Q3 2024 Mueller Water Products Inc Earnings Call
With me over to your host Mr. Whit Kincaid. Thank you you may begin good morning, everyone. Thank you for joining us on Mueller water products third quarter conference call.
Speaker Change: Yesterday afternoon, we issued our press release reporting results of operations for the quarter ended June 32024.
Speaker Change: Copies of the press release are available on our website newer water products Dot com.
Speaker Change: I'm joined this morning by Marty <unk>, our Chief Executive Officer, Paul Mcandrew, Our President and Chief operating Officer, and Steve <unk>, Our Chief Financial Officer, and Chief Legal Officer.
Speaker Change: Following our prepared remarks, we will address questions related to the information covered on the call.
Speaker Change: As a reminder, please keep to one question and a follow up and then return to the queue.
Speaker Change: 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.
Speaker Change: They also address forward looking statements and our non-GAAP disclosure requirements.
Speaker Change: At this time, please refer to slide two.
Speaker Change: This slide identifies non-GAAP financial measures referenced in our press release on our slides and on this call that discloses. The reasons why we believe that these measures provide useful information to investors.
Speaker Change: Reconciliations between non-GAAP and GAAP financial measures are included in the supplemental information within our press release and on our website.
Speaker Change: 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.
Speaker Change: Please review slides two and three in their entirety.
Speaker Change: During this call all references to a specific year or quarter unless specified otherwise refer to our fiscal year, which ends the 30 of September.
Speaker Change: A replay of this morning's call will be available for 30 days at one 880 13555, the archived webcast and corresponding slides will be available for at least 90 days on the Investor Relations section of our website.
Speaker Change: I'll now turn the call over to Marty.
Speaker Change: Thanks Whit.
Marty: Morning, everyone. Thank you for joining our earnings call I'll start with a brief overview of our third quarter results I am pleased with our performance this quarter as we reported record quarterly results that exceeded our expectations. We achieved record quarterly net sales with nine 2% year over year growth with healthy order levels during the quarter supported by <unk>.
Speaker Change: Steady end market demand.
Speaker Change: Our commercial and operational teams overall executed at a high level, including delivering benefits from manufacturing and supply chain efficiencies.
Speaker Change: To their great work, we delivered our second consecutive quarter with a gross margin above 36% and a 620 basis points year over year improvement.
Speaker Change: During the quarter, we continued to maintain our disciplined approach to SG&A spending this discipline, along with a record quarter for net sales and a strong gross margin resulted in record adjusted EBITDA of approximately $85 million, which represents an increase of nearly 57% compared with the prior year. We also.
Speaker Change: <unk> achieved record quarterly adjusted net income per diluted share of <unk> 32.
Speaker Change: An increase of around 78% compared to the prior year quarter.
Speaker Change: In addition to driving efficiencies to expand gross margins. Our teams are focused on growing free cash flow through working capital improvements with disciplined capital spending.
Speaker Change: We also continue to look for opportunities to invest in our business to drive organic growth in sales margins and cash flow.
Speaker Change: As a result, we increased our year to date free cash flow more than $100 million compared with the prior year period.
Speaker Change: I am highly encouraged by the progress our teams have achieved this year based on their unrelenting focus on customer service and operational efficiency.
Speaker Change: Our teams continue to perform at an improving level, while controlling costs and driving manufacturing material and freight efficiencies. These.
Speaker Change: These results include strong performance at both our Iron gate valve and hydrant manufacturing facilities.
Speaker Change: The improvement in our margins, which are above pre pandemic highs is a testament to the operational progress we've made to date.
Speaker Change: Gross margin for the latest 12 months is about 34% and our adjusted EBITDA for the latest 12 months reached a record high with more than a 21% adjusted EBITDA margin.
Speaker Change: We are on track to achieve record annual results and accordingly, our raising our guidance for 2024 net sales and adjusted EBITDA.
Speaker Change: This guidance includes nearly a 36% annual gross margin at the midpoint of our updated annual guidance range for net sales and adjusted EBITDA growth.
Speaker Change: While the external environment remains dynamic we believe overall end market demand for the rest of the year will remain resilient and we are confident in our team's ability to execute while we look forward to 2025.
Speaker Change: We remain focused on ramping up our new brass foundry and continue to expect to close our <unk> brass foundry by the end of calendar 2024.
Speaker Change: With this tailwind and our ongoing operational improvements, we will look to leverage our leading market positions and investments to drive future sales and margin growth.
Speaker Change: With that I'll turn it over to Steve.
Steve: Thanks, Marty and good morning, everyone for the third quarter consolidated net sales of $356 $7 million increased nine 2% compared with the prior year, mainly due to higher volumes of water flow solutions and higher pricing across most product lines, which were partially offset by lower volumes of water management solutions.
