Mueller Water Products (NYSE: NYSE:MWA), a leading manufacturer of water infrastructure and flow control products, reported a robust performance in its second quarter earnings call for the period ending March 31, 2024. The company announced record quarterly net sales, propelled by significant volume increases and a solid improvement in gross margin. Adjusted EBITDA soared over 70% from the previous year, and adjusted net income per diluted share reached an all-time high. Mueller also received an upgrade to an AAA ESG rating from MSCI and raised its annual guidance for net sales and adjusted EBITDA, with ambitions to hit record gross margins in 2024.
Key Takeaways
- Record quarterly net sales and over 70% growth in adjusted EBITDA year-over-year.
- Achieved highest quarterly adjusted net income per diluted share.
- Upgraded to AAA ESG rating by MSCI.
- Increased annual guidance for net sales and adjusted EBITDA.
- Anticipates completion of new brass foundry and closure of old one by end of 2024.
- Water Flow Solutions segment had an exceptional quarter with increased volumes and pricing.
- Water Management Solutions segment saw lower volumes but higher pricing.
- Strengthened cash flow from operations and robust balance sheet.
- Repurchased $10 million in common stock, with $80 million left in share repurchase authorization.
- Total debt stands at $448.7 million, with cash and cash equivalents at $179.2 million.
Company Outlook
- Expecting net sales to range from flat to a 2% decrease compared to the prior year.
- Adjusted EBITDA projected to increase by 23% to 27% year-over-year.
- Focused on operational improvements, sales growth, talent development, and enhancing margins and free cash flow.
- Aiming to achieve pre-pandemic margins by 2025, with specific targets beyond that not provided.
Bearish Highlights
- Water Management Solutions segment's net sales decreased by 16% due to lower volumes.
- Adjusted operating income fell by 9.1%.
- Hydrants experienced a year-over-year double-digit decline in net sales.
Bullish Highlights
- Water Flow Solutions segment achieved its highest quarterly adjusted EBITDA margin of 30.3%.
- Strong net sales growth expected in Water Flow Solutions, particularly for iron gate valves and service brass products.
- Pull forward of shipments in the second quarter due to price increases and improved market outlook.
Misses
- Despite higher pricing, the Water Management Solutions segment did not offset the decline in volumes fully.
- Hydrant sales saw a significant year-over-year drop, although there was a sequential increase.
Q&A Highlights
- CEO Marietta Zakas discussed the impact of eliminating outsourcing on costs, with a step function due to fixed and other costs associated with running the foundry.
- Addressed the strong second-quarter net sales growth, citing timing of price increases and market outlook.
- Expressed confidence in profitable growth and the company's ability to address challenges in aging water infrastructure.
- Actively seeking M&A opportunities to expand the product portfolio, though availability and valuation pose challenges.
Mueller Water Products faced headwinds due to inflation and the lingering effects of COVID-19 on demand but managed to implement a price increase in February to cover rising costs and maintain margins. The company is committed to improving operational efficiencies and reducing expenses. With the new brass foundry expected to be operational by the end of 2024, Mueller anticipates cost savings in 2025 and 2026, contributing to a more robust financial outlook. The CEO's confidence in the company's strategic direction and capital structure suggests a positive trajectory for Mueller Water Products in the water infrastructure industry.
InvestingPro Insights
Mueller Water Products (NYSE: MWA) has demonstrated a strong commitment to shareholder returns, as evidenced by its consistent dividend growth. The company has impressively raised its dividend for 19 consecutive years, showcasing a reliable income stream for investors. This dedication to maintaining and increasing dividends is a testament to Mueller's financial health and management's confidence in the company's future prospects.
InvestingPro Data metrics reveal a mixed financial picture. The company's market capitalization stands at a robust $2.58 billion, and it trades at a high earnings multiple with a P/E ratio of 27.94 as of the last twelve months ending Q1 2024. Despite a slight decline in revenue growth of -5.63% during the same period, Mueller's gross profit margin remains strong at 30.61%, indicating effective cost management and a solid competitive position in the industry.
In terms of stock performance, Mueller Water Products has seen a significant return over the last week, with a price total return of 13.7%. This recent uptick could signal investor confidence in the company's strategic initiatives and its ability to navigate current market conditions.
