Mueller Water Products - Q4 2022

Transcript

Speaker 6

Welcome, and thank you for standing by. Your lines have been placed on 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. I now turn the call over to Whit Kincaid. You may begin.

Speaker 8

Good morning, everyone. Thank you for joining us on Mueller Water Products' fourth quarter and fiscal year-end 2022 conference call. We issued our press release reporting results of operations for the quarter ended September 30, 2022 yesterday afternoon. A copy of the press release is available on our website, muellerwaterproducts.com. Scott Hall, our President and CEO, and Martie Zakas, our CFO, will be discussing our fourth quarter and full year results and our outlook for 2023. 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, which address our 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 2 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 on the thirtieth of September. A replay of this morning's call will be available for 30 days at 1-800-834-5839. The archive 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 Scott.

Speaker 7

Thanks, Whit. Good morning. Thanks for joining us for our fourth quarter earnings call. We were pleased to deliver our second consecutive year of double-digit net sales growth. Our fourth quarter net sales growth exceeded our expectations, driven by continued higher price realization. We saw healthy order activity during the quarter and ended the year with record backlog. The sequential increase in orders is a testament to the resiliency of end market demand in the face of an evolving macro environment. Our fourth quarter results were disappointing as lower than expected shipment volumes of service brass products and manufacturing inefficiencies at our brass foundry more than offset the higher net sales. While improved price realization has helped offset the current level of inflationary pressures, it has not been enough to offset all of the headwinds.

Although we continue to experience headwinds from the ongoing supply chain disruptions and inflationary pressures, our teams maintain their focus on executing our large capital projects. We have a lot more work to do, but are confident we will deliver the benefits of our key initiatives, including our large domestic capital investments. Last month, we announced several corporate governance changes, including the appointment of two new board members. Our board also announced a process to accelerate the refreshment of our board of directors. Our board believes in the importance of having best-in-class corporate governance, including a proactive board refreshment process and ongoing shareholder engagement. Both new members bring valuable operating and supply chain management experience to our board. We believe Mueller and its stockholders will benefit from the perspectives and insights of our new board members and their support of the company's commitment to enhance shareholder value.

Before turning it over to Marty, I want to thank Bill Cofield, our Senior Vice President of Operations, who recently announced his retirement. Bill has worked tirelessly to drive process improvement in our operations during the past five years. Most notably, he led the development and execution of our safety, excellence and leadership program, which is used to evaluate safety and environmental performance across all areas of our facilities. Bill has kindly agreed to stay on to support the transition to new leadership. Paul McAndrew just started as Mueller's new operations leader. Paul brings more than 20 years of manufacturing experience and served most recently as Vice President of Global Operations and Supply Chain for Emerson Commercial & Residential Solutions. Now I'll turn the call over to Marty to discuss our financial results.

Speaker 4

Thanks, Scott, and good morning, everyone. I will start with our fourth quarter 2022 consolidated GAAP and non-GAAP financial results. After that, I will review our segment performance and discuss our cash flow and liquidity. Our consolidated net sales increased 12.1% to $331.4 million compared to the prior year, with growth in both Water Flow Solutions and Water Management Solutions. The increase was primarily due to higher pricing across most of our product lines, which was partially offset by a decrease in volumes, mainly in our service brass products. For 2022, our consolidated net sales increased 12.3% due to both higher pricing and increased volumes. Gross profit of $85.6 million decreased 0.8% compared with the prior year.

Gross margin of 25.8% decreased 340 basis points compared with the prior year, as benefits from higher pricing were more than offset by higher costs associated with inflation, unfavorable manufacturing performance, and lower volumes. The unfavorable manufacturing performance, which includes the impact of outsourcing, machine downtime, supply chain disruptions, and labor challenges, was primarily driven by our brass foundry and specialty valve operations. Inflation increased sequentially as we experienced higher costs associated with raw and purchased materials, tariffs, utilities, freight, and labor. The supply chain disruptions continued to impact our total material costs, which increased around 14% compared with the prior year. However, our price realization again improved sequentially more than covering inflationary pressures. Selling, general, and administrative expenses of $63.6 million in the quarter increased 12.4% compared with the prior year.

