Mueller Water Products - Earnings Call - Q3 2019

Transcript

Speaker 0

Welcome and thank you for standing by. At this time, all participants are in a listen only mode until the question and answer session of today's conference. I would like to inform all parties that today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to Whit Kincaid.

Thank you. You may begin.

Speaker 1

Good morning, everyone. Welcome to Mueller Water Products third quarter twenty nineteen conference call. We issued our press release reporting results of operations for the quarter ended June 3039, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Discussing the third quarter's results and our outlook for 2019 are Scott Hall, our President and CEO and Marty Zakas, our CFO.

This morning's call is being recorded and webcast live on the Internet. We have also posted slides on our website to help illustrate the quarter's results as well as to address forward looking statements and our non GAAP disclosure requirements. At this time, please refer to Slide two. This slide identifies non GAAP financial measures referenced in our press release, on our slides and on this call and discloses the reasons why we believe that these measures provide useful information to investors. Reconciliations between non GAAP and GAAP financial measures are included in the supplemental information within our press release and on our website.

Slide three addresses forward looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward looking statements. Please review Slides two and three in their entirety. During this call, all references to a specific year or quarter, unless specified otherwise, refer to our fiscal year, which ends on September 30. A replay of this morning's call will be available for thirty days at 665-0519.

The archived webcast and corresponding slides will be available for at least ninety days in the Investor Relations section of our website. In addition, we will furnish a copy of our prepared remarks on Form eight ks later this morning. I'll now turn the call over to Scott. Thanks, Whit. Thank you for joining us today to discuss our results for the 2019.

I am pleased with our performance

Speaker 2

in the quarter as the team has produced solid growth both in sales and adjusted EBITDA. Our consolidated net sales increased 9.6% and our organic net sales increased 4.6% as we benefited from both higher pricing and shipment volumes. Our gross margin improved 90 basis points to over 36% excluding the impact of the inventory step up at Krausz. This performance helped deliver adjusted EBITDA growth of 13% with favorable contributions from both infrastructure and technologies. We remain on track to meet the net sales and adjusted EBITDA target ranges we communicated in our second quarter earnings release.

We are focused on continuing our momentum in the fourth quarter and finishing the year on a strong note, even as we compare performance to the fourth quarter of the prior year in which we reported a 12% organic increase in net sales. Looking forward, with the support of our strong balance sheet, we will continue to maintain a balanced approach to capital allocation, which I will address later on the call. With that, I'll turn the call over to Martie.

Speaker 3

Thanks, Scott, and good morning, everyone. I will first discuss our third quarter consolidated financial results then review our segment performance. Our consolidated net sales for the third quarter increased 9.6% or $24,100,000 to $274,300,000 This increase was primarily driven by the acquisition of Krausz as well as higher pricing and shipment volumes. Our gross profit this quarter improved to $97,200,000 or 35.4% of net sales. This improvement was primarily due to increased net sales, which was partially offset by higher costs associated with inflation, manufacturing performance and a $2,300,000 inventory step up expense at Krausz.

Material costs increased nearly 1% year over year in the quarter. As a reminder, our third quarter twenty eighteen results included a $14,100,000 warranty charge. We delivered a 90 basis point improvement year over year in our gross margin excluding the impact of the inventory step up expense and prior year warranty charge. Selling, general and administrative expenses were $47,500,000 in the quarter, a $6,200,000 increase over the prior year. The increase was primarily due to the addition of Krausz.

SG and A as a percent of net sales was 17.3% in the third quarter compared to 16.5% in the prior year. Operating income was $47,200,000 in the third quarter compared to $30,600,000 in the prior year. Strategic reorganization and other charges were $2,500,000 in the quarter versus $2,600,000 in the prior year. Adjusted operating income increased 9.9% or $4,700,000 to $52,000,000 in the third quarter. The increase was driven by higher adjusted operating income at Infrastructure, which was partially offset by corporate SG and A expenses and a slight decrease performance at Technologies.

