Q1 2025 Mueller Water Products Inc Earnings Call
Welcome and thank you for standing by your lines have been placed on a listen only mode until the question and answer session at that time, if you would like to ask a question you May Press Star. One today's conference is being recorded if you have any objections you may disconnect at this time and now I'll turn the call over to Whit Kincaid you may begin.
Whit Kincaid: Good morning, everyone. Thank you for joining us on your water products first quarter conference call Yes.
Whit Kincaid: Yesterday afternoon, we issued our press release reporting results of operations for the quarter ended December 31 2024.
Whit Kincaid: A copy of the press release is available on our website in your water products Dot com.
Marty: Joined this morning by Marty <unk>, our Chief Executive Officer, Paul Mcandrew, our President and Chief operating Officer, and Steve Hydro <unk>, Our Chief Financial Officer, and Chief Legal Officer.
Marty: Following our prepared remarks, we will address questions related to the information covered on the call.
Marty: A reminder, please keep to one question and a follow up and then return to the queue.
Marty: 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. They also address forward looking statements and our non-GAAP disclosure requirements.
Marty: At this time, please refer to slide two.
Marty: This slide identifies non-GAAP financial measures referenced in our press release on our slides at all let's call it.
Marty: Discloses the reasons why we believe that these measures provide useful information to investors.
Marty: Reconciliations between non-GAAP and GAAP financial measures are included in the supplemental information that our press release and on our website.
Marty: Slide three addresses forward looking statements made on this call.
Marty: This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward looking statements.
Marty: Please review slides two and three in their entirety.
Marty: During this call all references to a specific year or quarter unless specified otherwise refer to our fiscal year, which ends the 30th September.
Marty: A replay of this morning's call will be available for 30 days at 18665111891, the archived webcast and corresponding slides will be available for at least 90 days on the Investor Relations section of our website I'll now turn the call over to Marty.
Marty: Thanks, Good morning, everyone. Thank you for joining our quarterly earnings call I'll start with a brief overview of our first quarter performance we.
Marty: We are very pleased with our strong start to the year, we achieved record first quarter results for adjusted EBITDA and adjusted net income per diluted share.
Marty: Our net sales growth of 18.7% exceeded expectations as we experienced healthy order levels supported by resilient end market demand and our focus on delivering outstanding customer service.
Marty: Our disciplined execution on higher volumes led to a record first quarter adjusted EBITDA and a 340 basis points year over year improvement in our adjusted EBITDA margin.
Marty: We achieved a record first quarter adjusted net income per diluted share of 25 cents.
Marty: An increase of 92% compared to the prior year.
Marty: We generated $42 million of free cash flow in the quarter after allocating $12 million towards capital expenditures.
Marty: These results were due to great execution from our teams as we lapped an abnormally strong first quarter, our free cash flow generation last year.
Marty: We are increasing our guidance for 2025 net sales and adjusted EBITDA, primarily to reflect our strong first quarter results and benefits from recent price actions.
Our guidance deliveries gross and adjusted EBITDA margin gains this year supported by our operational and commercial initiatives.
Marty: <unk> the anticipated benefits from the recent closure of our legacy brass foundry.
Marty: Our updated guidance does not include any potential cost increases or impacts associated with the recently announced tariffs.
Marty: Our latest price actions were communicated prior to the recently announced tariffs.
Marty: As a reminder, more than 90% of our annual sales are in the U S and we're largely vertically integrated for many of our major product categories.
Marty: We believe the proposed new tariffs would be a headwind that we could manage through with a combination of price actions and efficiencies as needed with our teams continuing to execute at a high level, including delivering benefits from our manufacturing and supply chain efficiencies I am confident that we can execute our COO.
Marty: Key strategies, while managing external challenges.
Marty: I am excited that our new CFO, Melissa Rasmuson will join Mueller early next month.
Marty: After a comprehensive search we are confident that she will help deliver long term value to shareholders. As a reminder, upon melissa's arrival, Steve will transition to a consulting role through the end of fiscal 2025 to help ensure a smooth transition.
Marty: Since this is Steve's last earnings call I want to take the time to thank him for his tremendous contributions over the years. He has provided strong leadership and counsel throughout his tenure, we all wish him the best in his future endeavors.
Paul: With that I'll now turn it over to Paul to address some of our commercial and operational insights.
Paul: Thanks, Bobby.
Speaker Change: Good morning, everyone, it's great to be with you.
Paul: I'm excited about how we started the year.
Paul: Order levels exceeded our expectations, mainly for our short cycle Iron gate valves and hydrants.
Paul: With normalized lead times, the strong execution of our commercial and operations teams enabled us to do a great job fulfilling these orders during the quarter.
Paul: We achieved an exciting milestone at the end of the first quarter when.