The increase was primarily driven by inflation, investments in personnel, T&E, trade show activity, and professional fees. SG&A, as a percent of net sales, was 19.2% as compared to 19.1% in the prior year quarter. Operating income of $11.6 million decreased 58.3% in the quarter compared with $27.8 million in the prior year. Operating income includes strategic reorganization and other charges of $3.6 million in the quarter, which primarily relate to transaction expenses and previously announced plant restructurings. Additionally, we wrote off the goodwill relating to our specialty valves product line, which was a non-cash expense of $6.8 million. Turning now to our consolidated non-GAAP results. Adjusted operating income of $22 million decreased 25.9% compared with $29.7 million in the prior year.

The benefits from higher pricing were more than offset by higher costs associated with inflation, unfavorable manufacturing performance, SG&A expenses, and lower volumes. Adjusted EBITDA of $38.6 million decreased 15.4% in the quarter, leading to an adjusted EBITDA margin of 11.6% compared with 15.4% in the prior year. For 2022, adjusted EBITDA of $194.5 million declined $9.1 million or 4.5%, yielding an adjusted EBITDA margin of 15.6%. Net interest expense for the quarter declined to $3.9 million as compared with $4.4 million in the prior year. The decrease in the quarter primarily resulted from higher interest income.

For the full year, our effective tax rate was 22.3% as compared with 25.8% in the prior year, primarily due to benefits from R&D tax credits and lower foreign tax rates. For the quarter, we generated adjusted net income per share of $0.10 compared with $0.12 in the prior year. For the full year, our adjusted net income per share increased 3.6% to $0.58 per share, compared with $0.56 per share in the prior year. Moving on to the quarterly segment performance, starting with Water Flow Solutions. Net sales increased 8.8% compared with the prior year, primarily due to higher pricing across most of the segment's product lines. Double-digit sales growth in iron gate valves and specialty valves more than offset lower volumes of service brass products resulting from manufacturing inefficiencies.

Adjusted operating income of $20.5 million decreased 26.5% as the benefits from higher pricing were more than offset by higher costs associated with unfavorable manufacturing performance, primarily at our brass foundry and specialty valve operations, inflation, and lower volumes. Adjusted EBITDA of $28 million decreased 21.3%, leading to an adjusted EBITDA margin of 15.6% compared with 21.6% last year. For the full year, adjusted EBITDA margin was 21.7%. Turning now to Water Management Solutions. Net sales of $152 million increased 16.3% as compared with the prior year, primarily due to higher pricing across the segment's product lines. Hydrants, gas, and repair and installation products experienced double-digit net sales growth compared to the prior year, driven by higher pricing and increased volumes.

Adjusted operating income of $13.8 million decreased 1.4% in the quarter as benefits from higher pricing and increased volumes were more than offset by higher costs associated with inflation, SG&A expenses and unfavorable manufacturing performance. Adjusted EBITDA of $21.9 million increased 2.8% in the quarter, leading to an adjusted EBITDA margin of 14.4% compared with 16.3% last year. For the full year, adjusted EBITDA margin was 15.7%. Moving on to cash flow. Net cash provided by operating activities for the year ended September 30, 2022 was $53.9 million compared with $159.8 million in the prior year.

The decrease was primarily due to an increase in inventories, primarily driven by higher volumes and the supply chain disruptions as well as inflation. Average net working capital using the five-point method as a percent of net sales increased to 27.5% compared with 25.7% in the fourth quarter of last year, primarily due to higher inventories. During the year, we invested $54.7 million in capital expenditures compared with $62.7 million in the prior year. Free cash flow for the year was -$0.8 million compared with $97.1 million in the prior year, primarily due to the decrease in cash provided by operating activities, partially offset by lower capital expenditures. Additionally, during the quarter, we repurchased $10 million in common stock, bringing our full year total to $35 million.

As of September 30, we had $100 million remaining under our share repurchase authorization. At September 30, 2022, we had total debt of $446.9 million and cash and cash equivalents of $146.5 million. At the end of the fourth quarter, our net debt leverage ratio was 1.5 times. We did not have any borrowings under our ABL agreement at year-end, nor did we borrow any amounts under our ABL during the year. As a reminder, we currently have no debt maturities before June 2029. With $307.2 million of total liquidity at the end of the year, we continue to have ample liquidity and capacity to support our strategic priorities, including acquisitions. Scott, back to you.