Steve: We've mentioned in earlier quarters or lead times in backlogs for Iron gate valves and hydrants from normalized so the differences in year over year volumes between our segments are primarily related to the timing of backlog normalization and channel and customer Destocking in 2023 for these products.
Steve: In the third quarter gross profit of $131 4 million incur.
<unk> increased 31, 3% compared with the prior year gross.
Steve: Gross margin of 36, 8% increased 620 basis points compared with the prior year and reflects the second consecutive quarterly gross margin above 36%.
Steve: The year over year increase was driven by favorable manufacturing performance increased volumes and favorable price cost, which were partially offset by the impacts of the Israel Hamas War.
Steve: Similar to last quarter the improvements in manufacturing performance were mainly driven by improved productivity, including labor material and freight efficiencies for the quarter total SG&A expenses of $61 5 million were $900000 higher than the prior year.
Steve: Lower personnel related costs associated with our restructuring activities and lower third party fees were more than offset by higher incentive costs and inflationary pressures.
Steve: Operating income of $67 million increased 88, 2% in the quarter compared with the prior year operating income includes strategic reorganization and other charges of $2 9 million in the quarter, which have been excluded from adjusted results.
Steve: These are primarily related to a leadership transition severance and certain transaction related expenses as well as a noncash asset impairment at water management solutions.
Steve: Turning now to our consolidated non-GAAP results for the quarter <unk>.
Steve: Adjusted operating income of $69 9 million increased 77% compared with the prior year the.
Steve: The increase was primarily due to favorable manufacturing performance increased volumes and favorable price cost, which were partially offset by impacts of Israel Hamas War on water management solutions.
Steve: Our adjusted operating margin improved 750 basis points to 19, 6% compared with the prior year.
Steve: This margin also yields a sequential improvement of 70 basis points and is the highest quarterly margin since the third quarter of 2016.
Adjusted EBITDA of $85 $2 million increased 56, 6% in the quarter.
Steve: Our adjusted EBITDA margin improved 720 basis points to 23, 9%.
Steve: This is a 60 basis point sequential improvement and also equals the highest quarterly margin since the third quarter of 2016.
Historically, the third quarter has been our strongest quarter, reflecting the seasonality of the business.
Steve: For the last 12 months adjusted EBITDA was $267 6 million.
Steve: Or 21, 1% of net sales.
Steve: 690 basis point improvement compared with the prior 12 month period.
Steve: Our third quarter adjusted net income per diluted share of <unk> 32, <unk> increased to 77, 8% compared with the prior year and is another quarterly record.
Speaker Change: Turning now to quarterly segment performance, starting with water flow solutions net sales of $208 1 million increased 38, 6% compared with the prior year, primarily due to higher volumes of iron gate valves as well as higher pricing across most product lines with normalized lead times, a strong net sales growth for iron gate valves have been.
Speaker Change: <unk> from a healthy level of orders as well as lapping low orders and shipments in the prior year quarter, which was primarily due to channel and customer inventory destocking.
Speaker Change: Adjusted operating income of $57 $8 million increased 355, 1% in the quarter.
Speaker Change: The benefits from favorable manufacturing performance increased volumes and favorable price cost more than offset higher SG&A expenses.
Speaker Change: Adjusted EBITDA of $66 $9 million increased to 221% and our adjusted EBITDA margin also improved significantly to 32, 1%.
Speaker Change: This is a record high quarterly adjusted EBITDA margin for the segment.
Speaker Change: Turning to quarterly results for water management solutions net sales of $148 $6 million decreased 15, 8% 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 net sales for hydrants had a lower volume compared with the prior year quarter for the reasons. We discussed earlier as our lead times are now normalized and we experienced healthy order levels again this quarter.
Speaker Change: As a reminder, the prior year quarters sales benefited from very strong hydro shipments as we serve an elevated backlog adjusted operating income of $26 $9 million decreased 32, 8% in the quarter the benefits from lower SG&A expenses and favorable price cost were more than offset by lower volumes and the impacts are.
Speaker Change: The Israel Hamas War.
Speaker Change: Adjusted EBITDA of $34 million decreased to 28, 6% and adjusted EBITDA margin declined 410 basis points to 22, 9% moving on to cash flow net cash provided by operating activities for the nine months year to date period was $149 5 million an increase of 90.
Speaker Change: $7 million compared with the prior year period the.
Speaker Change: The increase was primarily as a result of higher net income and improvements in working capital compared with the prior year, which includes a smaller increase in inventories.
Speaker Change: We invested $28 million and capital expenditures through the first nine months as compared with $32 4 million in the prior year period.
Speaker Change: Free cash flow for the nine month year to date period increased $101 4 million.
Speaker Change: Two $121 $5 million compared with the prior year, primarily due to higher cash from operations for the nine month year to date period free cash flow as a percent of adjusted net income was 105%.
Speaker Change: At the end of the third quarter, our total debt outstanding was $448 9 million and we had cash and cash equivalents of $243 3 million.