Paul: When we ceased melting and casting operations, although legacy brass foundry.
Paul: And transition production to a state of the art foundry.
Paul: Our teams are working to decommission the foundry side.
Paul: Which drove the inventory and other write downs at water flow solutions in the first quarter.
Paul: We continue to expect the closure of the legacy foundry to generate an 8200 basis point annualized improvement in our gross margin starting in the second half of 2025, thanks to our teams great execution, we largely work through our elevated backlog of service brass products in the first quarter.
Paul: With normalized lead times for these products going forward, we anticipate that with experience year over year volume headwinds over the next few quarters, a channel on customer inventory levels normalize.
Paul: We remain excited about the multi year volume and margin expansion opportunity in front of us as we ramp up our capabilities and efficiencies at the new foundry.
Paul: As expected during the first quarter, we continued to experience headwinds from krausz repair products relative to the prior year quarter.
Paul: As a result of the Israel Hamas rule.
Paul: Our team is focused on improving our supply chain partnerships.
Paul: And ramping up production levels has helped us to decrease our lead times and we are beginning to reduce elevated backlog levels.
Paul: With our customers and employees is our main priorities, we expect to continue to experience margin headwinds throughout the year as we reduce backlog through increased production with a focus on delivering outstanding customer service. Our teams are improving operational excellence increase in supply chain efficiencies.
Paul: And developing advanced manufacturing capabilities to drive productivity across our facilities.
We are poised to benefit from disciplined investments in our commercial and operations capabilities.
Paul: Along with the closure of the legacy brass foundry.
Paul: For 2025, our increased expectations in play more than a 200 basis point year over year improvement in gross margin at the midpoint of our guidance.
Paul: With that I'll turn it over to Steve. So you can take you through the financials.
Steve: Thanks, Paul and good morning, everyone for the first quarter consolidated net sales increased 18, 7% to $304 $3 million compared with the prior year.
Steve: This increase was primarily due to higher volumes, mainly for iron gate valves, hydrants, and specialty valves as well as higher pricing across most of our product lines.
Steve: As we've mentioned in previous quarters, our lead times and backlogs for Iron gate valves and hydrants, a normalized so year over year volume increases at water flow solutions and water management solutions include the benefit from lapping the channel and customer Destocking in the prior year.
Steve: The increase in specialty valve volumes benefited from lapping the production challenges we experienced in the prior year in the first quarter gross profit of $103 million increased 19, 4% compared with the prior year and gross margin of 33, 8% increased 10 basis points year over year.
Steve: Benefits from higher volumes favorable price cost and improved manufacturing performance more than offset write downs associated with the closure of our legacy brass foundry at water flow solutions as well as impacts of Israel, Hamas war on repair products and water management solutions.
Steve: Excluding $3 $3 million in write downs associated with our legacy brass foundry closure, our gross margin was 34, 9%, a 120 basis point improvement compared with the prior year.
Steve: For the quarter total SG&A expenses of $53 $9 million were $3 million lower than the prior year.
Steve: This decrease was primarily driven by lower amortization expense and favorable foreign exchange, partially offset by inflationary pressures higher third party fees and personnel related costs.
Steve: Operating income increased 107, 9% in the quarter to $47 $4 million compared with the prior year.
Steve: Operating income includes $1 $7 million of strategic reorganization and other charges primarily related to the leadership transition and severance.
Steve: Additionally, we incurred $3 $3 million in inventory and other asset write downs associated with the closure of our legacy brass foundry.
Steve: Both of these items have been excluded from adjusted results.
Steve: Turning now to our consolidated non-GAAP results for the quarter.
Steve: Adjusted operating income in the first quarter was $52 $4 million, an increase of 78, 2% compared with the prior year.
Steve: The increase was primarily due to higher gross profit and lower total SG&A expenses, our adjusted operating margin improved 570 basis points to 17, 2% compared with the prior year.
Steve: Adjusted EBITDA came in at $63 $5 billion, an increase of 41, 7% in the quarter.
Steve: We achieved an adjusted EBITDA margin of 29% in the quarter, which was 340 basis points higher than the prior year and slightly better on a sequential basis.
Steve: These are first quarter record levels for adjusted EBITDA and adjusted EBITDA margin.
Steve: For the last 12 months adjusted EBITDA was $303 $4 million or 22, 3% of net sales of 560 basis point improvement compared with the prior 12 month period.
Steve: Net interest expense in the first quarter declined $1.7 million year over year to $1.6 million, primarily due to higher interest income.
Steve: Our effective tax rate increased for the quarter to 22, 9% as compared with 15, 4% in the prior year.
Steve: As a reminder, our income tax rate in the prior year benefited from a $1 $6 million income tax benefit associated with the exploration of an uncertain tax position.
Steve: This tax benefit was offset by the release of a $1 $6 million indemnification receivable in other expense.