Speaker 7

Thanks, Martie. I'll touch on fourth quarter performance, end markets, and our full year 2023 outlook. After that, we'll open the call up for questions. Similar to last quarter, manufacturing challenges were the primary reason for our disappointing gross margin and adjusted EBITDA conversion compared with the expectations provided on our last earnings call. The adjusted EBITDA gap was around $10 million, primarily due to a gross margin gap of around 400 basis points, partially offset by lower SG&A. The primary driver of the gap versus our expectations was the manufacturing performance at our brass foundry. The machine downtime challenges did not improve as we anticipated for August and September. Due to the downtime in our brass foundry, our melt production was more than 20% below our forecast.

The foundry production was down about 35% sequentially and more than 50% below the prior year. While machine uptime has had periods of improvement, we have been unable to get foundry production up to 2021 levels. Lower foundry production impacted our service brass shipments in the quarter and led to a significant amount of underabsorbed labor and overhead costs. Additionally, as this foundry supplies brass parts to our other facilities, we incurred higher outsourcing costs to meet our needs for brass purchase parts. While we expect the challenges to continue into 2023, we believe we can get the foundry production back to 2021 levels in the second half of the year. The new brass foundry startup and progression to full run rate are critical for us as it is the best long-term solution for the manufacturing inefficiencies.

We are on track to begin the initial startup phase later this quarter. In the new year, we expect the production part approval process to begin. We will prioritize developing tools for the highest volume brass parts first. The new foundry will have more than two production lines to provide capacity for maintenance and contingency planning. We also will have significantly more capacity at the new foundry. The manufacturing inefficiencies have added pressure to other plants since the foundry has historically made some of the brass parts used in iron gate valves and hydrants. This needed outsourcing has unfavorably impacted our product costs compared with the prior year. With record backlog for service brass, iron gate valves, and hydrants, we anticipate material outsourcing to continue until the new foundry is able to take over the production for these parts.

We took additional price actions during the quarter due to these higher costs and ongoing inflationary pressures. I will now briefly review our end markets and updated outlook for 2023. As mentioned earlier, we saw healthy order activity again during the quarter. We believe this was primarily due to strong municipal repair and replacement activity offsetting slower new residential construction. We expect municipal repair and replacement activity to remain healthy in 2023 as utilities try to proactively address the aging water infrastructure while they also deal with unplanned maintenance issues like water main breaks. As a reminder, we estimate that approximately two-thirds of our net sales are related to repair and replacement activities of utilities, which provides resiliency for our business. We believe the initial phase of the new funding from the infrastructure bill could flow into projects later in 2023.

While improvements in the ongoing supply chain and labor availability challenges could improve the timing of projects, we don't expect to see meaningful benefit until 2024. For the new residential construction end market, specifically lot and land development activity, we continue to anticipate that the higher interest rates will lead to lower levels of lot and land development activity as the housing market adjusts to lower demand. As a result, we expect to see a slowdown in residential construction activity in 2023. However, we do expect new residential construction activity to normalize at a level above pre-pandemic levels due to relatively low inventories, demographics, and population shifts. Moving on to our updated outlook for 2023.

The record backlog at the end of 2022 across our short cycle products and the expected realization from higher pricing position us to deliver net sales growth in 2023. We currently anticipate that our consolidated net sales will increase between 6% and 8%. We did see a slowdown in order activity in October. However, this isn't surprising given the timing of our most recent price increases in August and the evolving macro environment. As a result of our sales growth forecast and improved operations execution, we expect adjusted EBITDA will increase between 10% and 14% as compared with the prior year. Note that this outlook includes a headwind from higher pension expense, primarily due to the stock market performance.

We estimate the expense will be approximately $3.8 million, or a swing of -$7.7 million versus the prior year. Our adjusted operating income, which excludes the impact of pension expense, is expected to increase more than 20% compared with the prior year. As a result of improved cash flow from operations, we anticipate free cash flow to increase as compared with 2022. This forecast includes higher capital expenditures from both carryover spending and the completion of the new brass foundry, in addition to other capital investments. Taking this increase into account, we expect free cash flow as a percentage of adjusted net income to be between 40% and 60%. These expectations assume the challenges associated with higher inflation, labor availability and supply chain disruptions will continue in 2023.

