role.

Joseph Craig Giordano: I think the reality of that has probably been slower than people would like to see. I'm just curious as to how you think about, now that you're in the permanent role, is there like a pivot somewhere coming? Or how should we think about that?

Joseph Craig Giordano: Is there like a real pivot somewhere coming how should we think about that.

Marty: So, look, I think with respect to the leadership changes that were just announced, we've got nothing else planned at this time. I think, importantly, as I referenced the team, we have made some changes over the last eight months. We had an internal realignment, and with that realignment, our focus was looking to invest further in and around our customer experience and in and around our customer relationships. Additionally, as I just said, we have looked to enhance our overall operational expertise and investment there.

Joseph Craig Giordano: So look I think.

Marty: With respect to the leadership changes that that were just announced we've got nothing else planned at this time.

Marty: Importantly, as I referenced the team we have made.

Marty: Some changes over the last eight months.

Marty: <unk> had an internal realignment and with that realignment our focus was looking to invest further in and around our.

Marty: Customer experience and in and around our customer relationships. Additionally, as I just said we.

Marty: Have look to enhance our overall operational expertise and investment there and I think sort of the other area that we said is internally and from our <unk>.

Marty: And I think sort of the other area that we've said is internally, and from an employee culture perspective, we have really looked to emphasize more collaboration across the company with a real emphasis on performance and accountability. So I think a lot of that is what we have been working on internally across the company, and I think we are realizing some of those benefits as we look at the performance that we had this quarter. Thanks, guys.

Marty: Employee culture perspective, we have really looked to emphasize more collaboration across the company.

Marty: With real emphasis on performance and accountability. So I think a lot of that is what we have been.

Marty: <unk> been working on internally.

Marty: The company and I think you are we are realizing some of those benefits as we look at the performance that we had this quarter.

Marty: Thanks, guys.

Bryan Francis Blair: Thank you. The next question comes from Bryan Blair with Oppenheimer. Your line is open.

Marty: Thank you. Our next question comes from Bryan Blair with Oppenheimer. Your line is open.

Bryan Francis Blair: Thank you good morning, everyone.

Bryan Francis Blair: Good morning, Brian.

Marty: Excellent quarter. I guess somewhat of a follow-up to Joe's question in terms of guidance and visibility, maybe we can level set a little bit more on back half expectations, you know, appreciate the color on you to pull forward. Can you offer some finer points on how that influences your team's Q3 and Q4 expectations, both top line and EBITDA margin progression?

Bryan Francis Blair: Excellent quarter.

Marty: I guess somewhat of a follow up to Joe's question in terms of.

Marty: Guidance.

Marty: Our guidance visibility, maybe looking to level set a little bit more on back half expectations. Yeah. I appreciate the color on Q2 pull forward.

Marty: Can you offer some finer.

Marty: Points on how and how that influences your cadence Q3, and Q4 expectations both Tom.

Marty: Offline in EBITDA margin progression.

Marty: Yeah, so as we look at the guidance that we have just given in and around the second half of the year, I think, you know, overall, in the first half of our year, we saw net sales down, and we are looking for net sales growth with the recent guidance that we just gave in the second half of the year. I think importantly, as we look more now at the profit line or the bottom line and what our expectations are for the second half of the year, I know you just referenced the bit of pull forward that we think we saw as a result of the timing of the price increase.

Speaker Change: Yes, so as we look with the guidance that we've just given in and around that.

Marty: In the second half of their second half of the year I think overall first of our first half of our year.

Marty: We saw a.

Marty: Net sales down and we are looking for net sales growth with the recent guidance that we just gave in the second half of the year.

Marty: I think importantly, as we look more now on the profit line or the bottom line and what our expectations are for the as we look to the second half of the year I know you just referenced.

Marty: That a pull forward that we think we saw.

Marty: As a result of that the timing of the price increase.

Marty: We talked about some higher costs that we expect to continue to have in and around our Krauss repair products. We have got higher costs largely for labor, materials, and freight. We did experience some of those in our second quarter.

Marty: We talked about some higher costs that we expect to continue to have in and around our.

Marty: Kraus repair products, we've got higher costs, largely with labor materials and freight.

Marty: We did experience some of those in our second quarter. As a reminder, we really didn't have it in our first quarter.

Marty: As a reminder, we really did not have any in our first quarter, but we do expect that we will continue to have those higher costs as we move into the second half of the year. With respect to inflation, probably impacted more by labor inflation, I would say, in the first half of the year. But as we look out into the second half of the year, we think we could see more inflationary pressures in and around some of the material costs that we have, which could also be reflected in purchase prices.