Steve: Excluding the tax benefit our effective tax rate this quarter was comparable to the prior year quarter.
Steve: For the quarter, we increased adjusted net income per diluted share by 92, 3% to 25 sets compared with the prior year. This is a record for our first quarter.
Steve: Turning now to quarterly segment performance, starting with water flow solutions.
Steve: Net sales increased 23, 6% to $174 $6 million compared with the prior year, primarily due to higher volumes of iron gate and specialty valves as well as higher pricing across most product lines.
Steve: With normalized lead times strong net sales growth for iron gate valves benefited from healthy order levels as well as lapping low orders and shipments in the prior year, which were primarily due to channel and customer inventory destocking.
Steve: Specialty valve volumes benefited from lapping the production challenges we experienced in the prior year.
Steve: Adjusted operating income increased to 49% to $38 $6 million in the quarter.
Steve: The benefits from higher volumes, lower amortization and favorable price cost more than offset higher SG&A expenses and unfavorable manufacturing performance.
Steve: Manufacturing performance included the inefficiencies associated with operating two breath foundries and prior year benefits associated with serving an elevated backlog for service brass products during the first quarter of last year.
Steve: Adjusted EBITDA increased 21, 8% to $44 $7 million and adjusted EBITDA margin was 25, 6% compared with 26% in the prior year.
Steve: Turning to quarterly results for water management solutions.
Steve: Net sales increased to 12, 7% to $129 $7 million compared with the prior year.
Steve: This increase was primarily due to higher volumes of hydrogen as well as higher pricing across most product lines.
Steve: Similar to Iron Gate valves strong net sales growth for hydro, it's benefited from normalized lead times and healthy order levels as well as lapping low orders and shipments in the prior year, which were primarily due to channel and customer inventory destocking.
Steve: Adjusted operating income increased 82, 8% to $27 $6 million in the quarter due to benefits from higher volumes favorable manufacturing performance lower SG&A expenses, including benefits from amortization and foreign exchange and favorable price cost, which more than offset the impacts of the Israel Hamas.
Speaker Change: For our apparel products.
Speaker Change: Adjusted EBITDA for the quarter increased 47, 5% to $32 $6 million with adjusted EBITDA margin, improving 590 basis points to 25, 1%.
Speaker Change: Moving onto cash flow.
Net cash provided by operating activities for the quarter was $54 1 million, a decrease of $13 $8 million compared with the prior year period.
Speaker Change: The decrease was primarily driven by changes in working capital, including other current liabilities such as incentive compensation, partially offset by higher net income.
Speaker Change: As a reminder, our payables increased in the first quarter of last year largely related to delays caused by the cyber security incident.
Speaker Change: We invested $11 $9 million in capital expenditures in the first quarter as compared with $5 $7 million in the prior year.
Speaker Change: This increase was primarily driven by increased expenditures in our foundries and timing and spending in the prior year.
Speaker Change: Our free cash flow for the first quarter decreased $20 million to $42 $2 million compared with the prior year due to the decrease in net cash provided by operating activities and higher capital expenditures.
Speaker Change: For the first quarter free cash flow as a percent of adjusted net income was 108%.
Speaker Change: At the end of the first quarter, our total debt outstanding was $449 5 million and we had cash and cash equivalents of $338 $2 million.
Speaker Change: We continue to have a strong and flexible balance sheet with a net debt leverage ratio below one.
Speaker Change: No debt maturities until June 2029, and $450 million senior notes at a 4% fixed interest rate.
Speaker Change: We did not have any borrowings under our ABL at quarter end motor we borrow any amounts under our ABL during the quarter.
Speaker Change: We ended the quarter with a half a billion dollars of total liquidity, including $163 million of excess availability under the ABL.
Speaker Change: I will now review our increased outlook for 2025.
Speaker Change: We are increasing our guidance for both consolidated net sales and adjusted EBITDA.
Speaker Change: We now expect consolidated net sales to be between 1.37 and $1 $39 billion, which.
Speaker Change: Which represents a year over year increase between 4.2 and five 7%.
Speaker Change: This guidance takes into account our first quarter performance.
Speaker Change: <unk> benefits from recent price actions for many of our products and current expectations for end market demand.
Speaker Change: In addition to raising our net sales expectations, we are increasing our guidance for adjusted EBITDA to reflect our first quarter performance and updated expectations for net sales and total SG&A expenses.
Speaker Change: We now expect that our adjusted EBITDA will range between 310 and $315 million reflecting year.
Speaker Change: Year over year growth of eight 9% to 10, 6%.
Speaker Change: This achieves a 22, 6% adjusted EBITDA margin for the year at the midpoint of our guidance range, reflecting a 90 basis point year over year improvement.