With our broad portfolio of water infrastructure products and solutions, we are well-positioned to help water utilities address challenges from aging infrastructure, climate change and workforce demographics. Our top priorities for 2023 include executing operational improvements, delivering benefits from our large domestic capital investments, accelerating development and commercialization of new products, and generating ongoing price realization. Our strategies are focused on capitalizing on the key trends in water, which include the increased demand for water infrastructure products that qualify for the federal domestic production requirements. Key trends are also driving the growing need for technology-enabled products and solutions to help customers address challenges with the aging water infrastructure. With our strong balance sheet, liquidity and cash flow, we will continue to reinvest in our business while returning cash to shareholders through our quarterly dividends and share repurchases. We recently announced another increase to our quarterly dividend.

During this past year, we repurchased $35 million of common stock. With $100 million remaining in our share repurchase authorization, we will continue to balance our cash allocation to support our key strategies to grow the business. That concludes my comments. Operator, please open this call for questions.

Speaker 6

We will now begin the question-and-answer session. If you would like to ask a question, please unmute your phones, press star one and record your name clearly. To withdraw your question, you may press star two. Again, press star one to ask a question, and one moment for the first question. Looks like our first question comes from Brian Lee with Goldman Sachs. Your line is open. You may ask your question.

Speaker 5

Hey, everyone, this is Miguel on for Brian. Thanks for taking the question. Appreciate all the guidance around 2023. Maybe if I could just start there. On the adjusted EBITDA guidance for 2023, it's looking like it's implying a fairly steep ramp in adjusted EBITDA margin, coming off of maybe a more challenging fourth quarter. How should we think about the cadence on margins through the year? Should we sort of be thinking about the fourth quarter as the bottom of adjusted EBITDA margins and things picking up from there?

Speaker 7

Yes. You know, as you think about what the math would indicate, you're absolutely correct in that it's gonna ramp in the late second half, and be higher in the second half than in the first half. The implied conversion margin is in the 20%-35% range, with about 27% as the midpoint. There is some noise in here that you're seeing that we have due to the operational issues. We expect some of the outsourcing to be transitory. As the year progresses, we will do less outsourcing and make more of the brass in-house with the new foundry.

As the year progresses, everybody will recall that we have signed agreements with our unions and our foundry plants that will allow us to start weekend shifts on a regular basis as they get staffed. As that comes up, we would expect the outsourcing premiums to disappear over the second half of the year. The other thing that kind of mutes the improvement on the EBITDA as a result of the 6.8% is some pension expense change, about $7.9-$8 million, something like that, year-over-year, that goes from, you know, a benefit in our baseline year of 2022 into an expense of 2023.

I believe the turning point comes in the middle of 2023 as we get more of these challenges associated with the outsourcing, associated with the restrictive language in getting staff for weekend work, and associated with the equipment uptime as our brass facility has fewer and fewer pounds going through it. For everybody on the call, our problems for the year could be best described as coming from outsourcing, primarily from brass performance and the foundry, the current foundry that's had its challenges, some predictable, but many unexpected.

I think that the main message here, though, is that I expect most of those manufacturing performance issues associated with the outsource and associated with the lost absorption, for lack of a better word, in the downstream processes because of material shortages from the brass foundry is that they will be mostly transitory. As we bring the new foundry up, and as Kimball gets to run at rate, I think if you heard Marty's comments, you know, it really was primarily brass and then a little bit of specialty. You know, I am pleased to report that Aurora is closed, Hammond is closed, Surrey is closed, and the Western facility out in Oregon is closed. I think progress is being made. I concede it's slower.

Speaker 5

Okay, great. Yeah, appreciate all the additional color there. Second question, and switching gears. The infrastructure bill, I think last year was not included in the guidance. You called it out in terms of maybe seeing some of that starting to flow through, maybe in the latter part of this year. What are you seeing for 2023 in terms of funds becoming available? You know, if you know, how much of that is expected to translate into some of the growth you're embedding into the 2023 revenue growth guidance?

Speaker 7

Yeah, I think that the overall message around IIJA, we remain excited. I think that it's gonna take time for the funds to flow through to new projects. I think a lot of money and tasks, you know, are starting to get processed through EPA and the state agency. See, we saw the timing lag back in 2009 with the ARRA, which caused project approval delays as utilities figured out the requirements for the stimulus dollars. The first phase of annual appropriations appear to have gone through for many states, primarily the largest like California, who has started to approve projects.

We really don't anticipate seeing meaningful benefit until later this year and believe that the benefits for next year will be limited due to ongoing supply chain constraints and labor availability challenges that the utilities will face. Expect that beyond that time period, we'll benefit from the infrastructure bill spending. I think that I do think that with the residential slowdown and residential construction could help make labor more available for some of those infrastructure construction projects. You know, the headline is starting to feel benefit in the second half of 2023 and accelerate through the 2028, 2029 period as the bill appropriations funding profile would indicate.