For investors seeking more in-depth analysis and additional insights on Mueller Water Products, InvestingPro offers a range of tips that could further inform investment decisions. Subscribers can access these additional InvestingPro Tips by visiting https://www.investing.com/pro/MWA, and can utilize the exclusive coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. With 13 more InvestingPro Tips available, including insights on the company's liquidity, debt levels, and profitability expectations, investors can gain a comprehensive understanding of Mueller Water Products' financial health and market potential.
Full transcript - Mueller Water Products Inc (MWA) Q2 2024:
Operator: Welcome, and thank you for standing by. [Operator Instructions] Today's call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn today's meeting over to your host, Mr. Whit Kincaid. Thank you. You may begin.
Whit Kincaid: Good morning, everyone. Thank you for joining us on Mueller Water Products' Second Quarter Conference Call. Yesterday afternoon, we issued our press release reporting results of operations for the quarter ended March 31, 2024. We also issued a press release providing an update on our leadership team and Board refreshment. Copies of the press releases are available on our website, muellerwaterproducts.com. I'm joined this morning by Marietta Zakas, our Chief Executive Officer; and Steve Heinrichs, our Chief Financial Officer and Chief Legal Officer. Following our prepared remarks, we will address questions related to the information covered on the call. As a reminder, please keep to one question and a follow-up and then return to the queue. This morning's 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. At this time, please refer to Slide 2. This slide identifies non-GAAP financial measures referenced in our press release, on our slides and on this call. It discloses the reasons why we believe that these measures provide useful information to investors. Reconciliations between non-GAAP and GAAP financial measures are included in the supplemental information within our press release and on our website. Slide 3 addresses forward-looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward-looking statements. Please review Slides two and 3 in their entirety. 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. A replay of this morning's call will be available for 30 days at 1-866-360-8712. 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 Martie.
Marietta Zakas: Thanks, Whit. Good morning, everyone. Thank you for joining our earnings call. It is an honor to continue in the role as CEO, and I thank the Board for placing its trust in me to lead Mueller at this critical juncture. Mueller plays an essential role in helping our customers deliver clean and safe drinking water to hundreds of millions of people. I get the work with the best team in the industry, and we will continue to build on the power of our industry-leading brands and deep channel and end-customer relationships. I look forward to working with Paul and the rest of the team as we continue to execute on our strategy to drive shareholder returns. I'll now start with a brief overview of our second quarter performance. We had a fantastic second quarter, reflecting the progress our teams have made executing our operational and commercial initiatives to deliver long-term sustainable growth. We achieved record quarterly net sales with a strong sequential increase in volumes, supported by our continued enhancements in customer experience. We improved gross margin 750 basis points to 36.9%, supported by continued manufacturing and supply chain efficiencies, leading to our highest quarterly gross margin in more than 7 years. With a record quarter for net sales and a strong gross margin, along with SG&A leverage, we delivered over 70% adjusted EBITDA growth compared to the prior year. We also achieved record quarterly adjusted net income per diluted share of $0.30, which increased more than 100% compared to the prior year quarter. Turning to sustainability, I am pleased to report that in the second quarter, MSCI upgraded Mueller to its highest ESG rating of AAA. This rating is a great accomplishment and a testament not only to the critical products and solutions we provide for our municipal customers and their communities, but also the hard work and dedication of our team members, suppliers and customers. We look forward to sharing our continued progress in the next annual ESG report, which will be published later this year. We are increasing our annual guidance for net sales and adjusted EBITDA. These increases reflect our strong first half performance and order activity across most product lines as well as our belief that overall end market demand is healthy. Municipal repair and replacement activity remains very resilient, and the new residential construction end market is improving relative to a challenging 2023. We are targeting record gross margin for 2024. The significant expected increase primarily reflects benefits from the actions we have taken over the past year to drive efficiencies in our operations. At the midpoint of our updated annual guidance range for net sales and adjusted EBITDA growth, the adjusted EBITDA margin is a 420 basis points expansion, reflecting our expected improved operational performance. Our teams have worked diligently on improving lead times while controlling costs and driving manufacturing material and freight efficiencies. Our execution allowed us to leverage the increased volumes in the second quarter leading to an improvement in gross margin. This strong conversion included outstanding performance at both our iron gate valve and hydrant manufacturing facilities. We also expect to have an additional tailwind in the near future from the completion of our new brass foundry project and closure of our old brass foundry by the end of calendar 2024. Our commercial teams continue to do a great job working with our customers. We were pleased to see the strong sequential increase in order activity this quarter across most product lines, which was primarily driven by favorable end market demand. We believe some of this order strength was due to the timing of our price increases and positive sentiment moving into the construction season. We believe that net sales growth in the quarter versus the prior year would have been close to flat without the pull forward. With normalized lead times, we expect this pull forward to impact our third quarter sales, which is reflected in our updated annual guidance. Our team continues to do an admirable job dealing with the impacts of the Israel Hamas war on our repair products business while also working to satisfy customer demand. As expected, during the second quarter, we experienced higher costs associated with labor, materials and freight. Our accomplishments this quarter and through the first half of the year are a testament to the progress we've made with our transformation, especially considering the external headwinds our teams have faced. I am confident in our ability to continue our momentum as we look to leverage our leading market positions and investments to deliver more consistent execution and drive future sales and margin growth. With that, I'll turn it over to Steve.