Speaker Change: We continue to expect our second half adjusted EBITDA margin to be significantly higher than the first half.
Speaker Change: This is primarily driven by the seasonality of net sales and continuing manufacturing performance improvements, including anticipated benefits from the closure of our legacy brass foundry, along with operational and supply chain efficiencies.
Speaker Change: We are maintaining our free cash flow expectations to be more than 80% of adjusted net income in 2025.
Speaker Change: This outlook continues to assume our capital expenditures are between 45 and $50 million for the year.
Speaker Change: As Mory mentioned, our updated guidance does not include any potential impacts from the recently announced tariffs while the tariffs may impact our supply chain and increased costs, we would seek to secure alternative sourcing to mitigate costs or increased pricing as necessary.
Marty: With that I'll turn it back to Marty for closing comments.
Marty: Thanks, Steve I wanted to provide a few closing comments before opening it up for Q&A.
Marty: Thank you to all our employees around the world for their focused execution to start the year.
Marty: Their continued dedication and passion for helping our customers and communities is the engine for our future success.
Marty: We are pleased to be increasing our annual guidance for 2025, we are mindful of the uncertain external environment, including potential policy changes.
Marty: Two our teams disciplined focus on serving our customers and delivering on our key strategic priorities. We are poised to drive net sales growth and future margin improvements beyond 2025.
Marty: We have positioned ourselves to accelerate sales growth and capture the benefits from favorable long term end market growth trends, new product innovation and service. We believe we can capture the benefits from the investments needed to address the aging North American water infrastructure and the expected incremental spending associate.
Marty: With federal infrastructure, Bill, particularly with lead service line replacement projects.
Marty: We are continuing to drive operational improvements to deliver the benefits from our capital investments and expand our capabilities.
Marty: We are increasing 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.
Marty: With these strategies I am confident that the actions we are taking will further strengthen the alert for the long term.
Speaker Change: This concludes our comments operator, please open the line for questions.
Speaker Change: We will now begin the question and answer session. If you would like to ask a question. Please UN mute your phone press star one and record your name clearly to withdraw your question you May Press Star two.
Speaker Change: Again press Star one to ask a question and one moment. Please for our first question.
Speaker Change: I think our first question comes from Joe Giordano with J D.
Speaker Change: T D. Cowen. Your line is open you may ask your question.
Joe Giordano: Hey, guys good morning.
Speaker Change: I'm just curious like how are you thinking about well one whats the price embedded in the guidance and then like how are you thinking about volumes from here because the comps get very very different now that the lead times that normalized.
Speaker Change: And you kind of get past those those big declines from prior.
Speaker Change: Let me start off so as we look at the guidance that we have given for sales through the balance of 2025.
Speaker Change: Our sales guidance does assume benefits from both volume.
Speaker Change: As well as price.
Speaker Change: As we look at our 2025, we think we'll have normal seasonality in that normal seasonality as a reminder started between the construction and the non <unk>.
Speaker Change: <unk> seasons tend to see our lowest sales in Q1.
Speaker Change: The sequential increase in Q2, and then higher again in Q3.
Speaker Change: With respect to carryover pricing.
Speaker Change: Certainly benefited our first quarter as well as the price actions that we just announced.
Speaker Change: We do think that will benefit from price realization, probably somewhere in the low to mid single digit range.
Speaker Change: In and around volumes with respect to our guidance, we expect that growth from both iron gate valves and hydrants as we said we're back to normalized lead times, which helps us convert any order level activity into shipments.
Speaker Change: That said, we do expect some headwinds as we're lapping a record consolidated sales in second quarter.
Speaker Change: Additionally, we benefited from some of the elevated service brass backlog in the prior year and expect that will be a headwind. We think overall as we look at our end markets looking at residential construction.
Speaker Change: As well as the municipal end market.
Speaker Change: That there are there'll be primarily resilient, but I will note that theres a lot of uncertainty in and around the external environment.
Certainly with what we see in and around mortgage rates tariffs inflation global tensions labor availability and any potential policy changes I think the last comment I want to give you in and around the guidance is just a reminder that in the guidance we have.
Speaker Change: Not assumed any meaningful impact from the funding from the infrastructure Bill.
Interestingly that was gonna be my my follow up on the infrastructure funding like even though.
Speaker Change: Yeah.
Speaker Change: How do you get a read on your customers like for projects are things moving or are there is there a fear that like I don't even know if some of the stuff can be changed by like the thought of maybe we go in there and we change like we.
Speaker Change: We stopped funding for four led type of novel or we change implementation dates is it impacting the timing of.
Speaker Change: Breaking ground on certain new projects and customers.
Speaker Change: Hey, good morning, Joe and Paul we continue to monitor the infrastructure Bill and how many rfps continue to come through that.