Adjusted EBITDA for the third quarter increased 13% or 7,500,000 to $65,400,000 Consolidated adjusted EBITDA conversion margin was 3117% in the prior year. For the last twelve months, adjusted EBITDA was $195,100,000 or 20.4% of net sales. Over the prior twelve month period, we have increased adjusted EBITDA 10.8% or $19,100,000 Our adjusted net income per share was $0.24 for the quarter compared to $0.19 in the prior year. Our 2019 quarterly adjusted EPS excludes the strategic reorganization and other charges mentioned earlier, the inventory step up expense and $05,000,000 of interest expense associated with the Walter Energy Accrual. Turning now to segment performance, starting with Infrastructure.

Infrastructure net sales increased 11.6% or $26,100,000 to $250,200,000 in the quarter. This increase was due to the sales from Krausz as well as higher pricing and shipment volumes. Organic net sales this quarter increased 6.1% versus the prior year. Adjusted operating income for the quarter increased 10.4% or $5,900,000 to $62,900,000 excluding the inventory step up expense. The increase was primarily due to higher pricing and shipment volumes and the inclusion of Krausz, partially offset by higher costs associated with inflation, increased SG and A expenses and manufacturing performance.

Adjusted EBITDA for the third quarter increased 12.1% or $8,000,000 to $74,200,000 yielding an adjusted EBITDA margin of 29.7% for this segment. Adjusted EBITDA conversion margin was 31% compared to 19% in the prior year. Moving on to technologies. Technologies net sales decreased $2,000,000 to $24,100,000 in the quarter driven by lower volumes at Metrology, which were partially offset by sales growth at Ecologics. Adjusted operating loss increased $200,000 compared to $2,000,000 in the prior year, primarily due to lower shipment volumes and manufacturing performance, partially offset by improved product mix and lower SG and A expenses.

However, Technologies adjusted EBITDA improved $300,000 in the quarter. Now we'll review our liquidity. Cash provided by operating activities for year to date 2019 was $17,800,000 The decrease compared to the prior year period was primarily driven by the timing of payments, including a $36,000,000 increase taxes and cash interest. We also invested $52,900,000 in capital expenditures in the period, which is $26,000,000 more than the prior year as we accelerated investments in our manufacturing capabilities, particularly our large casting foundry in Chattanooga. At June 2019, we had total debt of $446,200,000 and cash and cash equivalents of $140,700,000 At the end of the third quarter, our net debt leverage ratio was 1.6 times.

I'll turn the call back to Scott to talk more about our results and outlook

Speaker 2

a transformational process as we take a company with a strong history of manufacturing iron and brass products for municipal and residential infrastructure to one that provides more intelligent, value added solutions to help customers manage and deliver important resources. Our solid third quarter performance is a reflection of the progress we have made to date on our key strategies to create a strong foundation for future growth. Our team members continue to elevate their execution as we have faced a more challenging external environment from slower growth in housing starts and trade concerns among other factors. Through the first three quarters of the year, our consolidated net sales increased 6% with adjusted EBITDA growth around 12%. As a result, we delivered a 38% adjusted EBITDA conversion margin versus 20% in the prior year.

Our year to date adjusted EBITDA margin increased 110 basis points over the prior year to 20.2%, driven by improvements at both Infrastructure and Technologies. Infrastructure's year to date adjusted EBITDA increased nearly 8%. At Technologies, we continue to make progress on initiatives to improve margins, which have led to a $2,500,000 improvement in adjusted EBITDA through the first March of the year. Looking forward with the support of our strong balance sheet, we will continue to maintain a balanced approach to capital allocation. As I have mentioned previously, our company underwent multiple decades of underinvestment.

In general, capital investments to upgrade facilities were deprioritized. As a result, we will further accelerate capital investments to improve our manufacturing operations and enhance the technological fundamentals in our business. We have previously discussed our large casting foundry expansion at our Chattanooga facility, which will expand our product capabilities and improve costs for some of our specialty valve products. We remain on track to complete this project by the end of this year. We are initiating a multiyear project at our brass manufacturing facility in Decatur, Illinois, which will enable us to unlock significant efficiencies for both infrastructure and technologies.

Our Decatur operation, which includes a brass foundry, manufactures brass products and parts for valves and hydrants. The Decatur Foundry has been critical to Mueller's success. In fact, the company was founded in Decatur over one hundred and fifty years ago and some of the structures date back to the early 1900s. We believe further investment to expand capacity and technological capabilities will help us enhance execution of our key strategies including accelerating new product development and cost efficiencies. Over time, we expect that capital investments to modernize and expand our facilities like the Decatur investment will lead to non price gross margin improvements and enhance our adjusted EBITDA conversion margins.