Steven Heinrichs: Thanks, Marietta, and good morning. For the quarter, our consolidated net sales were $353.4 million, an increase of 6.2% compared with the prior year. Net sales primarily increased due to higher pricing across most product lines with higher volumes at Water Flow Solutions, partially offset by lower volumes at Water Management Solutions. As we've previously mentioned, we believe the lead times and backlogs for iron gate valves and hydrants have normalized. Based on order activity during the quarter, we also believe that valve and hydrant end market demand was healthy in this period. The differences in year-over-year volumes between iron gate valves and hydrants are primarily related to the timing of backlog normalization and channel and customer destocking. In the prior year quarter, hydrant shipments benefited from serving an elevated backlog. In the second quarter, gross profit of $130.4 million increased 33.3% compared with the prior year. Gross margin of 36.9% increased 750 basis points compared with the prior year and reflects our highest quarterly gross margin in over 7 years. The increase was driven by improved manufacturing performance and higher pricing. Our continued improvements in manufacturing performance were primarily driven by improved productivity, including labor, material and freight efficiencies. This improvement also includes benefits from lower brass outsourcing costs. Higher pricing more than offset inflationary pressures, which mainly related to labor inflation. Total materials costs were slightly higher, primarily due to inflation related to purchase parts which was partially offset by lower raw material costs relative to the prior year. For the quarter, total SG&A expenses of $63.7 million were $500,000 lower than the prior year. Lower personnel-related costs, third-party fees and engineering expenses were partially offset by higher incentive costs and inflationary pressures. Operating income of $63.5 million increased 93% in the quarter compared with the prior year. Operating income included strategic reorganization and other charges of $3.2 million in the quarter which have been excluded from adjusted results. These are primarily related to the leadership transition, severance, and certain transaction-related expenses. Turning now to our consolidated non-GAAP results for the quarter. Adjusted operating income of $66.7 million increased 98.5% compared with the prior year, primarily due to favorable manufacturing performance and higher pricing, which more than offset inflationary pressures. Our adjusted operating margin improved 880 basis points to 18.9% compared with the prior year. This is the highest quarterly gross margin since the third quarter of 2019. Adjusted EBITDA of $82.2 million increased 70.9% in the quarter. Our adjusted EBITDA margin improved 890 basis points to 23.3%. Similar to adjusted operating income margin, this is also the highest quarterly margin since the third quarter of 2019. For the last 12 months, adjusted EBITDA was $236.8 million, or 19.1% of net sales, a 470 basis point improvement compared with the prior 12-month period. Adjusted net income per diluted share more than doubled in the second quarter, increasing 114.3% to $0.30 per share, which is a quarterly record. Turning now to quarterly segment performance, I'm pleased to start with Water Flow Solutions, where our operations and business teams led the segment to an outstanding quarter. Net sales of $205.8 million increased 30.9% compared with the prior year primarily due to higher volumes of iron-gate valves and service brass products as well as higher pricing across most product lines. With normalized lead times, strong net sales growth for iron gate valves benefited from a sequential increase in orders, as well as lapping low orders and shipments in the prior year quarter, primarily due to channel and customer inventory destocking. Net sales growth for Service brass products benefited from improved manufacturing efficiencies and serving an elevated backlog, which we continue to lower. Adjusted operating income of $52.6 million increased 246.1% in the quarter. The benefits from increased volumes, favorable manufacturing performance, and higher pricing more than offset increased costs associated with inflation and higher SG&A expenses. Adjusted EBITDA of $62.4 million increased 171.3% and our adjusted EBITDA margin also improved significantly to 30.3%. This is the highest quarterly adjusted EBITDA margin the Water Flow Solutions segment has ever achieved. Turning to quarterly results for Water Management Solutions, net sales of $147.6 million decreased 16% compared with the prior year. This was primarily due to lower volumes across most product lines, partially offset by higher pricing across most product lines. Net sales for hydrants were down double digits compared with the prior year quarter. Although our lead times are now normalized