Speaker Change: The other avenue that and we do see a trend of increasing of infrastructure build activity, but it's not that meaningful or material change from the prior quarters that we've discussed.
Speaker Change: I think the positive yet as we were we are very well positioned to supply from a b in the U S vertically integrated company.
Speaker Change: We don't anticipate any changes from the administration around the infrastructure Bill.
Speaker Change: Great. Thanks, guys.
Speaker Change: Thank you. Our next question comes from Brian Lee with Goldman Sachs. Your line is open you may ask your question.
Brian Lee: Hey, good morning, everyone. Thanks for taking the questions.
Brian Lee: Maybe just to follow up on the previous question just.
Speaker Change: You said at the outset, Marty that order levels exceeded expectations it sounds like.
Brian Lee: Outlook obviously.
Brian Lee: Appearing to be more robust given the guidance increase.
Brian Lee: Specifically called out short cycle Iron Gate valves hydrants could you kind of talk about.
Brian Lee: What what youre seeing there and the ordering environment how much of this is just the inventory cycle playing through how much of this is just.
Brian Lee: New organic demand ups.
Brian Lee: Upside to whatever expectations you might have been.
Brian Lee: Anticipating coming into the year.
Brian Lee: Yes, so I think.
Brian Lee: Fortunately and if we look at what it's.
Brian Lee: Then our excuse me, which are our short cycle products.
Largely will note that we have been back to normalized delivery patterns with respect our lead times I should say with respect to our iron gate valves and hydrants and.
Brian Lee: To dimension that that really is sort of that turnaround primarily of I'll say sort of two to four weeks between orders and shipments.
Brian Lee: So we had that in place for a while looking at the service bras.
Brian Lee: Products that we have which are a short cycle product we certainly.
Brian Lee: Through out our 2024, we knew we had elevated backlog levels, but worked throughout our 2024 to improve the lead times and bring down those backlog levels with respect to our service brass products and.
Brian Lee: Have pretty much moved back.
Brian Lee: Backlog levels to be more normalized.
Brian Lee: That said as we look out at our 2025 given that we.
Brian Lee: Servicing orders from our backlog in 2024, we could see that as being an impact for us in 2025 little bit similar to the impact that we have discussed with you all with respect our iron gate valves and hydrants, when we were still working through that piece of it.
Brian Lee:
Brian Lee: In and around sort of our overall.
Brian Lee: Overall, I'd say stocking levels from our distributors.
Brian Lee: I'm going to let Paul step in and comment on that yeah, just before I go to that just to add some color. You know, we took $60 million of service price backlog out in the prior year and that's predominantly to get back to the normalized lead times that both our customers on our end customers.
Brian Lee: Anticipate where we should be at.
Brian Lee: In terms of channel inventory stocking levels. We believe they are back to normalized levels, but there may be a short term headwind in terms of lapping from the service pass backlog reduction.
Speaker Change: Okay, Great Super helpful. I appreciate the context, and then maybe a quick follow up on.
Speaker Change: Yeah, Marty your comments around pricing I think you said.
Speaker Change: Youre embedding low single digit to mid single digit pricing.
Speaker Change: And the outlook here and part of the commentary on the improved outlook for the full year was was on pricing so.
Speaker Change: If I recall I think pricing typically.
Speaker Change: Youre more in the low single digit range. Historically, so has something changed in the mix or is there something happening on the pricing strategy or are you just getting.
Speaker Change: More price realization I guess heading into this year than you might've been anticipating and historically have seen just trying to understand that a little bit better. Thank you.
Speaker Change: Yeah, certainly so in and around the pricing I would say that in terms of price realization.
Speaker Change: I'd say no were not.
Speaker Change: Projecting anything different from what we have experienced in the past now I'm certainly going to call out.
Speaker Change: The period, where we were in the rapidly rising inflation, the very high levels of inflation certainly all of the challenges in and around.
Speaker Change: Covid delivery times et cetera, and certainly we'll remind you that we implemented a series of price increases.
Speaker Change: Few years back as we were.
Speaker Change: In essence catching up to what we were saying in at around inflation, but no with the commentary that I have just given a I would say in terms of what we have seen in and around price realization than what we have.
Speaker Change: Built in.
Speaker Change: As that sort of low to mid single I would say that is fairly comparable to what we've seen outside of that unusual period.
Speaker Change: Okay Fair enough I'll pass it on thank you.
Bryan Blair: Thank you. Our next question comes from Bryan Blair with Oppenheimer. Your line is open you may ask your question.
Bryan Blair: Thank you good morning, everyone.
Speaker Change: Good morning, Brian.
Speaker Change: As your team's framed the 80 to 100 basis points gross margin benefit from ramping the new brass foundry in closing the legacy plant at least run rate looking to the back half of this fiscal year, maybe touch on the commercial benefits.