Speaker 5

Okay, great. That's helpful. I'll pass it on.

Speaker 7

Thank you.

Speaker 6

Thank you. Our next question comes from Deane Dray with RBC Capital Markets. Your line is open. You may ask your question.

Speaker 2

Thank you. Good morning, everyone.

Speaker 7

Good morning.

Speaker 5

Good morning.

Speaker 2

I'd like to start with the plans for the new plant ramp because this comes with its own set of operational challenges. You've got duplicate labor going on. You've got higher working capital needs that will come into play. I'd like to know with a little bit more color what's baked into your guidance, especially regarding contingencies. Ramping new plants like a foundry like this just raises prospects for more things not going exactly right or in the timing that you expect it to be. Just what's baked into your guidance for these kind of contingencies as well as the higher working capital and impact on cash flow?

Speaker 7

I think the easiest one to deal with first is the working capital. As everybody can see in our balance sheet, we've added about $98 million of inventory year-over-year. I think a lot of that is behind us. About, you know, think of a third of it as being inflationary driven and the balance of it being driven by the amount of actual units on hand. Those units on hand has been inflated as a result of you know, how much third-party inventory, material in transit, things like that, associated with the outsource. I think that there is a little more pain associated with the working capital to come from an inventory perspective, but I think most of it is already in the baseline, Deane.

With regard to the second question, without giving specific pounds for competitive reasons, on the call, I think that there is probably about 20% contingency from what we believe the machine should demonstrate at and what we have in the forecast. If you listen closely to Marty's comments, where she basically said the foundry was 20% below our expectations, 35% below sequentially and 50% year-over-year in Q4, then you would realize that that's probably at the lower end. There is some risk if we can't get the pounds anticipated through. Our hot commissioning begins actually next week. We'll be melting metal and pouring it into forms, and then we'll start the PPAP process.

The key is getting the first, you know, around 200 parts through that process. We get those first 200 parts through that process and the absorption math you're talking about will basically melt away. Because instead of running production in the new foundry, that really won't be absorbing any of the labor, it won't be absorbing any of the overhead, it will all of a sudden start to earn its way, and then we'll start to get operational leverage. So for that to work for us, we really have that kind of duplicate costs through the first quarter in our guidance. I don't know if that gives you enough color, Dean, without getting into specific numbers.

Speaker 2

No, it really does help, especially kind of framing what's your contingencies. I also appreciate the competitive dynamics. You're not gonna give the exact poundage, and so forth, but the roadmap here is helpful. All right. As a second question, shifting gears, can you, Scott, set expectations for the potential scale of change coming now that there is an activist, you have new board members coming in, that you've got this, and maybe give some context what this capital allocation and operating committee is that you are co-chair of, how is this all going to work? Just is there an expectation that there's some big change coming in the portfolio? Is there a big bath restructuring coming? We saw some impairment here.

Was that already in the works prior to the activist arriving? A lot baked into there, but if you could take us through that, please.

Speaker 7

Well, I think that there's, you know, a couple of things here that we have, you know, in the context of your question. Number one, I think that the main message is that the settlement came. We had a number of discussions. I think they were collaborative mostly with Ancora to understand their views, and to share ours, as to why we've invested as heavily as we've invested, their view as to whether it was going fast enough or not. I won't get into the specifics, but what I can share is that the board was pleased to have reached an agreement, and it accelerates our ongoing, you know, the ongoing board refreshment process. I think Bryan and Nicholas bring valuable operating and supply chain management experience to our already diverse board.

I think our stockholders will benefit. As to a foreshadowing of major restructurings and portfolio rebalancing, things of that nature, you know, at this time, I don't see any of that. I think the goodwill issue that you referenced is, you know, just a byproduct of the changing macro environment, but I'll let Marty handle where we ended up on goodwill. The message on the Ancora agreement, I think, is that, you know, we're in this vulnerable period of having made the investments. We're basically almost fully invested. We probably have nine months of investments left with the three majors. They're ramping up. I think the progress in the large casting foundry, the progress in Kimball, are about where we expect.