and we saw a sequential increase in orders, the prior year quarter's sales benefited from very strong hydrant shipments as we serve an elevated backlog. Adjusted operating income of $29 million decreased 9.1% in the quarter. The benefits from higher pricing, improved manufacturing performance and lower SG&A expenses were more than offset by lower volumes. Adjusted EBITDA of $35.7 million decreased 9.8%. However, adjusted EBITDA margin improved 170 basis points to 24.2% despite the decrease in net sales. Moving on to cash flow, net cash provided by operating activities for the year-to-date period was $62.2 million, an increase of $84.4 million compared with the prior year. The increase was primarily a result of higher net income and improvements in working capital compared with the prior year, which includes a smaller increase in inventories. During the quarter, we invested $10.1 million in capital expenditures and invested $15.8 million through the first six months. While spending through the first half of the year is $4.7 million lower than the prior year period, we do expect spending to be higher in the second half of the year. Our free cash flow for the year-to-date period increased $89.1 million to $46.4 million compared with the prior year, driven by higher cash from operations and lower capital spending. Free cash flow as a percent of adjusted net income was at 70.1% for the first half of the year. During the second quarter, we repurchased $10 million in common stock, and as of March 31, we had $80 million remaining under our share repurchase authorization. At the end of the second quarter, our total debt outstanding was $448.7 million, we had cash and cash equivalents of $179.2 million. Our balance sheet remains strong with our net debt leverage ratio at 1.1x at quarter end, no debt maturities until June 2029 and our $450 million senior notes at a 4% fixed interest rate. We did not have any borrowings on our ABL agreement at the quarter end nor did we borrow any amounts under our ABL during the quarter. In March, we amended our ABL, which extended the maturity date to March 2029 and lowered our applicable margins. I will now review our updated and improved outlook for fiscal 2024. Based on our strong first half performance and current expectations for the rest of the year, we are increasing our guidance for both consolidated net sales and adjusted EBITDA. We now anticipate net sales will be between flat and down 2% as compared with the prior year. We believe municipal and new residential construction end markets will continue to be healthy in the second half of the year. In addition to raising our net sales expectations, we are significantly increasing our guidance for adjusted EBITDA as a result of our strong first half operating and margin performance, coupled with our current expectations for favorable end market demand. We now anticipate that our adjusted EBITDA will increase between 23% and 27% compared with the prior year. This includes an expected increase in our total SG&A expenses, reflecting higher incentive compensation and personnel investments. Additionally, we expect our free cash flow as a percentage of adjusted net income to be more than 75% for fiscal 2024 as compared with 62.7% in fiscal 2023. With that, I'll turn it back to Martie for closing comments.
Marietta Zakas: Thanks, Steve. I want to highlight a few key items before opening it up for Q&A. I'm excited about what we've accomplished so far this year, especially given the uncertainties in the external environment. I am thankful for our talented and committed employees who are doing incredible work focusing on serving our customers and driving manufacturing material and freight efficiencies while also executing our large capital projects. There is still work ahead of us, and we are primarily focused on executing initiatives in four key strategic areas. We will continue to drive operational improvements to deliver the benefits from our capital investments. We are making changes to accelerate sales growth and capture the benefits from favorable long-term end market growth trends through product innovation and service. We are also increasing collaboration and teamwork throughout the organization to create a culture of talent development, enabling us to execute on our targets and make Mueller a preferred place to work. We are well positioned to execute on our strategies to improve margins and increase free cash flow to support future investments. I am confident in our strong foundation of talented and committed employees, industry-leading brands and deep distribution channel and direct customer relationships. That concludes my comments. Operator, please open this call for questions.
Operator: [Operator Instructions]. At this time, we'll begin our question-and-answer session. [Operator Instructions]. Our first question comes from Brian Lee with Goldman Sachs (NYSE:GS). Your line is open.