Speaker Change: Of the new foundry seems like Youre gaining share.
Speaker Change: Or perhaps furthering pricing power is that the case and if so what role it might.
Speaker Change: The new standard to be playing in those dynamics.
Brian Lee: Good morning, Brian.
Speaker Change: You are right. We are kind of quantified the 80 to 100 basis points in terms of operational improvement than from closing the legacy brass foundry.
Speaker Change: Thank you from a commercial perspective, the advantages of the eco brass.
Speaker Change: And how that translates into a much more efficient foundry and our ability to service our customers.
Speaker Change: A much more improved manner.
Speaker Change: Those two things going together is going to allow us to be well positioned particularly for the lead service line replacement as that.
Speaker Change: Rolls out in the future.
Speaker Change: That's helpful color.
Speaker Change: And just to level set.
Speaker Change: I understand that day by day hour by hour.
Speaker Change: <unk>.
Speaker Change: You know things change in terms of the.
Speaker Change: Tariff backdrop.
Speaker Change: And dynamics.
And just the wells prior to mitigation be that pricing or otherwise what would the potential impact.
Speaker Change: <unk> threatens tariffs be at this point.
Speaker Change: Yeah, So let me.
Speaker Change: The.
Speaker Change: Address sort of how we are viewing tariffs and what we would say first of all I think.
Speaker Change: To level set well remind you that.
Speaker Change: In 2024, 92% of our net sales were in the U S. And we are largely vertically integrated for most of our major product categories and that includes iron gate valves hydrants and service brass products.
Speaker Change: As we look at sourcing we do have a facility in China.
Speaker Change: The facility in China supports our specialty valve business.
Speaker Change: And we do have a small amount of supply chain exposure to Mexico, and Canada I think importantly.
Speaker Change: With a lot of the <unk>.
Speaker Change: <unk> and announcements.
Speaker Change: In and around tariffs.
Speaker Change: Our teams are working diligently through various scenarios and that includes the most recently announced 10% tariff on Chinese goods.
Speaker Change: Again, specifically addressing Canada, Canada from a net sales perspective was about 6% of our 2024.
Speaker Change: Net sales.
Speaker Change: So I want to emphasize again that with the timing of the tariff announcements the guidance that we have just provided does not include any potential cost increases or impact associated with those tariffs.
Speaker Change: We will also reference set the price.
It's meant that we just made that was communicated prior to the announced tariffs.
Speaker Change: While we believe that any tariffs could increase cost we think that our exposure is manageable and we certainly think our competitors would certainly have feel some impact as well.
Speaker Change: I will tell you we have.
Against this before certainly if we go.
Previously when there were the Chinese tariffs were implemented during the previous Trump administration.
Speaker Change: We did see elevated costs associated with those prior tariffs and as part of the mitigation efforts, we increased prices for certain of our products, particularly specialty valves. We also executed some strategic sourcing sourcing initiatives.
Speaker Change: Our Kimball facility, which I know we've talked about has been one of our recent capital investments.
Speaker Change: That facility has been opened for a number of years. It is focused largely on our specialty valve products and that does increase our domestic manufacturing capabilities.
Speaker Change: We're going to continue to monitor what we see from our channel partners and end use customers to see what impact that there is but I think overall our sector had an industry.
Speaker Change: Of passing on cost increases over a period of time and although we do see any potential tariffs as being a headwind. We will certainly work to and are working through to manage them through a combination of pricing actions.
Speaker Change: As well as strategic sourcing initiatives as we need to as we need them.
Speaker Change: I appreciate all the color.
Speaker Change: Okay.
Speaker Change: Our next question.
Speaker Change: Your next question comes from Deane Dray with RBC capital markets. Your line is open you may ask your question.
Deane Dray: Thank you and good morning, everyone.
Speaker Change: Good morning Deane.
Speaker Change: I'd like to talk about the impact of the closure of the old foundry and I don't know if you had a closing ceremony, but you probably should have because it's a big deal. It's a big accomplishment to have gotten.
Speaker Change: That timing that you said and could you just clarify for the quarter.
Speaker Change: Or is there any outsourcing that was still done and as that rolls off.
Speaker Change: Can you just directionally tell us how much of that expense goes away.
Speaker Change: And then.
Speaker Change: Related to the closure of that facility I mean, it was operating for so many years.
Speaker Change: Are there any remediation risks that are that you have.
Speaker Change: Have you taken any reserves for that is there any reason that that might be a concern so kind of near term price cost relief and then longer term are there any liabilities that we should be aware of.
Paul: Hey, good morning. This is Paul.
Paul: In terms of the outsource and if I take that question first.
Paul: You've been reducing that two of the last 12 to 18 months as we've been ramping up the new foundry.
Paul: And.
<unk> all been eradicated.
Paul: Over the last.