Marty: But we do expect that we will continue to have those higher costs as we move into the second six months of the year.

Marty: With respect to inflation.

Marty: Quickly impacted more by labor inflation, I would say in the first half of the year.

Marty: But as we look out into the second half of the year, we think we could see more inflationary pressures in around some of the material cost that we have which could also.

Marty: They reflected in the purchase parts.

Marty: Additionally, from an SG&A perspective, I think you saw us increase our guidance a little bit in and around SG&A as we move to the second half of the year. And some of that guidance is really coming from differences in and around our incentive accruals, inflation, personnel investments, as well as additional cyber security protection investments.

Marty: Additionally from an SG&A perspective, I think you saw us increase our guidance a little bit in and around SG&A as we move to the second half of the year and some of that.

Marty: Our guidance is really coming from.

Marty: Differences in and around our incentive accruals.

Marty: Inflation personnel investments as well as additional cyber security protection investments.

Speaker Change: Okay understood.

Marty: and your up until your guide, you know, implies around 20% margin on that, you know that that achieves, assuming execution continues, the fiscal 25 outlook that your team had in place for a while. And you walked through a lot of good guys, in terms of the margin outlook and an opportunity that still lies ahead for your team. Is there a new margin target that you're willing to speak to if we think about fiscal 25, 26, or, you know, any medium-term kind of time frame?

Marty: And your.

Marty: Up until your guide implies around 20% margin to that.

Marty: Yeah.

Marty: That achieves assuming execution continues the fiscal 'twenty outlook that youre seeing that in place for a while.

Marty: I'll.

Marty: Walked through a lot of good guys.

Marty: In terms of margin outlook and opportunity that that still lies ahead for your team.

Marty: Is there a new margin target that you're willing to speak to if we think about fiscal 'twenty five 'twenty six or.

Marty: Lenny.

Marty: Medium term kind of timeframe.

Marty: Yeah, so I'd say, you know, looking out beyond 2024, I'd say we haven't, we haven't put anything out there at this point, I think, absolutely right to call out what we had been saying is that we did have an expectation that, as we looked at gross margin and EBITDA margin, we felt that we could get back to pre-pandemic margins as we looked at 2025. And I think certainly, as you point out, with the second quarter and the outlook, we're certainly, you know, moving in that direction, but specifically other than looking to hit and move above the pre-pandemic margins. That's where we are today.

Speaker Change: Yeah, So I'd say looking out beyond 2020 for I would say we haven't.

Marty: We haven't put anything out there at this point I think.

Bryan Francis Blair: Got it. All right. Thank you for taking my questions.

Bryan Francis Blair: Absolutely right to call out what we had been saying is that we did have an expectation that as we looked at gross margin and EBITDA margin are.

Bryan Francis Blair: We felt that we could get back to the pre pandemic margins as we look to 2025 and I think certainly as you point out with.

Bryan Francis Blair: The second quarter and the outlook we're certainly.

Bryan Francis Blair: Moving in that direction, but specifically other than looking to.

Bryan Francis Blair:

Bryan Francis Blair: Hitting move above the pre pandemic margins that are that's where we are today.

Bryan Francis Blair: Got it alright, thank you for taking my questions.

Deane Michael Dray: Our next question comes from Deane Dray with RBC Capital Markets. Your line is open.

Bryan Francis Blair: Thank you and our next question comes from Deane Dray with RBC capital markets. Your line is open.

Deane Michael Dray: Thank you. Good morning, everyone. And I'll add my congratulations to Marty and Paul.

Deane Michael Dray: Thank you good morning, everyone and I'll add my congrats Marty and Paul.

Marty: Great. Thank you, Deane.

Deane Michael Dray: Great. Thank you Deane.

Deane Michael Dray: Hey, maybe we can start off with any more specifics on the new foundry. I know there are limitations in terms of, you know, comparisons. You can't necessarily say what inning or how many SKUs or product certifications or anything like that, but just any color in terms of where you stand.

Deane Michael Dray: Maybe we can start off with.

Deane Michael Dray: Any more specifics on the new foundry.

Deane Michael Dray: I know there are limitations in terms of <unk>.

Deane Michael Dray: Paris, and you can't say necessarily what inning are how many skus or product certification, but just any color in terms of where you stand on that process of being closer to a full ramp.