Brian Lee: Hey, everyone. Good morning. Thanks for taking the questions and kudos on the impressive execution here. Maybe a big picture question for you, Martie. You've had quite a tenure at Mueller, you've seen a lot of change at the company over the years, and you're not necessarily new to the CEO role as it becomes your full-time responsibility though. How are you thinking about kind of the strategic priorities? I know you touched upon a few here at the end of the call, but what's kind of changed here as you're taking on the role. Obviously, the company is in a different spot. But as you think about your strategic priorities in that role, can you kind of speak to what you think you can change or enact change going forward? And then one thing I think, in particular, I'd be curious to hear your take on, as you mentioned, sales growth and product innovation. Can you elaborate a bit more on kind of where you see Mueller headed and where the best opportunities might be when it comes to that particular piece of the stool?
Marietta Zakas: Great. Yes. Thanks, Brian, and thanks for the question. Look, I think one of the most important things I'm going to say is, look, we have been continuing to lead change, not just today going forward, but I think even looking at the last eight months, and importantly, as we look out, we are a water-focused company. We do have a long history within the business, but I think in many ways, the time has never been better for us to really leverage many of the products that we have together. And importantly, as we say, when we look at the opportunity, as we have aging infrastructure, as we have continued focus on water-starved areas and importantly, particularly how different regions are going to need to focus on improving their ability to provide water and provide water at a reasonable cost to all their customers. We have, over the years, look to broaden our portfolio. We're a full service provider as we look across valves, hydrants, certainly brass products, and I can emphasize brass products here because with the emphasis, with the infrastructure bill and the designated funds for the lead service line replacement, I think importantly, our role with the service brass products that we provide and importantly, with the additional capacity that we have just brought on with our new brass foundry and the Eco Brass product that we have, which has many sustainability benefits, I think that is one of the additional products and services that plays well as we look forward. The other piece that I want to talk about, and it's an area where we have, I think, reenergized ourselves, and that's really in and around our focus on the customer experience. We are focused on improving our delivery lead times. We are looking to even further deepen the relationships that we have with our customers and overall enhancing that customer experience, that we think will also further to promote ourselves in that and the breadth of products and services that we offer, I think, is helpful. In and around the area of technology, I certainly think that the areas that we focus on with our leak detection, with our pipe condition assessment, looking to get into pressure management and again, looking to bridge ways for the municipalities to gain more intelligence in and around what their systems have and the solutions to help them better manage it. And that's where I think increasingly, you're going to see us look to link these infrastructure products that we have and how they can be used and we can bring more intelligence to those products. And I think we will absolutely continue along those lines as well. With that, I want to -- I'll hit one other thing because I think it's important, and I really appreciate the longer term question that you have asked. When we look, I think as Steve talked through, when we look at the capital structure that we have, that we put in place when we look at the capacity that we have and the flexibility that we have, we are positioned to look to broaden our product portfolio and/or deepen our product portfolio. And I will say that we are going to -- we will continue to look for those right opportunities at the right valuations to allow us to continue to grow, not only organically but inorganically as well.
Brian Lee: That's all super helpful.
Marietta Zakas: The other piece that I think you've -- sorry, you're saying, but I want to hit on the operations piece as well because with some of the internal realignment that we have recently done, part of that has been further investment in and around our operations capabilities and importantly, I think, a real forward vision in terms of how we can continue to improve our operational performance for our margins to continue to grow over time.
Brian Lee: Yes. Maybe that's a good segue into just the second question I had, a little bit more mundane and less big picture, and then I'll pass it on. When you think about this kind of 7-year high in gross margins, you mentioned specifically price and manufacturing improvements. How sustainable do you kind of see those two pillars? It seems like you still have some outsourcing benefits that are still to come and then price sounds like it's something that's moving into your wheelhouse in terms of something you can leverage. But can you kind of speak to sort of the impacts on gross margin this quarter between the two buckets and then how you think about them going forward as having sustainability?