Speaker Change: Our balance sheet remains strong and flexible with our net debt leverage ratio less than one quarter and no debt maturities until June 2029, and our $450 million senior notes at a 4% fixed interest rate.
Speaker Change: We do not have any borrowings under our ABL at quarter end, nor did we borrow any amounts under our ABL during the quarter.
Speaker Change: I will now review, our updated and improved outlook for fiscal 2024.
Speaker Change: We are increasing our guidance for both consolidated net sales and adjusted EBITDA. We now anticipate net sales will increase between <unk>, seven and one 5% compared with the prior year, we believe municipal and new residential construction end markets will continue to be healthy for the balance of the year.
The expected sequential decrease in net sales from the third to fourth quarter reflects more normalized seasonality for orders and fewer production days in the fourth quarter.
Speaker Change: In addition to raising our net sales expectations, we are significantly increasing our guidance for adjusted EBITDA as a result of our strong operating and margin performance to date, coupled with our current expectations for end market demand.
Speaker Change: This outlook includes an expected increase in our total SG&A expenses in the fourth quarter, primarily reflecting higher incentive compensation and personnel investments.
Speaker Change: We now anticipate that our adjusted EBITDA will be between 271, and $275 million, which translates to about a 34% to 36% year over year increase.
Speaker Change: Additionally, we are raising our expectations for our free cash flow as a percentage of adjusted net income to now be more than 85% for fiscal 2024 as compared with 62, 7% in fiscal 2023.
Speaker Change: This outlook includes higher capital expenditures in the fourth quarter.
Speaker Change: With that I'll turn it back to Marty for closing comments.
Thanks, Steve I wanted to highlight a few key items before opening it up for Q&A.
Marty: I want to thank all our employees around the world for their tireless efforts and passion for helping our customers and communities. They are the reason for our success and Weinmueller has become a trusted partner for water utilities for over a century.
We are moving forward with confidence and strength with leading brands improving manufacturing operations, a large installed base and strong channel and end customer relationships.
Speaker Change: As we look ahead, we are well positioned to benefit from the investment to address the aging North American water infrastructure and the incremental spending associated with our federal infrastructure Dell, including lead service line replacement projects we.
Speaker Change: We are focused on executing strategies in four key areas. We will continue to drive operational improvements to deliver the benefits from our capital investments and expand our capabilities, we have positioned ourselves to accelerate sales growth and capture the benefits from favorable long term end market growth trends through product innovation and service.
Speaker Change: We are making changes to increase collaboration and teamwork throughout the organization to create a culture of talent development, enabling us to execute on our strategic opportunities 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 fees.
Speaker Change: <unk> investments and growth.
Speaker Change: With our fiscal 2024 coming to a close in a few months, we are refining plans and our strategy for 2025 and beyond with the ramp up of our new brass foundry close to completion and our improved execution. We are confident that we can build on our momentum to continue to drive net sales and margin growth as a.
Minder: Minder, we look forward to sharing our forthcoming annual ESG report and engaging with stakeholders on our progress as we work to become a more sustainable innovative and impactful organization dedicated to being a leader in the water infrastructure industry.
Speaker Change: That concludes our comments operator, please open this call for questions.
Speaker Change: Sure as a quick reminder, if you'd like to ask a question. Please press Star then one remember to mute your phone and record your name and company clearly when prompted if you'd like to withdraw that question you May press star two.
Speaker Change: And our first question comes from Bryan Blair with Oppenheimer. Your line is open.
Brian: Good morning, Brian everyone.
Bryan Blair: Very solid quarter.
Speaker Change: I was hoping to dig into.
Bryan Blair: A little more on what's contemplated in your implied fourth quarter EBITDA guidance I understand the last few years have been operationally noisy.
Speaker Change: Yes, certainly complicates a year on year and stacked comp.
Speaker Change: Analysis with.
Speaker Change: <unk> is in a better place somewhat normalized plus early stage efficiency benefits that are better reading through it seems reasonable to think about normalized season.
Speaker Change: Seasonality and sequential trends and through that lens.
Speaker Change: Yes, there would be a fair amount of upside implied versus the 59 to 63.
Speaker Change: That's not built in the guide just looking for more detail on the discrete items that.
Speaker Change: M representing.
Speaker Change: Sequential headwind.
Speaker Change: Versus just continuing to win conservative in the outlook provided.
Speaker Change: Very good well, let me, let me kick off with that and as we look out to our fourth quarter.
Speaker Change: Certainly we'll highlight that it's off a record third quarter that we have just announced as we look into our fourth quarter.
Speaker Change: We think that although we will see some year over year volumes on our <unk>.
Speaker Change: Volume growth.
Speaker Change: As we think about the sequential moving from the third quarter to the fourth quarter. We do expect that this short cycle orders will be sequentially lower and this is typically what we see with a normalized seasonality.
Speaker Change: Also in our fourth quarter, we have planned fewer.