Marty: Yeah, Dean, our foundry teams are continuing to improve operations in the new foundry, and as you can see, this has translated into higher year-over-year production volumes and better sales through the foundry. The new founders using new equipment, which pieces of it continue to be installed, and we're focused on ramping up the production volumes there to satisfy the backlog while continuing to work through. Our tooling process, we do expect, will close the old foundry at the end of calendar 2024, which does continue to run today.

Deane Michael Dray: Yeah, Deane our foundry teams are continuing to improve the operations and the new foundry.

Marty: As you can see this translated into higher year over year production volumes and better sales.

Marty: Through the foundry.

Marty: The new problems, using new equipment, which pieces of it continuing to be installed and were focused on ramping up the production volumes there.

Marty: To satisfy.

Marty: The backlog, while continuing to work through.

Marty: Our tooling process, we do expect to close the old foundry with you end of calendar 2024, which does continue to work.

Marty: Today.

Marty: We think that the impact of the duplicative costs of running two foundries is around 80 to 100 basis points as a headwind to gross margin, and with the closure of that facility, we expect to see that benefit come in 2025 and carry over to 2026.

Marty: We think that the impact of the duplicative costs of running two borrowers is around 80 to 100 basis points.

Marty: One the gross margin.

Marty: With the closure of that facility, we expect to see that benefit coming in 2025.

Marty: For 2026.

Deane Michael Dray: Those duplicative costs, those ramp-down, we can just assume linearly or to be any kind of step function, as you know, you eliminate outsourcing.

Marty: Those duplicative costs those ramp down we can just assume linearly.

Deane Michael Dray: Or to be any kind of step function is.

Deane Michael Dray: You eliminate outsourcing.

Marty: Yeah, no, look, that's a great question. And I think of it more as a step function. Because they're going to be they're just certain, you know, when you're running the foundry, they're just certain basic fixed and other costs that you're going to have as long as that south boundary is running. So we do not expect it to be linear. Just because of, you know, all the basic things, you know, the lights on the maintenance, importantly, for the workforce that's there, etc.

Speaker Change: Yeah, No look that's a great question and it's a think of it more as a step function.

Marty: Because they're going to they're just certain.

Marty: When you are running the foundry there are just certain basic fixed and other cost that youre going to have as long as that south boundary is running so we do not expect it to.

Marty: To be linear.

Marty: Just because of all the basic the lights on the maintenance importantly for the workforce, that's there et cetera.

Deane Michael Dray: That's great. And then, Marty, just the idea of the pull forward, you know, you've put through price increases before in the past. Was the magnitude of the pull forward surprising at all? I know that's a high-quality problem to ask about, you know, more business coming through in the quarter. But just the idea, did the pull forward surprise you in any way?

Speaker Change: That's great and then Marty.

Deane Michael Dray: Just the idea on the pull forward.

Deane Michael Dray: Put through price increases before in the past was the magnitude of the pull forward surprising at all I know, that's a high quality problem to ask about that.

Deane Michael Dray: More business coming through in the quarter, but just the idea that the pull forward surprise you in any way.

Marty: Yeah, Deane I would probably think of it maybe maybe a little here's the way I'm thinking about it I think with the timing of the price increase.

Marty: Deane, I probably think of it maybe, you know, maybe a little. Here's the way I'm thinking about it. I think, you know, with the timing of the price increase, I think, number one, it was the ability that we had to deliver and ship the product, which was a piece of it. I think the other piece of it is reflective of the market outlook. And as we talked about all the de-stocking that had been done, which we thought was pretty much by the end of the quarter, I think, in terms of looking at the end market, we talked about the municipal market sort of being fairly resilient.

Marty: I think.

Marty: Number one it was the ability that we had to deliver and ship the product, which was a piece of it.

Marty: The other piece of that is reflective of the market outlook and as we talked about all the destocking that had been done which we thought was pretty much by the by the end of the quarter I think in terms of looking at the end market we have to.

Marty: Talk about the municipal market sort of being fairly resilient.

Marty: And certainly the residential construction market.

Marty: And certainly, the residential construction market is in a much better position than it was last year. But that said, we know that the high interest rate environment that is reflected in mortgage rates does still impact demand somewhat. But I really think those factors came into play. So it's, you know, it's just, I would say, one of the call-outs in terms of explaining part of the strength of our second quarter net sales growth.

Marty: <unk> better position than it was last year.