Additionally, we expect these initiatives will drive above market sales growth and improve manufacturing performance. Over the next few years, we plan further reinvestment in our manufacturing base before returning to a more normalized level. As we improve our execution, we will also continue to return cash to shareholders through our ongoing share repurchase program and quarterly dividend. During the third quarter, we repurchased $10,000,000 of stock and most recently we announced an increase in our quarterly dividend. I will wrap up my comments with a review of our current full year 2019 expectations for consolidated results.

During our fourth quarter, we anticipate growth in all of our end markets. We believe the municipal end market remains healthy despite challenges from severe weather and labor constraints. Our expectations for the residential construction end market remain positive despite the challenges from weather and slower growth in the housing starts during the year. We anticipate that our 2019 full year consolidated net sales growth will be towards the lower end of the 7% to 9% range we communicated in our second quarter earnings release. However, we expect our adjusted EBITDA growth will be towards the midpoint of the 12% to 15% range previously provided.

We are focused on finishing the year on a strong note and are excited about the opportunities ahead of us in 2020 and beyond. Marty will now provide some final comments on our 2019 outlook.

Speaker 3

Thanks, Scott. For full year 2019, we expect that depreciation and amortization will be about $53,000,000 Corporate SG and A expenses are expected to be between $34,000,000 and $35,000,000 Net interest expense is expected to be around $21,000,000 Our effective income tax rate for the full year is expected to be between 2325%. Finally, we currently expect capital expenditures to be about $80,000,000 and we continue to evaluate additional investment opportunities. With that, operator, please open the call for questions.

Speaker 0

Thank you. We will now begin the question and answer session. Our first question comes from Michael Wood with Nomura Instinet. Your line is open.

Speaker 4

Good morning. This is Ryan Coyne on for Mike. You didn't change your end market assumptions for 2019, so just curious what's driving the shift to the lower end of the 7%, 9% sales range?

Speaker 2

Yes, I think we did change it a little bit in that we said at the lower end because I think that housing starts in general have been below, I think, everybody's expectations. But I think that the fundamentals in the muni market and the fundamentals with what's left in housing is still good enough to get us to the bottom end of the range by the end of the year. I think the other thing of import is that the I think the weather that we saw in Q2 especially slowed construction. And it slowed construction in Muni and new housing starts. So we believe that there's enough family formations or household formations and with the most recent interest rate deduction that that we will continue to see tepid demand for housing starts.

Not hot, but kind of warm.

Speaker 4

Okay, great. And then just one more. On CapEx, you're guiding to increase CapEx spend, 80,000,000 from 60,000,000 to $65,000,000 previously. With only one quarter left in the fiscal year, how much of this multiyear CapEx project is going be hitting this year? And then what should we expect CapEx to trend at maybe over the next one to two years?

Speaker 2

So I think that that's a great question, by the way. I think that the legacy of the business is that this is a business that I kind of think of as needing somewhere figure around 4% of sales as a kind of a target for this kind of technology business along with some legacy industrial capacity issues. Think about 4%. I think we were underinvested in for decades. And we have this period where this year, I think we're at 8% of sales.

And I think that that is an elevated level that we will see for one or two years. And then in the long run, you should expect to kind of get back to around that 4%. I think the other thing of import is that the amount of manufacturing productivity we get and the impact we both get from a power usage, water utilization, some of the ESG considerations are also part of these investments. So I think we'll be elevated for this year and probably two more and then we should get back to some normal level of sales.

Speaker 4

Great. Thank you.

Speaker 0

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

Speaker 5

Thank you. Good morning, everyone.

Speaker 2

Good morning.

Speaker 5

Hey, one of the themes that we've seen this earnings season and more from the industrial companies are short cycle pressures and destocking across distributors. Now look, you're in very different markets than some of these core industrial companies. But are you seeing any of those types of trends this quarter?

Speaker 2

No, I think we actually experienced that a little bit in Q2. If you think back about where we felt we were, we thought inventories were a little elevated at the end of Q1 as a result of the September price increase. We had another price increase in the February that probably fattened a little bit of our traditional distributor inventories. We kind of lived through that destocking, if you will, in Q2. And I think that the flow through now with our main distributors is pretty good.