Speaker Change: Production days as a reminder, this largely impacts the short cycle products, which are certainly our iron gate valves as well as our fire hydrants, and so that will flow through some on a margin basis. Additionally, as we look out to the fourth quarter, we expect the price cost.
Speaker Change: To again be favorable as we saw in the third quarter, but it could be to a slightly lower degree as we expect some higher inflation looking out to our fourth quarter I think the other key area to highlight is in and around our <unk>.
Speaker Change: Projected or forecasted SG&A as we look to the fourth quarter as we think about it both on a sequential basis as well as a year over year basis, we do expect SG&A expenses to be higher.
Speaker Change: Largely due to.
Speaker Change: Hi incentive compensation.
As well as personnel investments.
Speaker Change: We do expect that we will have continued investments to support our repair product lines during the fourth quarter.
Speaker Change: And then I think that overall sort of captures what we are expecting as we look into our fourth quarter.
Speaker Change: Okay I appreciate all the detail there.
Speaker Change: I respect that you don't have a fiscal 'twenty five guide out yet, but based on current end market visibility and your operating position.
Or any reason to think that.
Speaker Change: Top and bottom line growth is not in play for next year and then looking forward.
Speaker Change: Given all the work that's been done.
Speaker Change: The operating momentum that I know your team has are you willing to speak to a new medium term EBITDA margin targets or entitlements margin anything of that sort.
Yes, so certainly as we've said in past years, our 2025 guidance will be provided with our fourth quarter earnings announcement.
Speaker Change: But overall just to address your question look we do think we've got the right synergies for sales and margin growth next year certainly looking at the first nine months of 2024 as well as the outlook that we've given for the full year, we think we have.
Speaker Change: Demonstrated a notable improvement with our margin performance.
Speaker Change: And are on track to receive a record sales as you know we initially expected that we would not see sales growth largely due to some of the year over year comparisons and the fulfillment of the backlog we had in 2023, but I think with our most recent recent guidance you see that we are.
Speaker Change: Forecasting very low but sales growth for the full year.
Speaker Change: The adjusted EBITDA margin.
Speaker Change: Has improved notably as we've looked through the first nine months and we are certainly seeing improved operational performance with our second quarter with gross margin above 36%.
Speaker Change: Looking to 2025, I think one of the areas that we've called out is we do expect to be in a position to close our old brass foundry ads.
Speaker Change: The ramp up of our new brass foundry should be substantially complete we have said, we expect that to be at the end of calendar 2024 and <unk>.
Speaker Change: Once that all the old brass foundry is closed that should give us a.
Speaker Change: Benefit.
Speaker Change: We have been carrying as duplicative costs with both of the breath boundaries open. So I think that will have continued commercial execution will be focused on our price cost.
Looking to continue to benefit from the operational improvements that we've had.
Speaker Change: With respect to our end markets and Thats, where it can be a little more challenging at this point in time to project where that goes.
Speaker Change: Thus far we felt that the municipal repair and replacement market has been has been fairly resilient.
Speaker Change: With respect to residential construction.
Speaker Change: I think it's.
Speaker Change: Certainly been improved and 24 versus <unk> 23, and there are at least our expectations in the market that way.
Speaker Change: We will see an interest rate cut.
Speaker Change: Coming up shortly which certainly could have an impact on mortgage rates.
Speaker Change: We as a team remains very focused on what we can control. We are very focused on our overall customer experience continuing to strengthen our customer relationships. We are continually focused on how we can improve our operations as we go forward and then I think the one other piece that I want to touch on as we think about.
Speaker Change: 2025, we will certainly be any benefits that we might.
Speaker Change: <unk> from the infrastructure Dell.
Speaker Change: As we've said, we really didn't expect to see any benefits from that in 2000 and for looking for that to come sometime probably in 2025, and particularly first with benefits coming from the lead service line replacement. So I think that will be another factor that we could see in 2025.
Speaker Change: Understood I appreciate all the color. Thank you.
Speaker Change: Thank you and our next.
Speaker Change: Question comes from Mike Halloran with Baird. Your line is open.
Mike Halloran: Hey, good morning, everyone.
Mike Halloran: Hey, good morning.
Mike Halloran: Hey, Thanks, So you talked about the resilience of demand maybe you could just point to what what youre seeing in the marketplace that gives you confidence to say that I mean.
The commentary in the quarter. So is this about orders more what are the what are the customers, saying what are you seeing from a from a front log perspectives.
Speaker Change: Funding from a from a regulatory perspective would a land developer, saying any kind of context beyond just the one of the comments you gave would be great.
Speaker Change: Yeah. So let me let me see what I can do just to give you probably.
Speaker Change: Maybe a little bit more.
Speaker Change: Context around it if I break it down into the end of the market.
Speaker Change: I think enter in and around your municipal repair and replacement.
Speaker Change: As I just said, we think it's a fairly.