Marietta Zakas: Absolutely. So in and around price. I think when you look over certainly a longer-term period, I think is, we have generally benefited from price over the longer term. And our objective, as we said, is always for price to more than cover any of the inflationary costs that we are experiencing. Not to delve too much into the history, but I think with sort of the level of inflation that we had, coupled with some of the challenges with COVID and demand levels, that it was a challenging period, but I think we've gotten back into, you've seen this quarter, we're probably sort of mid-single digit in and around pricing. I think we told you last quarter that we had implemented a price increase across most of our product lines in February. And as we called out in our script, we do think as a result of the price increase that we announced in February, importantly, our ability to manufacture and ship product with shorter lead times, we think that caused a little bit of a pull forward of some of the shipments into our second quarter. So I think pricing, I would say we would expect to continue to benefit covering inflationary cost and preserving margin as we go forward. I think with respect to gross margin, I think we will continue to challenge ourselves for -- to improve our operational efficiencies where we can. We did see some of that benefit during the quarter. I know we also called out some of the lower outsourcing costs that we had, I think we will be at a point where we're pretty much anniversary that as we're moving into the second half of our year, but I think that was a benefit where we look to improve our overall cost structure. But I would say we do continue to see opportunities to improve our material, labor, and freight efficiencies and certainly volume leverage can also help us as we move forward as well.
Operator: Our next question comes from Joe Giordano with TD Cowen. Your line is open.
Joseph Giordano: Hey, good morning, guys. So I wanted to just ask on like if you look back over the last year, there's just been huge volatility in the guides, both directions. I mean, we're happy to see it in the positive direction this time, but both directions has been huge up and down moves. And then also like the actual performance relative to the guide, there's been huge volatility. So you've had quite extenuating circumstances over the last year with what's going on internally and the inventory situation at channel partners. But like can you kind of talk through the internal modeling process and how you feel the comfort level you have about the ability to forecast the businesses from here?
Marietta Zakas: Certainly. So I'd say, look, overall, one of the areas that we're certainly going to try to do is to give you the explanations for why we have the guide that we have as well as to provide you insights into what our performance was and why our performance was what it was. Look, I think as we take a look at our outlook for 2024, I think importantly, as we move from our first quarter, and I'll remind you, we did see our net sales down about 18% in the first quarter. And certainly, the explanation that we provided then is we were still experiencing in our 2023, servicing a very elevated level of short-cycle backlog which was a situation that I will say we had not experienced at the company. I think as we look at where we are today, most of the destocking that we felt had been done largely with distributors was behind us. Our short-cycle backlog at this point in time with the exception of service brass, we would call pretty much back in the normalized level. Now I'll remind you, on a year-over-year basis, hydrants was still elevated, in our prior year, and that's why you're seeing some of the differential in the net sales performance between our Water Flow Solutions segment and our Water Management Solutions segment. But I think as we move through the year, it was pretty much towards the end of the third quarter into the fourth quarter of '23 by the time we've gotten that hydrant backlog down. But I think as we look at where we are today, a lot of those disruptions from supply chain, from COVID, from the very elevated and fast rise in inflation. I think a lot of those factors were caused some of the challenges that we had. But I'd say destocking is largely behind us. The service brass backlog is still higher than what we would call normalized, but importantly continued to reduce that short-cycle backlog this year. I would say, our delivery times are back to normal with respect to our iron-gate valves and hydrants. And we have continued to reduce the delivery times across most of our service brass products. So I think we're seeing some of that return. And I would say the guidance that we have just provided for our 2024 certainly reflects what we have seen in the order patterns as they have progressed through the first six months of our year. I hope that answers your question, Joe.
Joseph Giordano: And just to follow up on the portfolio question from earlier. I mean, we're bringing in new Board members and there's a refresh going on. Just curious is like as you think about where to go as a company, should we be on the lookout for kind of departures or kind of pivots anywhere? I know we talked -- you mentioned linking infrastructure with your technology -- with your technology products. I mean we've talked about that in the past. I think the reality of that has probably been slower than people have liked to see. I'm just curious as to how you think about like now that you're in the permanent role, is there like a pivot somewhere coming? Or how should we think about that?
Marietta Zakas: So look, I think with respect to the leadership changes that were just announced, we've got nothing else planned at this time. I think importantly, as I referenced, the team, we have made some changes over the last eight months. We had an internal realignment. And with that realignment, our focus was looking to invest further in and around our customer experience and in and around our customer relationships. Additionally, as I just said, we have looked to enhance our overall operational expertise and investment there. And I think sort of the other area that we said is internally and from an employee culture perspective, we have really looked to emphasize more collaboration across the company with real emphasis on performance and accountability. So I think a lot of that is what we have been working on internally across the company. And I think you were -- we are realizing some of those benefits as we look at the performance that we had this quarter.