Certainly, they're dilutive in the duplicative period time. As we start to get on the other side of this, I expect this outsourcing magnitude, which we did not anticipate, and the flexibility we get with the new labor contracts, as I said earlier in the call, most of these will become transitory. You know, I think both Ancora and our other shareholders will stand to benefit from that. I think that their interest is in making sure we execute on that. Marty, on the goodwill?

Speaker 4

Yeah. Let me go ahead, Deane, and just talk specifically about the goodwill impairment we took this quarter. It was a non-cash expense of $6.8 million. It relates back primarily to an acquisition we had in 2014 with Line Valve Company. So this is part of our specialty valve product line. On an annual basis, we test our reporting units for any potential impairment, and largely due to an increase that we have with respect to the discount rates that we needed to use. That was the primary reason as to why we determined that we needed to write off this goodwill of $6.8 million in the quarter.

Speaker 2

That's all very helpful. Thank you.

Speaker 7

Thank you.

Speaker 6

Thank you. Our next question comes from Joe Giordano with Cowen. You may ask your question. Your line is open.

Speaker 3

Hey, guys. Good morning.

Speaker 4

Good morning.

Speaker 3

Can you just comment on what price contribution was in the quarter and how much is carrying over in that 6%-8% revenue growth guide?

Speaker 7

Yeah. I think that the price was, you know, above our expectations in the quarter. It more than covered the inflation and the dilution effect. I'd say to everybody that we're still in, you know, we're keeping track of the inflationary cycle that kind of began late 2017, early 2018, and we're still diluted, so we still have some more price to get in total. In Q4, total material cost inflation, which included the purchased parts, it remained elevated, increasing, you know, kind of mid-teens%. The improved price realization more than covered that for the third quarter, but we're still down, you know, cumulatively, and I currently expect price and inflation to continue into 2023.

As for the second part of your question, regarding, you know, what's the implied volume? The implied volume from the guidance would indicate that we'll have slightly less units year-over-year in this environment as the headwinds associated with the resi market offset by the tailwinds associated with IIJA and the, you know, the utility and the break-fix market are gonna leave us down slightly to maybe flat.

Speaker 4

Yeah. Being very clear, when we look at the short cycle backlog and the series of price increases that we took, we go into 2023, you know, knowing that we'll experience higher price realization as we continue to work through the backlog that we have with the series of price increases that were taken.

Speaker 3

Perfect. Can you just, like, level set us on all the capital projects? I know there's a lot been happening over the last several quarters, but you're starting up the brass foundry. You said in, like, a week you're starting commissioning there. You're gonna spend $70 million-$80 million in fiscal 2023. Like, where are we at the end of that? What, if any, still needs to happen, or all your major projects gonna be done by then? Just so we kind of maybe like an updated timeline on everything and where we stand.

Speaker 7

Yeah, you know, I think the Decatur foundry is nearing completion. It's the last of the three major capital projects. I'd ballpark-ish $150 million multiyear spend that was associated. Remind everybody, large casting foundry in Chattanooga. The facility consolidation play to move Woodland, Surrey, Hammond, Aurora, and some Mexico maquiladora into the Kimball facility. Then last but not least, Decatur. I think especially in the large valve investments, the first two are in the process of ramping up now, with the vast majority of the CapEx investment completed. We're completing the transition of the Aurora facility to manufacturing in Kimball. Aurora is closed and nobody's there as of September.

We remain confident that we will ramp up in 2023 with the margin benefits following accordingly in the kind of second half of the year run at rate for Kimball. The brass foundry, which will now pour the new lead-free brass, which will be an advancement in sustainability for customers and end users, will allow us to be completely lead-free by 2030 and achieve 100% lead-free manufacturing processes by 2030. I think it's the one with, you know, some execution risk today around it as some of the unknowns. You know, we've turned the power on, we got the lights on. We've done some cold commissioning, that is, you know, moving molds, punching patterns, doing things like that.

I think, combined, to answer your question specifically, all three projects are accounting for about 85% of their spending is through. If you were to say, you know, there's $22-$23 million of the $85 million, you know, 15%, the $22.5 million of the $150 million is in the new capital budget, and then you'd see what kind of we see as the maintenance budget if you took the guidance and subtracted that. I think if you look at every year since 2018 and subtract the large CapEx projects, we've been kind of in that maintenance range of that, you know, 3%-4% range of sales since then with these anomalies out. Now, next question you had was, are we done? I believe we're done.