Marty: We know that it's still the high interest rate environment that is reflected in mortgage rates does impact the demand somewhat but I really think it was probably those factors that came into.

Marty: Came into play so it's you know, it's just I would say one of the callouts in terms of explaining.

Marty: Part of the strength of our second quarter net sales growth.

Deane Michael Dray: It's really helpful. Thank you.

Speaker Change: That's really helpful. Thank you.

Michael Patrick Halloran: Thank you. The next question comes from Mike Halloran with Bayard. Your line is open. Hey, good morning, everyone.

Deane Michael Dray: Thank you and our next question comes from Mike Halloran with Baird. Your line is open.

Marty: Hey, good morning, everyone, and congrats on a great quarter. And Marty, congrats on the formal announcement. A quick one here on margins. As we think about the cadence, particularly in WFS margins, you know, how much should we be thinking about the margin levels kind of tracking with revenue as we move into 3Q and 4Q and we think about the impact of the pull forward, or rather should we be more focused on the kind of the sequential trend and the impact of the internal initiatives and the pricing? Just trying to think about which kind of item which line item we should be keying more off of.

Michael Patrick Halloran: Hey, good morning, everyone and congrats on a great quarter and Marty congrats on the formal announcements.

Marty: A quick one here on margins as we think about the cadence, particularly.

Marty: In W.

Marty: <unk> margins.

Marty: How much should we be thinking about the margin levels kind of tracking with revenue as we as we move into <unk> and <unk>.

Marty: And we think about the impact of the pull forward or.

Marty: Rather should we be more focused on the kind of the sequential trend and the impact of the internal initiatives and the pricing.

Marty: Just trying to think about what's what's kind of item, which line item, we should be king more off of.

Marty:

Marty: So, good question. Let me sort of hit some of the things I think we should think about as we look at that. I will say, you know, with respect to water flow solutions, I think we would say that the strong net sales growth that we saw through the first half of the year, I think we can continue to expect due to the year-over-year comparisons and certainly continued growth from iron gate valves and service brass products.

Marty: So good question, let me sort of hit some of the things I think to think about as we look at that.

Marty: I will say with respect to water flow solutions I think we.

Marty: Would say that the strong net sales growth that we saw through the first half of the year I think we can continue to expect due to the year over year comparisons and certainly continued growth from iron Gate valves service brass products as I said, we're continuing to.

Marty: Worked down that elevated.

Marty: Backlog.

Marty: As I said, we're continuing to work down that elevated backlog. Um, We also, I think, from an operational perspective, we are continuing to get the improved labor, material, and supply chain efficiencies out of WFS as well, and I think that's, you know, that and the volume growth that we see with iron gate valves will certainly all be drivers as we look at water flow solutions for the year. You know, on water management solutions, I think we have seen on a year over year, lower net sales, certainly net sales for our hydrants were down double digits compared with the prior year quarter, although importantly, and now I'm going to shift you to sequential, we did see on a sequential basis an increase there, both from orders and shipments perspective, but on the year over year, we had such strong hydrant shipments in 23 due to that elevated backlog that that's a difference year over year.

Marty:

Marty: We also I think from an operational perspective, we are continuing to get the improved labor material and supply chain efficiencies out of W. F S as well and I think that's you know that and the volume growth that we see with our gateway.

Marty: Well certainly I'll be drivers as we look at waterflood solutions for the year.

Marty: On water management solutions I think we have seen on a year over year lower net sales certainly net sales for our hydrants were down double digits.

Marty: Compared with the prior year quarter, Although importantly, and now I'm going to shift you to sequential we did see on a sequential basis an increase there.

Marty: Both from orders and shipments perspective, but on the year over year, we had such strong heidrick shipments in 'twenty three due to that elevated backlog that that's a difference year over year I will also call out within the water management solutions segment that is where we have a repair products and we have.

Marty: I will also call out within the water management solutions segment, that is where we have our repair products, and we have referenced that we, just as we experienced in our second quarter, we do expect that we will have higher labor, freight, and material costs and anticipate that in the second half of the year. You know, that said, we're looking for continued favorable price costs, I would say, across both of the segments, as well as underlying manufacturing.

Marty: Referenced that we adjust as we experienced in our second quarter. We do expect that we will have higher labor and freight and material costs and anticipate that in the second half of the year that said we're looking for.

Marty: <unk> had favorable price cost I would say across both of the segments as well as underlying manufacturing performance.