Operator: Our next question comes from Bryan Blair with Oppenheimer.
Bryan Blair: Thank you. Good morning, everyone. Excellent quarter. I guess, somewhat of a follow-up to Joe's question in terms of guidance visibility, maybe we can level set a little bit more on back half expectations. I appreciate the color on Q2 pull forward. Can you give some finer points on how that influences your team's Q3 and Q4 expectations, both top line and EBITDA margin progression?
Marietta Zakas: Yes. So as we look with the guidance that we have just given in and around the second half of the year. I think overall, first half of our year, we saw net sales down and we are looking for net sales growth with the recent guidance that we just gave in the second half of the year. I think importantly, as we look more now on the profit line or the bottom line and what our expectations are for the -- as we look to the second half of the year. I know you just referenced the bit of pull forward that we think we saw as a result of the timing of the price increase. We talked about some higher costs that we expect to continue to have in and around our Krausz repair products. We've got higher costs largely with labor, materials and freight. We did experience some of those in our second quarter. As a reminder, we really didn't have any in our first quarter. But we do expect that we will continue to have those higher costs as we move into the second six months of the year. With respect to inflation, probably impacted more by labor inflation, I would say, in the first half of the year. But as we look out into the second half of the year, we think we could see more inflationary pressures in and around some of the material costs that we have, which could also be reflected in the purchase parts. Additionally, from an SG&A perspective, I think you saw us increase our guidance a little bit in and around SG&A as we move to the second half of the year. And some of that guidance is really coming from differences in and around our incentive accruals, inflation, personnel investments as well as additional cybersecurity protection investments.
Bryan Blair: Okay. Understood. And your updated full year guide implies around 20% margin. So that achieves, assuming execution continues, the fiscal '25 outlook that your team had in place for a while, and you walked through a lot of good guides in terms of margin outlook and an opportunity that still lies ahead for your team? Is there a new margin target that you're willing to speak to if we think about fiscal '25, '26 or any medium-term kind of time frame?
Marietta Zakas: Yes. So I'd say, looking out beyond 2024, I'd say we haven't put anything out there at this point. I think absolutely right to call out what we had been saying is that we did have an expectation that as we looked at gross margin and EBITDA margin, we felt that we could get back to the pre-pandemic margins as we look to 2025. And I think certainly, as you point out, with the second quarter and the outlook, we're certainly moving in that direction, but specifically other than looking to hit and move above the pre-pandemic margins that's where we are today.
Operator: Our next question comes from Deane Dray with RBC Capital Markets.
Deane Dray: I'll add my congrats to Martie and Paul. Maybe we can start off with the any more specifics on the new foundry. I know there are limitations in terms of comparisons, you can't say necessarily what inning or how many SKUs or product certification. But just any color in terms of where you stand on the process of being closer to a full ramp?
Steven Heinrichs: Yes, Deane, our foundry teams are continuing to improve the operations in the new foundry. And as you can see, this translated into higher year-over-year production volumes and better sales through the foundry. The new foundry is using new equipment, which pieces of it continue to be installed, and we're focused on ramping up the production volumes there to satisfy the backlog while continuing to work through our tooling process. We do expect to close the old foundry at the end of calendar 2024, which does continue to run today. We think that the impact of the duplicative costs of running two foundries is around 80 to 100 basis points as a headwind to gross margin. And with the closure of that facility, we expect to see that benefit coming in 2025 and going over to 2026.
Deane Dray: Those duplicative costs, those ramp down, we can just assume linearly or can there be any kind of step function as you eliminate outsourcing?
Marietta Zakas: Yes. No, look, that's a great question. And it's -- think of it more as a step function because they're going to -- they're just certain -- when you're running the foundry, there are just certain basic fixed and other costs that you're going to have as long as that South foundry is running. So we do not expect it to be linear just because of all the basic -- the lights on, the maintenance, importantly for the workforce that's there, et cetera.
Deane Dray: That's great. And then, Martie, just the idea on the pull forward, you've put through price increases before in the past. Was the magnitude of the pull forward surprising at all? I know, look, that's a high-quality problem to ask about more business coming through in the quarter. But just the idea, did the pull forward surprise you in any way?