Speaker Change: Resilient I would say less cyclical market I think certainly.
Speaker Change: The aging infrastructure and Thats, obviously, a theme we've been talking about for a long time, but I think certainly the the aging infrastructure and certainly as you see stories across the U S where various.
Speaker Change: Cities are experiencing the challenges when when they say the water main breaks and other things that certainly impact all of their citizens.
Speaker Change: As you know.
Speaker Change: The funding for water really comes at a very local level. So we're certainly looking at a lot of those local factors for the municipalities, which the aging infrastructure, we've talked about whatever the population dynamics are overall the health.
Speaker Change: Of the funding as well as it could be water sources sources as well for those local municipalities.
Speaker Change: <unk>.
Speaker Change: Yes.
Speaker Change: I will.
Speaker Change: Comment briefly on with the upcoming election, and I think the.
Speaker Change: What could we think about with any uncertainty given around given the upcoming election I think overall the infrastructure Bill as we think about it generally both parties have been supportive.
Speaker Change: The infrastructure Dell both have been.
Speaker Change: <unk> emphasized a lead service line replacement.
But I think as we are in that period, it could be sort of a.
Speaker Change: Very very short term.
Speaker Change: Uncertainty in and around that.
Speaker Change: To try to delve a little bit deeper on on the residential construction market I think as we overall look at where housing starts are and I know some of the more recent.
Speaker Change: Rod based.
Speaker Change: Forecast in and around housing starts were probably slightly lowered for 'twenty four from where they previously were but I think within that single family housing starts have have been stronger than the multifamily housing starts.
Speaker Change: Certainly look very closely as you were identifying with the homebuilders and where they are with their investments in with their inventory levels.
Speaker Change: And I think.
Speaker Change: We don't see an overbuilding or get a sense that there is an overbuilding with lot availability at this point.
Speaker Change: Probably the one other thing that I'll call out on there are two other things I want to call out on the resi side. One is certainly with residential construction, we see stronger pockets across the U S probably with the south.
Speaker Change: Southwest in parts of the west certainly being the stronger areas.
Speaker Change: In terms of residential construction activity and I think probably the challenge that is out there for the longer term is really the employee construction availability as we look to where demand could be for residential construction.
Speaker Change: As well as demand that could be there with overall the infrastructure bill and the increased construction demand that could come from that.
Speaker Change: Great Super helpful. And then net leverage below one finish line is in sight on some of the major capital projects.
It's been pretty consuming the last couple of years here. How are you thinking about capital deployment on a forward basis prioritization change at all.
Speaker Change: The organic first but more of the the buyback M&A side and on the army side, what the funnel might look like today.
Yes, so Mike on that I'm going to ask Paul to.
Paul Mcandrew: Take the question in terms of looking out at overall RV.
Paul Mcandrew: Our views around capital investment.
Mike This is Paul.
Paul Mcandrew: I think you hit the nail we've made large investments there come into an end so but obviously we are vertically integrated as a manufacturing organization. So we have to continue to invest within our four walls of our manufacturing facilities.
Speaker Change: So I think we're in a good position to continue investing in those continue to grow from an organic perspective.
Speaker Change: From an inorganic perspective, obviously, we're looking at all opportunities to deploy our capital.
Speaker Change: We get the best returns.
Speaker Change: I think we will continue working those relationships, but in terms of our manufacturing capital, we're going to get back to a kind of normalized level, rather than kind of mid three 5% to 4% of sales.
In terms of how we invest or reinvest in our facilities and our new product development.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question comes from Deane Dray with RBC capital markets. Your line is open.
Deane Dray: Thank you and good morning, everyone.
Deane Dray: Maybe we can start with a little level set on some of the demand dynamics. This quarter. If you recall in this last quarter. Your fiscal second quarter, you talked about some potential benefit of pull in from this fiscal third quarter because of a price increase.
Speaker Change: So if we were looking for any evidence of that certainly didn't see it today in the fiscal third quarter, there wasn't like a gap.
Speaker Change: <unk> sales have been pulled forward. So just how does that dynamic play out is that does that say anything about the fourth quarter, but be really interested in starting there. Thanks.
Speaker Change: Yes, So let me I'll kick off with that and you're exactly right. If you go back to our second quarter.
Carl: Carl and with the announced an effective price increase that we had.
Carl: Across most of our our iron products in the second quarter, we did call out that we felt that we got some pull forward of demand into our second quarter.
Carl: Largely due to the orders that came and importantly, the orders that came in as a result of the price increase and importantly, our ability to execute on those short cycle orders, particularly iron gate valves and hydrants as we've gotten our lead times back down to being more normalized so with respect to the third quarter.
And what we saw with the strong net sales growth at about 9%.
Carl: <unk>.
As we look at the third quarter, we really saw a stronger end market demand and I would say we had expected back in the in the May timeframe.
Speaker Change: Got it.