Certainly, I'm not in a position to say that the board has approved anything of a scale and scope as to the three large capital projects that we conceived, you know, four years ago when we set off on this path. With that said, of course, there's always things around, you know, lost foam innovations. There's always things around, you know, energy efficiency, coreless ovens, things of that nature that could one day come in. I think that in the end, you know, this next year should be mostly the end of the CapEx associated with the large capital projects.

Speaker 3

That's great color. If I could just sneak in one. Just strategically, because we didn't mention it once today, like is metering being somewhat deprioritized internally?

Speaker 7

No, I would not say that metering is internally deprioritized. I think that, you know, we still have significant investment in product development in that space. We continue to have, you know, a lot of focus in the market with it. I think if anybody was at WEFTEC recently, you know, our booth and our main uptake was around Sentryx, around metering, around leak detection, around the introduction of the pressure solutions that integrated the i2O equipment with the pressure control valves from Singer. I think that we have the most compelling economic solution for pressure zones and pressure management on an integrated remote controlled basis using our user interface.

Not deprioritized, but certainly become less of a discussion with investors as, you know, the noise we have had with these manufacturing problems these last two quarters has become, you know, a bigger focus. When we start getting back to execution like clockwork, I would expect that we'll spend a lot of time discussing the progress made with the field trials that we've done. Anybody that recalls, you know, we have a pressure management zone going on up in Canada right now with the City of Halifax. We have a couple other trials going for pressure zone management, and a couple more pending, that we think will start to give traction to, you know, that particular solution.

Speaker 1

Thanks, guys.

Speaker 7

Thank you.

Speaker 6

Thank you. Our next question comes from Bryan Blair with Oppenheimer. Your line is open. You may ask your question.

Speaker 1

Thanks. Good morning, everyone.

Speaker 7

Good morning, Brian.

Speaker 4

Good morning.

Speaker 1

Circling back to top line trends and outlook, what were your growth rates in muni repair and replace and resi new construction in fiscal 2022? How did order trends diverge between those exposures in October, and what's contemplated in your fiscal 2023 outlook?

Speaker 7

In fiscal 2023 is the easiest to answer. You know, what we see is in the break-fix world, double-digit growth, you know, right there at the double-digit number. MRO spending, you know, kind of in the, you know, mid single digits. Those two are gonna be offset by what we anticipate, you know, resi construction market. I think Marty has the actual numbers, but my recollection is it goes from, you know, that 1.6-ish number back to 1.5 million and change, you know, could be as low as 1.4. That's gonna have a negative impact on that MRO spend.

You know, they probably offset, which is why the implied guidance is for units to remain, you know, down slightly to flat, and that we will have, you know, our lift come from the pricing power that's in the backlog. You know, that's how you should think about the market in this go forward. In the current segment, you know, it's really hard at the current quarter to differentiate what is associated with new construction versus what is associated with MRO. The distribution channel itself is, you know, extremely healthy, but it's also become extremely choppy.

The choppiness is a result of, you know, if pipe is the long pole in the tent, which I believe it still is, then, you know, hydrants on hand that could be sent for MRO purposes that were originally earmarked for new subdivision construction, that visibility, that flexibility in the channel is happening more and more as, you know, our chief channel partners try to manage their inventory investment and manage their opportunistic model. It's becoming more difficult, Brian, to say which is which, what's showing up in the new subdivision, new home construction, and what's going to MRO. Because as the order was placed, it may have been intended for X, but it's being redeployed as Y as they wait on other materials.

The break-fix continues to be a very healthy part of the business for us.

Speaker 1

Okay. That's all, sir. I appreciate the detail. To help us level set a little bit more on, you know, what took place in fiscal 2023, and then thinking about the progression and, you know, your 2023, 2024 profitability that should be there, can you give us a dollar impact of, you know, production downtime, outsourcing, you know, headwinds, et cetera, for the full year? Sounds like it's around $10 million for 4Q. Just trying to gauge, you know, what took place here, and if it is in fact transitory, you know, what should roll off during 2023, provide further tailwind into 2024, and then you have the, you know, assumed benefit of getting to run rate on your major projects going into the out years.

Speaker 7

Yeah. I think that the dollar amounts, you know, we have them obviously. I would prefer everybody to think of it this way, Brian, that you know, here we are in 2024, and you know, I have not lost sight of the fact that I stood before our investors, and I said that our EBITDA margins could expand 50 basis points a year from about a 19.5% EBITDA margin level, until we got as high as even you know, 24-25%. I'm not you know, forgetful, and I think I've always been fairly straight with you guys.