Marietta Zakas: Deane, I'd probably think of it maybe a little -- here's the way I'm thinking about it. I think with the timing of the price increase, I think, number one, it was the ability that we had to deliver and ship the product, which was a piece of it. I think the other piece of it is reflective of the market outlook. And as we talked about all the destocking that had been done, which we thought was pretty much by the end of the quarter, I think, in terms of looking at the end market, we've talked about the municipal market sort of being fairly resilient, and certainly, the residential construction market in a much better position than it was last year. That said, we know that still the high interest rate environment that is reflected in mortgage rates does impact the demand somewhat. But I really think it was probably those factors that came into play. So it's just, I would say, one of the call outs in terms of explaining part of the strength of our second quarter net sales growth.
Operator: The next question comes from Mike Halloran with Baird.
Michael Halloran: Martie, congrats on the formal announcement. A quick one here on margins. As we think about the cadence, particularly in WFS margins, how much should we be thinking about the margin levels kind of tracking with revenue as we move into 3Q and 4Q, and we think about the impact of the pull forward or rather, should we be more focused on the kind of the sequential trend and the impact of the internal initiatives and the pricing? Just trying to think about which kind of item -- which line item we should be keying more off of?
Marietta Zakas: So good question. Let me sort of hit some of the things, I think, to think about as we look at that. I will say with respect to Water Flow Solutions, I think we would say that the strong net sales growth that we saw through the first half of the year, I think we can continue to expect due to the year-over-year comparisons and certainly continued growth from iron gate valves and service brass products. As I said, we're continuing to work down that elevated backlog. We also, I think from an operational perspective, we are continuing to get the improved labor material and supply chain efficiencies out of WFS as well. And I think that and the volume growth that we see with our iron gate valves will certainly all be drivers as we look at Water Flow Solutions for the year. On Water Management Solutions, I think we have seen on a year-over-year lower net sales. Certainly, net sales for our hydrants were down double digits compared with the prior year quarter. Although importantly, and now I'm going to shift you to sequential, we did see, on a sequential basis, an increase there both from orders and shipments perspective. But on the year-over-year we had such strong hydrant shipments in '23 due to that elevated backlog, that's a difference year-over-year. I will also call out within the Water Management Solutions segment that is where we have our repair products, and we have referenced that we -- just as we experienced in our second quarter, we do expect that we will have higher labor and freight and material costs and anticipate that in the second half of the year. That said, we're looking for continued favorable price cost, I would say, across both of the segments as well as underlying manufacturing performance.
Michael Halloran: That's super helpful color. Maybe shifting gears a little bit to the capital deployment side. It's starting to feel like the team is getting their feet under them a little bit. Can you maybe talk about how you're thinking about the cultivation and the funnel on the M&A side and broadening and deepening the product portfolio as you mentioned during your prepared remarks?
Marietta Zakas: Yes. So I'd say, look, in and around the M&A front, I think we can -- it's easier for us, I would say, to identify what we think would be the right additions to our portfolio, not only to broaden our portfolio, but to deepen our portfolio. I think a lot of the -- probably our -- some of the challenges are really just in and around the availability of where we think could be some nice add-ons. That said, I think as we talked about, I think from a capital structure perspective, we are in the right -- we are well positioned with respect to our capital structure availability under the ABL and certainly, the flexibility that the capital structure affords us. And I would say, certainly, with the improvements that we're seeing from an operational performance perspective, I know that we are all excited about where acquisition opportunities could be. And as I said, we've got, I think, the team focused in and around that. It's just finding the right opportunities and importantly, at the valuation that we think will be additive for our investors over the long term.
Michael Halloran: Appreciate the time this morning. I'll pass it on.
Operator: [Operator Instructions]. Then one, one moment to see if we have any questions.
Marietta Zakas: Great. Well, operator, I will go ahead and close out the call today. I'll say thank you for everyone joining us. I wanted you to know that I'm really honored and excited to continue in the role of CEO, continuing to work with an exceptional team that we have at Mueller, including Paul with his recent promotion to President and Chief Operating Officer. We play a critical role in the business that we're in, helping our customers deliver safe, clean drinking water. We do believe that we are uniquely positioned to address the challenges that we are all seeing across the country with aging water infrastructure with the breadth of our products and solutions. With that, I'm confident that Mueller will continue to deliver profitable growth in the months and years ahead, and I thank you all for your continued interest and support of Mueller. With that, operator, we'll conclude the call.
Operator: Thank you. That concludes today's conference. You may all disconnect at this time.
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