Speaker Change: And then just can we put the spotlight on Crouch.
Speaker Change: This has been a fabulous investment and just when we think about all the dynamics of the aging water infrastructure water main breaks that's exactly where crouse shines.
Speaker Change: How do you address the geopolitical risk given their location.
Speaker Change: This is not a one time phenomenon, but as you can project. This out for multiple years. So how do you de risk crowds in terms of where they are located today and.
Speaker Change: Are there any near term plans to address it.
Speaker Change: Hey, good morning, Deane this is Paul.
Paul Mcandrew: Yes, so just as a reminder, the cross product line.
Speaker Change: Less than 10%, although consolidated sales.
Speaker Change: And the team have done a fantastic job of Derisking, not just within country, but.
Speaker Change: The manufacturing location sources perspective, but.
Speaker Change: Longer term.
Speaker Change: We have seen significant improvements in terms of the output from the closed facilities.
Speaker Change: And we internally are going to have to look at how we can de risk as much as possible.
Speaker Change: But you are correct in terms of this is a great product line great acquisition for the company, but the team in Israel has done a fantastic job in terms of how they've been able to pivot and flex and increase production over the last few months.
Speaker Change: Yes, and probably I think the other thing I just want to add on is that we have made the determination for some of the additional investments that we want to make because we are.
Speaker Change: Focused as well on meeting our customer demand there. So we have chosen to.
Speaker Change: To invest invest invest more there because we are intently focused on the customer demand piece of it but.
Speaker Change: We do expect that we will as we look into our fourth quarter and beyond that we will continue to hire have higher investment in and around the <unk> product line.
Speaker Change: Thank you.
Speaker Change: Thanks, Thank you and our next question comes from Joe Giordano with TD Cowen Your line is open.
Joe Giordano: Hey, good morning, guys.
Speaker Change: As you as you start to think through like what 2025 will look like.
Speaker Change: The volatility of the guidance here in the last year or so has been pretty high just given supply chain stuff in the underlying markets.
Speaker Change: The thing is going on with the new asset.
Speaker Change: Asset refresh.
Speaker Change: Do you feel more confident in our ability to like dial it in a little bit tighter now than probably.
Speaker Change: I guess, the underlying markets arent moving as much as the guidance is moving lately. So.
Speaker Change: How are you feeling about that and the ability to set like a tighter band into next year.
Speaker Change: Well look I think I think overall, we are very pleased that we've seen the sales growth and the strong margins that we've seen I'd say, particularly in our second and third quarter.
Speaker Change: This year I think some of the outperformance as I just discussed.
Versus the May guidance that we gave that was driven I'd say largely by.
Speaker Change: Few things that I'll tie and one as I just said, we think that the end market demand was stronger than we had expected.
Speaker Change: Coupled with that I think from an execution perspective.
Speaker Change: We were able to meet that demand largely.
Speaker Change: With our short cycle products and I'll focus here in and around Iron gate valves, and hydrants, and I think importantly, with that with the ability to to.
Speaker Change: To see the order levels come in to have the execution from an operational perspective, and certainly that represents an important piece of our of our mix and so I think those that is largely what was it one of the factors for the performance that we had.
Speaker Change: In the quarter, so certainly as I as we just discussed.
Speaker Change: We have seen.
Speaker Change: Through the first nine months of this year, a notable improvement in our margins.
Speaker Change: And I think that that that improvement is certainly something that we will look to.
Speaker Change: To retain and grow from where we are we had talked.
Speaker Change: A lot about getting to back to our pre pandemic margins and I think <unk> seen with the performance through the first nine months of this year that we are above our pre pandemic margins looking at gross margin as well as looking at our EBITDA margin at this time.
Speaker Change: Okay and now that you have the permanent team in place you have the balance sheet very flexible like how do you think about the growth vectors like what is this company going to look like in the future right. I mean, I think it's fair to say that some of the faster growth.
Speaker Change: Technology type applications.
Speaker Change: Kind of underwhelmed in terms of scaling in and in terms of like the magnitude of impact that has to be organization. So as you sit here. Unlike a good foundation of core businesses that have big market share how do you like evolve the company moving forward.
Speaker Change: So, yes, so as we look out and.
Speaker Change: And think about the future I think first of all.
Speaker Change: If we look historically if.
Speaker Change: If I go back, let's say over the last six seven years, we probably had a net sales growth in and around the range of 6% I think that's been reflective of both end market strength.
Speaker Change: As well as our ability to manage price realization over that period.
Speaker Change: With respect to the overall brands that we have we've got leading brands as we've long discussed in the market place. We are very focused on our customers and the customer experience.
Speaker Change: To continue to strengthen those customer relationships I think as we look out to the future and I know I just touched on this in one of the questions I think in and around the infrastructure Bill, which highlights at a federal level the need for investment in our aging water infrastructure.
Speaker Change: That coupled with the increasing level of challenges across many utilities I think that <unk>.