I think that what they're seeing in the way of demand is what we're seeing. So I think when you look at the water work space in general, we're going to be pretty close to when you take their pipe and put it off to the side. We'll be pretty much looking exactly like they do.

Speaker 5

Good. So that's the sell in matching sell through. Is that what you're referencing?

Speaker 2

Perfect. Yes.

Speaker 5

Okay. And then on this manufacturing footprint investment, can you flesh out a bit more the timing of this towards the end of the year? You did reference manufacturing performance as one of the headwinds this quarter. So what was the triggering event? It's kind of a midstream year to make a decision, hey, we're going to start investing in the footprint here.

That part makes sense, but what was the catalyst? And then I've got some follow-up in terms of what do you expect the return should be on these investments?

Speaker 2

Well, thank you for the question. And let me kind of back up to a higher level for a minute and say that when we look at all of the foundries and we look at modernization opportunities, whether it's for automation or just moving away from core furnaces to cordless and better power utilization. There's a lot of opportunities left in all of our melting technologies as it exists today. In particular, when we looked at the upgrades in some of the facilities in Decatur and went and toured and took a hard look, I thought that, as I referenced in my script, that investing more money buildings that were opened in 1920 where the spacing between pillars and some of these kinds of things, I thought was a sub optimization utilization of capital and thought that we would be better with new facilities. And I think the other big catalyst was, you know, talking with our our employees there and and and the union and and getting the assurances that, you know, we would have a skilled workforce be able to take us to this next generation of technology in the plants, I felt good about it.

And I'm not losing sight of the fact, last but not least, that as you look at these kinds of projects, I think, keep me honest here, Marty, but I believe the it's in 2023 that the bonus depreciation treatment from a tax perspective will need to be renewed by Congress. And so as we looked at what went in service and that we would get the favorable tax treatment on, we felt like since this was a multiyear project that we needed to kind of break ground and get going from a fairly soon.

Speaker 5

And just I might have missed this, but what was the reference to the manufacturing performance as a headwind this quarter? And was that a catalyst in moving the decision along to ramp up investment?

Speaker 2

No, I think that we've always had a kind of transparency with you guys. And I was not terribly happy with how much productivity we got in manufacturing. I think that from an EBITDA point of view, it was okay. But I was expecting more and I think that many people who remember our Q3 from a year ago would have said, we had the furnace problems in Chattanooga, which really impaired our performance a year ago. And so this should have been a little bit easier comp for manufacturing.

And I felt like it had some room for improvement there. That was what the comment was in reference to.

Speaker 5

That's helpful. And this last one for me. Just to clarify, are you prepared yet to talk about what kind of returns you get on this CapEx internal rate of return? Any sort of metrics like that would be helpful. Thanks.

Speaker 2

Okay, I think where we are right now, Dean, is that we obviously have our internal hurdles that we have to meet and that I think have our philosophy around scratch and stretch goals involved. And I think I would prefer at this point to consult with IR and finance and say what we're going to say publicly. But I can assure you that our internal targets are fairly healthy returns on projects like this. But to give you a number, I'd rather defer, if I may.

Speaker 5

Absolutely. Thank you.

Speaker 6

Thank you.

Speaker 0

Our next question comes from Brian Blair with Oppenheimer. Your line is open.

Speaker 6

Thank you. Good morning, everyone. Good morning. Good morning. Was hoping you could offer a little more detail on the fourth quarter outlook.

If we exclude assumed Krausz contribution, still decent growth there baked into the fourth quarter and obviously a challenging comp with both segments. How should we think about growth in Infrastructure and Technologies in 4Q?

Speaker 2

Yes. Well, I think that the way to think about it is we kind of say we think we'll probably end up around the lower end of the range. So you can do the weighted average math to kind of get you that 7% ish kind of number. But I think what we have that is still fairly healthy growth is the nuance of this is that we still have a lot of the Ecologic DX nodes to ship. In Q3, we saw kind of technology sales disappointing.

That was largely due to the lumpiness that we experienced with getting a lot of the Echo shipments that we were expecting to go to some West Coast customers getting pushed into what is our fourth quarter. And so that kind of, if you will, almost two quarters of demand for Echo in the component business, getting stacked on each other in the fourth quarter gives us the confidence that even if we have a similar housing environment, even if we have a similar muni environment, that instead of detracting from growth that we expect technologies to help with growth in Q4. And that's why we feel like we could be at that kind of low end of the range.