Two or three quarters, which is part of the margin improvement we've seen.
Paul: So theres no real outsourcing going on now from a service price perspective.
Paul: The ability of close in the South foundry there were some inventory builds during that period.
Paul: Last quarter, then in terms of some products as we transition to the to the new foundry as we spoke about some of the lower running parts as we transition all of our tools.
Paul: In terms of legacy costs. So outstanding liabilities, we took about $3 3 million of costs in the quarter around inventory and asset write downs.
Paul: And we are going to be start and are working on the decommissioning of that old legacy facility.
Paul: And right now we don't have a specific estimate for any future onetime costs at this point.
Speaker Change: Good alright, Eric future remediation expenses decommission impossible Deminers demolition, but we are not estimate them at this point alright.
Paul: Provided us incur so so.
Speaker Change: The expenses, we recognize when we incur the expense.
Speaker Change: Got it alright, that's helpful. And then second question and Marty I really appreciate all the details you've given around the tariffs and in the scheme of things you guys are really well positioned there and you've already done all of that kind of thinking of where there might be some very modest exposure. So I. Appreciate how you calibrated that and just related.
With the New administration, the Doge focus on government spending.
Speaker Change: Most of the municipal World is exactly that its not federal but there is some federal most of it is county and state, but just if there's pressure on government spending how or how not us.
Speaker Change: Water infrastructure impacted.
Speaker Change: So.
Very good question, certainly and I think.
Speaker Change: Overall, we do have as we all know the infrastructure Bill that was passed.
Speaker Change: A few years back and I think importantly that bill had bipartisan support.
Speaker Change: And in and around aging infrastructure and in and around.
Speaker Change: Specifically water I think just the growing awareness.
Speaker Change: Challenges in a number of cities have faced continues to emphasize the importance of the investment.
Speaker Change: With respect to that.
Speaker Change: The gap has been there the gap is widening.
Speaker Change: And so I think that certainly does lend support for the continued need on top of that I know the lead service line replacement.
Speaker Change: Again, I think it continues to be an area, where there is at least near term focus and that's largely because consumers and communities really appreciate the health risks associated with that.
Speaker Change:
Speaker Change: You know I think.
Speaker Change: Given the new administration, and certainly given a number of the policy changes.
Speaker Change: Certainly a great question to ask I think our belief is that overall that are municipal <unk> will continue to be resilient as you know we have not.
Speaker Change: Guidance doesn't assume a meaningful impact from the infrastructure Bill funding, we are continuing to watch it I know Paul shared earlier on our call today.
Speaker Change: As we look at the number of projects and the.
Speaker Change: Documentation and support their seeking around this so I think you know.
Speaker Change: Is there a near.
Speaker Change: Near term impact.
Speaker Change: Hard to tell if there will be but as I said, we don't have any specific infrastructure spending and I think when you assess the bipartisan support as well as the need due to the.
Speaker Change: Impact on water and importantly, health risks I think.
Speaker Change: That even if there are a few short term bumps.
Speaker Change: Over the longer term, we think this will still be an area.
Speaker Change: Where we will see investment.
Speaker Change: That's great. Thanks for all that color.
Speaker Change: Thank you. Our next question comes from Michael Halloran with Baird. Your line is open you may ask your question.
Michael Halloran: Good morning, everyone.
Michael Halloran: So two questions first we ended the front half back half in your comments you made earlier about margin acceleration in the back half.
Michael Halloran: Equation here, just simply seasonality plus the timing of.
Michael Halloran: The cost benefits from the facility closure and then.
Michael Halloran: Any sense for the magnitude front half versus back half on that margin ramp that you expect.
Michael Halloran: We do expect good morning, but we do expect the backup margins to be better than the first half.
Michael Halloran: In terms of for seasonal reasons as you mentioned and we do expect and water flow to benefit from the closure of the legacy brass foundry is we've already referenced.
Michael Halloran: And water management, we expect year over year improvements in our repair products business, which is the one impacted by the Israel Hamas War, even though we anticipate some elevated costs. There will continue the performance there is incrementally.
Michael Halloran: Better.
Michael Halloran: Yeah.
Speaker Change: Okay and then second one then is just could you give some thoughts on how youre looking at the land development side of your business what are your customers, saying, well certainly heard the prepared remarks, but any nuance from a customer level and how that what the prospects for development is if rates kind of stay where they are.
Speaker Change: I missed the start of that question did you did you pick it up yes, I think the question was around 90%.
Speaker Change: The actual construction.
Speaker Change: Correct.
Speaker Change: Is that your question.
Speaker Change: Yes. The question was just the outlook in general around land development and any nuance from customer conversations.
Speaker Change: Anything along that line.
Speaker Change: Yes, we see contingency demand for new homes has been resilient.