Speaker Change: Highlights the importance of making the investment in our infrastructure with some additional coming at the fund at the federal level.
Which is important opt.
Operationally we have been.
Speaker Change: And we're coming to the end of a period of investment.
Speaker Change: With our three large capital projects importantly, I think all of those investments have been domestic and I think that ties in nicely when you look at.
Continued federal initiatives, such as the American Iron and Steel Act and build America by America provisions that we have.
Speaker Change: See I think that certainly positions us well for that.
Speaker Change: We have talks across our technology businesses, and our strength with an infrastructure and we will continue to look to bridge.
Speaker Change: And reinforce our infrastructure with more smart infrastructure as we look out over the longer term. So I think as you say from a.
Speaker Change: Capital and our balance sheet perspective.
Speaker Change: And a very strong position.
With <unk>, we have no debt due before 2029 and with our fixed rate debt. We are currently running at 4%.
Speaker Change: It gives us.
Speaker Change: Very flexible structure with with capacity and we feel that we are are very well positioned and will continue to have a focus in and around our our capital allocation and capital deployment as.
Speaker Change: As well.
Speaker Change: Thank you.
Speaker Change: Thank you guys. Another quick reminder, if you'd like to ask a question. Please press Star then one our next question comes from Brian Lee with Goldman Sachs. Your line is open.
Speaker Change: Hey, good morning, everyone. Thanks for taking the questions good morning, Brian.
Brian Lee: Good morning, just I guess first I had a couple of modeling ones.
Brian Lee: When we think about.
Speaker Change: The nice execution here in <unk>, and then the solid guidance for for Q <unk>.
Brian Lee: You're tracking sort of high single digit year on year revenue growth I know pricing.
We're mentioning it is quite robust but the.
Across all product lines, and you're also talking about a pretty healthy order backdrop can you help parse out for US just as we think about I know youre not going to give us fiscal 'twenty five guy, but what what are sort of the puts and takes between what youre seeing in terms of volume growth today versus what you are getting on top of what you would typically.
Speaker Change: Getting the price just trying to parse through what what.
Speaker Change: Maybe price versus volume at this point.
Yeah.
Speaker Change:
Speaker Change: So I think.
Speaker Change: Do we need to parse that a little debt because certainly for the full year.
Speaker Change: With the most recent guide were up 7% to one 5%, but certainly our first quarter.
Speaker Change: We did see net sales down on a year over year basis.
Speaker Change: Yes.
Speaker Change: Quickly reverting to that just reminding everybody that that down sales in the first quarter was what.
Speaker Change: What was continued destocking.
Speaker Change: Largely by the distributors, which impacted that piece I think overall when we look at our.
Speaker Change: Pricing as we said we did have a price increase across most of our iron products that was announced during our.
Speaker Change: Second quarter.
Speaker Change: I think as we said we did see.
Speaker Change: See higher pricing across most of our product lines again this quarter in.
Speaker Change: And importantly, we saw strong volume growth at our water flow solutions.
Speaker Change: I will call out that on water management solutions, a couple of headwinds there in the third quarter from a volume perspective.
Speaker Change: One was hydrants, but again I've got going into a little bit of history here.
Speaker Change: And that's really largely due to the year over year comparisons because if we go back to the third quarter of 2023.
Speaker Change: Hydrants.
Speaker Change: Volumes were still impacted by servicing the higher level of backlog the backlog that we continue to carry in 2023. So as we look at the hydrants on a year over year basis volume was down, but we think as we move forward now we think that that.
Speaker Change: Working from the backlog from 2023 for hydrants had pretty much completed by the end of our third quarter, though now as we look forward, we're really seeing more of the orders and shipments for the short cycle products.
Speaker Change: Being in line with each other.
Speaker Change:
Speaker Change: I think let me see if I have hit so.
Speaker Change: That's it from a volume perspective, so I think as we move into the guidance, we've just given from the fourth quarter.
Speaker Change: And I think looking at it on a year over year basis, I think we expect to see benefits.
Speaker Change: From both pricing as well as volume.
Speaker Change: And then I think importantly, as we as we look out to 2025, but importantly look beyond I think it will certainly look to the end markets and where we are.
Speaker Change: See continued resilience and demand growth and then our teams as well we've always been very focused in and around the price cost relationship with margin preservation.
Speaker Change: To look to have pricing more than cover any inflation that we're seeing and preserve our margin.
Speaker Change: Okay. Thank you and our next question comes from Walter Liptak with Seaport Research. Your line is open.
Walter Liptak: Hey, Thanks, good morning, guys.
Speaker Change: Good morning.
Walter Liptak: Good morning, just wanted to ask about.
Speaker Change: The.
Walter Liptak: The demand trends were were pretty good this quarter and you called out.
Kind of customer service levels and doing focus there I'm wondering if you are.