Speaker 6

Okay. That's helpful. And then I understand your fiscal 'twenty guide is not out yet. But from where you stand, can you speak to confidence in sustained growth next year? And maybe any difference in end market outlook as much as you have visibility to that right now?

Speaker 2

Right. I think that I'll couch it with, given the interest rate environment, given the trade environment, as long as everything kind of calms down and settles down, I have no reason to believe there's any catalyst on the horizon to send us into a period of correction from an economic activity point of view. So no, I think that we continue to see favorable market dynamics, low interest rate environment, low housing inventory, the infrastructure aging problem has not been invested away. So I think that all of the fundamentals you would expect to say, yeah, it should grow again next year are in place. On the other side of that, we have the storm clouds moving with trade.

We have this discussion. It's almost like everybody's waiting to say what will send us into a recession because the expansion has I think we're now in the tenth year of the expansion. So these things are increased uncertainty. And so I believe that know, not barring something that sends us into a recession, that that the fundamentals in water and water infrastructure and the fundamentals for housing and and, you know, new developments, curb and sewer, are all positive. And you would expect them to provide growth next year and beyond.

Speaker 3

And probably just the one other thing to remind you of is from a Krausz perspective, for our fiscal twenty nineteen, we will have had nine months of acquisition revenue. And as we move into 2020, it will just be our first quarter that will benefit from year over year, with Krausz as a new entity for us.

Speaker 6

Got it. I appreciate the reminder. And in terms of Krausz, how has the integration been to date? Any surprises? Is that business performing as expected?

Speaker 2

Yes. I think the integration is going very well. I think that we're seeing good cooperation both Mueller to Krausz, Krausz to Mueller. I think the sales teams are doing an excellent job of providing a united face and the work that we're doing around harmonizing third party representatives and getting our channels distribution aligned. I think all of that is going very, very well.

I think that we've had really good growth as well, both good couple of record months during the year. So performing as expected. But as I've said all along, you don't buy these kinds of companies for Q1 or Q2. You buy them for the multiyear investment. We continue to believe that repair market is going to grow in double digits as this, if you will, the Weebel curve of failures accelerates.

And we think we're kind of in that inflection point.

Speaker 6

Yeah. All makes sense. And one last quick one if I can. The tax rate guide moved a couple points lower. To what extent was that affected by discrete items this year?

Or is 23% to 25% somewhat sustainable going forward?

Speaker 3

I think overall, as we look at the effective tax rate for this year with the current guidance of about 23% to 25%, we did have a lower tax rate in the third quarter, as you saw. Certainly, a few items for that, but I would call out one of the reasons for this quarter was the reversal of uncertain tax position reserves, that were reversed this quarter. I think overall, again, not specific guidance looking out, but, certainly we are subject to the federal statutory tax rate of 21%. Certainly need to consider state taxes on top of that. And then just as reminders we've discussed with the tax law changes back in 2017, there were some previous deductions that we were able to take advantage of.

And I'll call out the Section 199 or manufacturing deductions that have been eliminated now as part of the tax law changes.

Speaker 6

Okay. Thanks again.

Speaker 0

Our next question comes from Brian Lee with Goldman Sachs. Your line is open.

Speaker 7

Hey, guys. Good morning. Thanks for taking the questions. Hey Scott, I think during your prepared remarks around some of the elevated spending and investment here, you did mention specifically EBITDA margin conversion potential expanding. Can you maybe give us some sense of what you might be targeting there?

Is it to get back to the historical kind of 35% to 40% drop through levels or maybe well above that? Any color there would be helpful. And then just a timeline around when some of this might start to show up in the results?

Speaker 2

Yes, okay. So bunch of questions there. Let's break it down. I think, yes, the conversion margin, couple of things I'm a little bit sensitive to in what you said there, Brian, is that one, our conversion margin when the impact for inflation is normalized that we've seen through the last six quarters, our conversions are in the 30s. And so this would obviously be expected to accelerate conversions.