I know it seems far away right now, but there is, I think, a path back over the next couple of years, towards, you know, that kind of baseline that we set, at, you know, that 19.5%-20% EBITDA margins. Some of it's gonna come from performance. Some of it's gonna come from price management. Certainly, a big piece of it this year is gonna come from avoiding outsourcing. I think that, you know, as we go through these CapEx projects, the things I said four years ago I still firmly believe are within our grasp, and I believe they're within our grasp.

You know, I believe that the path, just as I did four years ago, was to get the manufacturing house in order, so that we could build a culture of productivity and start implementing some of these lean tools and start implementing some of these Six Sigma concepts. I definitely believe that's still within the realm of possibility. I think some of these temporary setbacks, certainly, you know, in previous quarter, AutoPour going down, SINTO going down, some of these problems we've had, associated with the brass foundry are, you know, I certainly didn't see them, and I'm not trying to say I did see them coming, but I do think that we have the ability to adapt.

You know, one of the things I'm most proud of for the team was the fact that, yeah, we did really have difficulty in the quarter meeting production because of what happened, but we were still able to satisfy customer demand. The team adapted. They got more outsource in the door. They made sure we didn't lose customers. They made sure we didn't lose share. They exceeded the selling number. It wasn't just because, you know, they had something else they could ship to make up the numbers. You know, we met our commitments. I think that, you know, those pieces of where we were four years ago to where we are today leave us in good stead for, you know, even a margin growing.

I think the way you should think about the outsource, though, is that, you know, if our total performance for the year was on a chart, let's say it's 100%, that, you know, somewhere around 40% of the year's performance problems occurred in 25% of the year in the fourth quarter.

Speaker 1

Okay. Appreciate the color again. Thanks.

Speaker 7

Thank you.

Speaker 6

Thank you. As a reminder, if you'd like to ask a question, press star one. Our next question comes from Brent Thielman with D.A. Davidson. You may ask your question. Your line is open.

Speaker 0

Hey, great. Thank you. Hey, Scott, are you seeing any unusual inventory rebalancing into your end among the distributor customers, just given some of the sort of growing caution around the housing market?

Speaker 7

Yeah, I think that there's, you know, certainly going to be things in the current channel inventory level. I think, you know, we work closely with distributors to understand their sell-through, manage their delivery times, satisfy orders if we have to jump and bundle things to make sure contractors are able to meet commitment dates so they don't get into penalties. You know, that dynamic is going on day to day. I believe many of the distributors continue to maintain higher inventory levels due to expected higher inflation and some of the supply chain disruptions. I think lead times for projects generally remain much longer than the pre-pandemic levels. Distributors, you know, need to take that into account in their inventories. They manage product availability to match installation schedules with extended timelines due to labor availability.

You know, whatever the long, long pole in the tent is as far as the long lead times and stuff is accumulating as they wait for. You know, it's no good for a contractor to receive all of my valves and my hydrants if they don't have pipe to hook them up to. Conversely, you know, running service lines from new home constructions to lines that don't exist out there is also something they're not going to do. As some of the variants, if you will, in the various lead times move out, there is more noise in the channel inventory too.

You know, I think additionally, depending on our distribution partners' expectation for slowing customer demand towards that housing market you were talking about, we could see some added pressure on inventory levels, as the channel needs to destock. But certainly some of the backlog we have is, you know, dependent on those lead times. I think in the, you know, what will become timing differences, in specific quarters is why we prefer to kind of look at it at the macro level and do the guidance in years and precisely why, you know, the noise in the channel is precisely why I don't like getting into the quarterly fluctuations.

Speaker 6

Thank you. At this time, I'm showing no further questions.

Speaker 7

Great, operator. Well, I'd like to thank everybody for joining us. I think that, you know, I'm looking forward to getting the fourth quarter and, you know, get our activities and our actions in place, to continue. I'm excited about the new foundry. I'm excited about the progress we're making in Kimball. Very excited about some of the profound achievements, setting records in our third quarter in the large casting foundry. I acknowledge, too, and I'm sober about, you know, the fact of where we are and what we have to do in order to meet our numbers and to continue to grow the business.

I'd like to thank everybody for spending time with us this morning, and I look forward to talking to you all again, next quarter. Thank you, operator.

Speaker 6

Thank you. This does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.