Walter Liptak: Back some market share or if you think the municipal markets are seeing more money flows.
Walter Liptak: More projects.
Walter Liptak: Hey, good morning, Walt this is Paul.
Paul Mcandrew: You're correct, we did see her.
Speaker Change: Healthy healthy demand in Q3.
Speaker Change: From a customer service perspective.
Speaker Change: Back to normalized lead time levels across the majority of our business we continue to.
Speaker Change: Take down these service plus backlog and anticipate by the end of Q4 that would be at normalized levels. So from a <unk>.
Speaker Change: Customer experience perspective, our orders and sales.
Speaker Change: And priority now as we've kind of drove down our backlog perspective.
Speaker Change: From an end user perspective.
Speaker Change: The only demand residential demand.
Speaker Change: Yeah.
Speaker Change: At the forefront then.
Speaker Change: The order perspective.
Speaker Change: So we think we've positioned ourselves well with our customers and end users to be given them the customer service experience they deserve and that's been evidenced in our healthy demand.
Speaker Change: Okay, alright, good that makes sense.
Speaker Change: And then I wanted to ask two.
Speaker Change:
Speaker Change: About the.
Speaker Change: Couple of quarters ago.
Speaker Change: You guys were talking about the.
Speaker Change: $25 million cost reduction and getting the full benefits are we now seeing the full benefits of prior cost reduction and.
Speaker Change: And when do we start anniversarying those benefits.
Steve: Well this is Steve.
Steve: Yes, you are right in the third quarter of 2023, we did do a restructuring that impacted.
Speaker Change: Many areas of our business, including our sales organization and our corporate organization.
Speaker Change: We took actions to streamline our expenses.
Speaker Change: So to improve the way, we manage our business, giving our business leaders a connection to the sales force.
And markets better we.
Speaker Change: Do believe that we achieve the $25 million in annual SG&A savings.
Speaker Change: I mentioned at the time of mainly in lower personnel related expenses and third party fees and our annual guidance for total SG&A prior to announcing a cost actions was $260 million.
Speaker Change: The midpoint, which is <unk>.
Speaker Change: About $10 million lower than our updated 2020 for SG&A guidance excuse me fire.
Speaker Change: Our fiscal 2020 guidance.
Speaker Change: Going forward, we're going to continue to look at SG&A with discipline and make appropriate investments in our SG&A over time.
<unk>.
Speaker Change: And so we don't do we do believe that we deliver to achieve that.
Speaker Change: As you can see in our guidance.
Speaker Change: We have.
Speaker Change: We're guiding between $240 million to $250 million of SG&A.
Speaker Change: We're experiencing some inflationary pressures in the fourth quarter as you can imagine related to higher incentive compensation and personnel investments.
Speaker Change: That we're experiencing in this quarter, but we've had improved SG&A performance year over year.
Speaker Change: Okay, Great and maybe just the last one for me it sounds like you are winding down the old brass foundry.
Speaker Change: Probably right about now or soon are there any risks.
Speaker Change: The fourth quarters.
Speaker Change: Inventory levels are.
Speaker Change: <unk> or anything like that as you go through the final wind down.
Speaker Change: Good morning, Walt this is Paul you're correct, we are going through the final wind down now just as a reminder, the new foundry is running the majority of our volume part numbers.
Speaker Change: The team continue doing a fantastic job as we transition from the old firm due to the new so we anticipate between now and the end of the calendar year, we will continue to <unk> development.
Speaker Change: <unk> approval of the remaining part numbers.
Speaker Change: Running the old foundry.
Speaker Change: And obviously it will be a step change then we would take the one shift that we are running and the old foundry stopped.
Speaker Change: Stopped our production with the anticipation of doing that by the end of the calendar year.
Speaker Change: So from a cost impact, we don't see anything in our forecast but.
Speaker Change: The benefit that as we move into FY 'twenty, five Q2 and beyond.
Speaker Change: Kind of modeled and we anticipate 80 to 100 basis points improvement to the consolidated financials. Once we close the cell phone on a gross margin basis.
Oh, that's great. Okay, yeah, thanks, very much for that detail.
Speaker Change: Alright, well look we certainly think I appreciate everybody's participation today.
Speaker Change: As we said very pleased with the third quarter results.
Speaker Change #100: We posted and are.
Speaker Change #100: Updated and increased guidance as we look out to the full year.
Speaker Change #101: We really think the Mueller team for their continued dedication and hard work.
Speaker Change #101: We are have made progress operationally and we will continue to look to make improvements as we can across the business.
Speaker Change #101: And control, what we can control and certainly look to benefit from.
Speaker Change #101: The federal infrastructure, Bill as that looks to come into play.
Speaker Change #101: As well as importantly, addressing the aging infrastructure.
Speaker Change #101: <unk> North America.
Speaker Change #102: Thank you.
Speaker Change #103: Thank you and that concludes today's conference you may all disconnect at this time.