So I think that you're going to start to see better and better conversion margins as long as we get back to a stable commodity environment. Secondly, I think that the the timing for this, it's, you know, it's a long cycle project. It's, you know, real impacts are gonna be the '22 and beyond, basically. And I think it's, you know, we expect the the impact to be wide ranging in in the context of not just, you know, without getting in any of the competitive information, not just a cost improvement, but also some material breakthroughs that will will allow us to, you know, fundamentally change the chemistry of some of what we make. So without getting into anything more than that, I think that the cost outlook should be for improvement 'twenty two and beyond and that the yes, you should expect conversion margins to be higher than they would be normally with these changes.

And what was the third part of your question? I'm sorry.

Speaker 7

That you got it. It was just around the sort of targets and maybe the timeline. So that's helpful. Maybe just related to that, as you think about this kind of newer CapEx spending level being the new normal for the next couple of years here, thoughts around free cash flow conversion, any sort of targeted range or levels we should be thinking about during this level, or this heightened CapEx spending environment?

Speaker 3

Look, think as we think about free cash flow, I think certainly as we're going to have higher levels of capital expenditures, that is going to adjust what we've given as sort of a long term guidance to be able to see free cash flow approximating our net income. But I think, I would expect, with these higher levels of CapEx that we're going to see, that you won't see that over the next few years.

Speaker 7

Okay, fair enough. Thank you.

Speaker 0

Our next question comes from Zane Karimi with D. A. Davidson. Your line is open.

Speaker 8

Hey. Good morning.

Speaker 2

Good morning, Vaden.

Speaker 5

So it looks like you still have

Speaker 8

a relatively positive view on the resi portion of your business. Can you provide any more color on, like, the discussions you've been having with your customer channel in regards to the market? And then also, does it feel like they've, like, kind of found a bottom from the slowdown in this market?

Speaker 2

Well, I think I think, you know, our our view, just to be clear, is that so we end up somewhere around, you know, let's say, in that eleven fifty to 12 housing start kind of number. When it's all said and done, the bad Q2 kind of closed through, but Q3 and Q4 are the two construction seasons and we see the summer activity pick up some more subdivision curb and sewer going in. That's our view. So I don't know how to say, well, I'm gonna justify this view based on this, or the other thing. But I think the pent up demand that was created from the severe weather and the rainfall impacted resi construction as much as it impacted muni demand.

And so I think we're starting to feel like there is push through and flow through at the distribution channel to the contractor community. And that's what gives us confidence that our Q4, which I'll remind everybody, ends September 30, so it's this summer construction season, should be enough to give us the confidence that we'll continue to see a strong order book through the end of the year. Where is the bottom? I think that the question that I would ask is what are the fundamentals around household formation, around availability and inventory of new houses, what's happening with average price, average house price, things like that. I think they're all paused a little bit, but they're not negative.

There's low inventory. There is opportunity for housing sales to continue. So I think that to call it dead or at the bottom is maybe a little premature. And so we think that that number, we think long term equilibrium is around 1,400,000 to 1,500,000 housing starts, and we continue to see ourselves being in that 200,250 housing starts below that. So I think there is room for it to move up.

Speaker 8

Thank you for that color there. And then kind of changing topics here, but also the capital allocation priorities. You you guys have talked about being internally focused right now, but can you also talk about the m and a pipeline and how much of a focus is that for Mueller right now?

Speaker 2

So let me let me start by saying, you know, our capital allocation, you know, is is to be balanced. And, you know, we we bought $10,000,000 worth of shares in the quarter. We just increased our dividend in the quarter a couple of weeks ago. We've increased our capital spending. We've done an acquisition this year with Krausz.

We continue to have an active acquisition pipeline. We believe the strength of our balance sheet and the position that we have both with relatively low net debt leverage that we can continue to do all of these things in a balanced approach. And we're committed to remaining balanced. So yes, we continue to look at M and A and yes, we will continue to look at our investment opportunities both internally, share buybacks and dividends.

Speaker 9

Thank you.

Speaker 0

Our next question comes from Joe Giordano with Cowen. Your line is open.

Speaker 5

Hey guys, good morning.

Speaker 2

Good morning, Joe.