Speaker Change: Despite the elevated mortgage rates and other factors, including low inventory exists existing homes.
Speaker Change: And we still believe in as we total customers homebuilders have strong balance sheets.
Speaker Change: The monastery law divestments.
Speaker Change: Really levels at a disciplined pace.
Speaker Change: So if our sales guidance, we assume lots and land development gross level modest growth.
Speaker Change: In terms of us anticipated into our guidance going forward.
Speaker Change: Thank you.
Speaker Change: Thank you again I would like to ask thank.
Speaker Change: Thank you again, if you'd like to ask a question just press star one.
Speaker Change: Our next question comes from Walter Liptak with Seaport Research you May ask your question. Your line is open.
Walter Liptak: Hi, Thanks, Good morning, Thanks for the good color so far let me.
Just to ask a follow up on the tariffs issue and just your I recall from.
The last time around was supply chain that there was issues with some of the material that goes into the foundries.
Walter Liptak: Some of the.
Walter Liptak: Pig iron and some of the other things.
Walter Liptak: Was impacted by international pricing.
Walter Liptak: Wonder if you could just review for us kind of in advance of these tariffs like you know.
Walter Liptak: Your supply of raw materials.
Walter Liptak: Hum.
Walter Liptak: How the pricing works from your suppliers.
Walter Liptak: Suppliers.
Walter Liptak: Hey, good morning Walt.
Walter Liptak: Our supply of raw materials is predominantly domestic.
Walter Liptak: So we don't anticipate any issues from the.
Walter Liptak: The tariffs from the from a raw material supply base.
Walter Liptak: Basically what <unk> anticipated.
Walter Liptak: Sure.
Walter Liptak: <unk>.
Walter Liptak: Where we may have some other components that may be impacted by these future tariffs.
Walt: Yes, and I think in and around that Walt it's sort of the specific on.
Walter Liptak: The cost for.
Walter Liptak: For imports and exports and how that has impacted directly by tariffs and then just are there other more general impacts in the economy as a result of the tariffs.
Walter Liptak: Okay got it so you're saying not an issue.
Walter Liptak: We're all more as.
Walter Liptak: You hear discussed could there be overall more inflationary pressure as a result of implementation of the of the terrorists but.
Walter Liptak: Yes, because our total material costs were influenced by purchase parts that suffer from potential labor inflation or other inflationary pressures. So it's not just raw materials.
Okay. So okay got it so is that supply chain is just pricing. So as the are the projects developing right now for the spring construction season.
Walter Liptak: Or are the projects kind of already.
Walter Liptak: Coming in with bids and things like that.
Walter Liptak: What's your.
Walter Liptak: It sounds like you've got pricing power, but whats the timing on these tariffs hitting and you're kind of inflation in some of the raw material markets.
Walter Liptak: So let me.
Walter Liptak: Dimension that a couple of different ways. So just as a reminder, with the short cycle products, which is the.
Walter Liptak: Certainly the largest percentage across our portfolio is that includes iron gate valves hydrants service brass repair or another that is where there tends to be a very short.
Walter Liptak: Shorter lead delivery time under normal conditions.
Walter Liptak: And as we said, we're pretty much back to the normal delivery times for most of those products outside of repair that Paul address.
Walter Liptak: Earlier so the.
Walter Liptak: With that we generally see with respect to orders two to four weeks between order and delivery.
Walter Liptak: In and around some of the comments that we've made with respect to what we're seeing on projects that could receive funding from the infra.
Infrastructure of Dell I think that's where we are saying we wanted to comment that we are seeing some of the projects that are going through.
Walter Liptak: The requirements needed to qualify for that funding and verify that.
Walter Liptak: It meets their requirements.
Walter Liptak: Designated by the different agencies for <unk>.
Walter Liptak: <unk> funding coming from the infrastructure Bill, but as a reminder, we are not assuming.
Walter Liptak: A lot of those dollar expenditures in the guidance. We provided does that does that address your question. Paul Yes, I think it does I think it does thank you very much.
Walter Liptak: Well I would just add I think in terms of the investments we've made around operational excellence and service levels of <unk>.
Walter Liptak: Lead times coming back to normalized levels, we are well positioned and as the construction season starts, particularly in the northern part of the country as it comes out of the winter period.
Walter Liptak: Yeah.
Walter Liptak: Okay, great. Thank you.
Walter Liptak: Thank you and at this time I'll turn the call over to Marty Sarkis.
Marty Sarkis: Very good. Thank you operator, we certainly appreciate everyone taking the time to join our call today, we look forward to speaking with.
Marty Sarkis: With you again, when we announce our second quarter results and that will be in early May hope everyone has a great day and operator with that if you would please conclude our call.
Marty Sarkis: Thank you. This concludes today's conference you may disconnect your lines at this time.