Marty: That's a super helpful color. Thank you, Marty. Maybe shifting gears a little bit to the capital deployment side. You know, it's starting to feel like the team is getting their feet under them a little bit. Can you maybe talk about how you're thinking about the cultivation and the funnel on the M&A side and broadening and deepening the product portfolio, as you mentioned during your prepared remarks?

Speaker Change: That's super helpful color. Thank you Marty.

Marty: Maybe shifting gears, a little bit to the capital deployment side.

Marty: It's starting to feel like.

Marty: The team is getting their feet under them a little bit can you maybe talk about how youre thinking about the cultivation and the funnel on the M&A side in broadening and deepening the product portfolio as you mentioned during your prepared remarks.

Marty: Yeah, so I'd say, look, in and around the M&A front, I think, you know, we can, it's easier for us, I would say, to identify what we think would be the right additions to our portfolio, not only to broaden our portfolio but to deepen our portfolio. I think, you know, a lot of the, you know, probably our, some of the challenges are really just in and around the availability of what we think could be some nice add-ons.

Marty: Yeah, So I'd say look in and around the <unk>.

Marty: M&A front I think.

Marty: We can if it's easier for us I would say to identify what we think would be the right additions to our portfolio not only to broaden our portfolio, but to deepen our portfolio I think a lot of the probably are some of the challenges are really.

Marty: Just in and around the availability of where we think could be some some nice add ons that said I think as.

Marty: As we talked about I think from a capital structure perspective, we are in the right we are well positioned.

Marty: That said, I think, you know, as we talked about, I think from a capital structure perspective, we are in the right. We are well positioned with respect to our capital structure availability under the ABL and certainly the flexibility that the capital structure affords us. And I would say, you know, With the improvements that we're seeing from an operational performance perspective, I know that we are all excited about where acquisition opportunities could be, and as I said, we've got, I think, the team focused on and around that. It's just finding the right opportunities, and importantly, at a valuation that we think will be attractive for our investors over the long term.

Marty: With respect to our capital structure availability under the ABL.

Marty: And certainly the flexibility that the capital structure affords us.

Marty: And I would say certainly.

Marty: With the improvements that we're seeing from a from an operational performance perspective, I know that.

Speaker Change: We are.

Marty: All excited about where acquisition opportunities could be and it's as I said, we've got a I think the team focused in and around that it's just finding the right opportunities and.

Marty: And importantly at the valuation that we think will be.

Marty: Additive for our investors over the long term.

Speaker Change: I appreciate the time this morning I'll pass it on.

Michael Patrick Halloran: I appreciate your time this morning. I'll pass it on.

Speaker Change: Great. Thanks.

Operator: Another quick reminder, if you'd like to ask a question, please press star and then 1. One moment to see if we have any questions.

Speaker Change: Another quick reminder, if you'd like to ask a question. Please press Star then one.

Operator: One moment to see if we have any questions.

Operator: Great. Well, operator.

Speaker Change: Alright, well operator.

Marty: I will go ahead and close out the call today. I'll say thank you to everyone who joined us. I wanted you to know that I am really honored and excited to continue in the role of CEO, continuing to work with the exceptional team that we have at Mueller, including Paul with his recent promotion to President and Chief Operating Officer. We play a critical role in the business that we're in, helping our customers deliver safe, clean drinking water.

Speaker Change: I will go ahead and close out the call today I will say, thank you for everyone joining us.

Marty: Now that I am really honored and excited to continue in the role of the.

Marty: So continuing to work with an exceptional team that we have at Mueller, including Paul with his recent promotion.

Marty: Promotion to President and Chief operating Officer, we play a critical role in the business that we're in helping our customers deliver safe clean drinking water. We do believe that we are uniquely positioned to address the challenges that we are all seeing across the country with aging water infrastructure with the breadth of our.

Marty: We do believe that we are uniquely positioned to address the challenges that we are all seeing across the country with aging water infrastructure, with the breadth of our products and solutions. With that, I'm confident that Mueller will continue to deliver profitable growth in the months and years ahead. And I thank you all for your continued interest and support of Mueller. With that, Operator, we'll conclude the call.

Marty: Products and solutions with that I am confident that Mueller will continue to deliver profitable growth in the months and years ahead and I. Thank you all for your continued interest and support of Mueller with that operator, we'll conclude the call.

Operator: Thank you. That concludes today's conference. You may all disconnect at this time.

Speaker Change: Thank you that concludes today's conference you may all disconnect at this time.

Operator: Okay.