Speaker 10

Hey, just like going through the fourth quarter kind of implied guide using the low end of revenue and the midpoint of EBITDA, it's a pretty sizable year on year growth and margin. So can you kind of I think it's almost 20% year on year growth of 17%, something like that, and margins up 200 something basis points year on year. So can you kind of talk me through where that's what are the major buckets, where that's coming through?

Speaker 2

Yeah. I think the the the the biggest piece is gonna be coming from, you know, the bump we get from technologies as I've referenced earlier. It's primarily a lot of pent up kind of unit sales of the Echologics Echoshor Dx, and then discontinued execution in manufacturing. And then we're gonna lap in September. We'll lap the September price increase, but we still have a fairly healthy conversion on the impact of having a basically being in a period right now in our valves and hydrants business of two price increases, one in September a year ago and then another one in in February.

They're they're the main reasons.

Speaker 10

Is the is the commentary you're making on tech is on the bump up in sales, is that gonna how does that impact profitability? And kind of related to that, is that kind of $100,000,000 kind of run rate seem is that like the forward kind of expectation now? And if it is, what's required to meet kind of sustainable profitability there?

Speaker 2

So let start by saying, tech overall, relatively pleased with where the team has gotten both from managing the business closer, relatively small amount of growth there, but we have $2,500,000 of EBITDA improvement year to date, that's through the first nine months. The second part of your question is, what do we need to get to kind of breakeven? I think the business that is 100,000,000 and $125,000,000 there's opportunities both from an efficiency point of view and from a price and discipline point of view that we should be able to get to breakeven when we scale a business that large. And we're still not there, but I think that that buck in a quarter area, should have enough scale that we could be through breakeven. With all of that said, we still have to take share smartly.

We have to we have to grow our sales smartly and not just use price. We have to find other sources of, you know, sustainable strategic advantage. And one of those areas, which I've been saying for a long time is, and I think anybody who is at age got a little taste of it, is that the strategic importance of the technologies group in order to put sensing abilities in our fire hydrants, in our valves, in our insertion valves, is terribly strategically important for us in the long term. And, you know, we've just started with software introduction that can do both acoustics, flow metering, and pressure. We've got flushing technologies that are out there now as well.

So I think that technologies, let's call it their contribution to where we are from the infrastructure health and where we are from pricing power and where we are from channel power in the infrastructure is terribly important. I think we continuously overlook it.

Speaker 6

Thanks.

Speaker 0

Our next question comes from Andrew Buscaglia with Berenberg. Your line is open.

Speaker 11

Hey guys, thanks for taking my question.

Speaker 6

Good Good morning. Can you talk a

Speaker 11

little bit about your CapEx

Speaker 2

is a

Speaker 11

little bit more elevated? Does it change the way you think about M and A? Was there a reason why you maybe push are pushing forward with a little more CapEx and that maybe M and A is not something you see is likely near term?

Speaker 2

No. As I said, we want to be balanced. We'll continue to look at the M and A pipeline. We think we have the capacity to do both. I think that even on the cash flow conversion as we talked about, but I still think we have opportunities from working capital, opportunities, other ways to generate cash as well.

So I think that we are going to be balanced. But with that said, I think that we believe we're in a period that with the bonus depreciation structure that is certainly in our favor to go ahead and take advantage of the bonus depreciation through 2023 as much as we can because all it will do is trade the cash out for CapEx and turn it into cash out for cash taxes.

Speaker 11

Yeah. Okay.

Speaker 2

Okay. Math is compelling.

Speaker 11

Right. Yeah. Okay. And then any reason why your SG and A I would have thought your SG and A would be a little bit lower across both segments. And then looking forward, should we be modeling sort of an elevated SG and A right now?

It seems like your sales are going come at the low end of what you're expecting, so you would think that SG and A would maybe trend a little bit lower.

Speaker 2

Yes, I think that from this discussion from before, I think that you've got to take the piece that's the impact of the acquisition and maybe what we can do is call that out. But there's an infrastructure of people all around the world that's associated with Krausz and the Israeli facilities. We have a dual facility running. The Tel Aviv facility, manufacturing facility will close at some point here in the, let's call it, the next six months and we will have everything in Ariel and then you'll get some SG and A efficiencies there. But the largest increase, if you look for the past two years to our total SG and A spend, have come as a result of the Singer acquisition and the Crest acquisition.

Speaker 11

Okay. And then, Jameet, just one last one. Your technologies, your top line, what saw a decline. But, yeah, seasonally, usually, q four tends to be strong. Should we think about that seasonality similar?

I guess, just looking at what it was last year. Is there anything any dynamics into year end where you might see a pickup and could still see year over year growth despite a tough comp from last year?

Speaker 2

No. I think that last year, everybody needs to remember we had the bulge of shipments that got hung up at the end of Q3. Shift in Q4 I think was around $2,000,002,500,000 So it is a tough comp. That's such a lumpy business that I would say that it's project based and lumpy that I would expect the lumpiness to help us in the Echo business, but I'm not sure what we have in terms of visibility for meter shipments.

Speaker 11

Got it. Okay, thanks.

Speaker 0

Our next question comes from Walter Liptak with Seaport Global. Your line is open.

Speaker 9

Hi, thanks. Good morning, guys, and congratulations on a nice quarter. I wanted to ask about the EBITDA improvement in Technology. So EBITDA up 2.5% or $2,500,000 year to date from last year. And the quarter was a little bit better.

Is it something structural that changed, or was it a mix? Why is EBITDA in tech looking better this quarter? I

Speaker 2

think there's a combination of things. They're running the business better, I believe. They're being more responsible around what business we take and what business we don't take. We're not chasing volume at breakeven on some of them. I think also that the distribution channel, as we've executed our strategy around getting our channel house in order, if you will, and we're now picked up and we have primary relationships with some of the same large distributors that our valves and hydrants business has primary relationships with.

We're getting some operational efficiencies there because when you have large customers, you can actually see the demand and you can make the schedule and you can avoid overtime and you can avoid a lot of the inefficiencies that come with kind of whipsawing the plant around. So I think the $2,500,000 has been a combination of price discipline and manufacturing efficiency improvements. And you think about it on basically flat volume, it's all operational.

Speaker 1

That's great.

Speaker 9

The fourth quarter, we are going to get close to that $100,000,000 run rate. Could the fourth quarter be at a breakeven profit level?

Speaker 2

Yes, don't think so. I think that we still got I'm just looking at the math where they are. I mean there would need to be massive improvement in either margin or cost containment. So I think it's I don't know what the number would be, Walt, but you can do the math.

Speaker 9

All right. We'll do our best. But you'll still get the price and manufacturing benefits, I guess. Just thinking about the channel inventory, you made some comments about how you're seeing sell through now into the fourth quarter with some of your contractors in municipal and resi. So could we are you saying that the inventory levels are good now, that any excess inventory from weather is now cleared out and you're getting better sell through into the fourth quarter?

Speaker 2

That's what we believe. I mean, that's after the Q2 slowdown where we think there was some destocking from Q1 going on, when we do our monthly reconciliation for what they're saying versus what we're saying, those numbers for our product lines are pretty, pretty close. So that would indicate that the sell through is matching pretty closely.

Speaker 9

Okay. Great. All right. Thank you.

Speaker 2

Thank you. Well, I want to thank everybody for joining us this morning. Of the things I want to make sure everybody is left with is I'm very pleased with our third quarter performance. I think the growth in net sales and the adjusted EBITDA and adjusted EPS are all a testament to the execution the team has undertaken. I think that we have a little more room for improvement in manufacturing, but the channel execution helping us get price, getting more price than inflation and even the impact of tariffs, which we didn't talk about this morning, all really, really positive.

And I think we remain on track to meet the net sales and adjusted EBITDA target ranges we communicated in our second quarter earnings release, which I think given what was a difficult second quarter is also a testament to the culture of execution we're trying to build here. So I think that we're focused on continuing our momentum. We believe our rent markets remain healthy. I think driven by steady growth in Muni and with residential construction markets returning to steady growth this year. I think the team is excited about the future as we prioritize reinvestments in our people, processes and our facilities.

And I think it's the time for us to accelerate capital spending to upgrade our manufacturing capabilities, especially in our three foundries. So I just wanted to reiterate that the strategies that we have been following that allow us to grow sales, to improve conversion margins and drive adjusted EBITDA margin are what we're about executing. And I just want to thank you all for your interest, and I hope you have a great week. But once again, pleased with the quarter. Thank you.

Speaker 0

Thank you. That does conclude today's conference. Thank you for participating. You may disconnect at this time.