MUELLER WATER PRODUCTS

Welcome, and thank you for standing by. At this time, all participants are on a listen-only mode. During the Q&A session, if you'd like to ask a question, you may press star 1 on your phone. Today's call is being recorded. If you have any objections, you may disconnect at this time. Now I'd like to turn the call over to Mr. Whit Kincaid. Sir, you may begin.

Good morning, everyone. Welcome to Mueller Water Products' first quarter 2020 conference call. We issued our press release reporting results of operations for the quarter ended December 31, 2019, yesterday afternoon. A copy of it is available on our website, MuellerWaterProducts.com. Discussing the first quarter's results and our outlook for 2020 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 2. 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 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 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 30th. A replay of this morning's call will be available for 30 days at 1-866-441-8817. The archived webcast and corresponding slides will be available for at least 90 days in the Investor Relations section of our website. In addition, we will furnish a copy of our prepared remarks on Form 8-K later this morning. I'll now turn the call over to Scott.

Thanks, Whit. Thank you for joining us today to discuss our first quarter results for 2020. We had a very good start to 2020 as we generated solid, organic, consolidated net sales growth, Improved margins and increased adjusted EBITDA in the quarter. Our net sales increased 10.3%, driven by the benefit of the Krause acquisition, with organic net sales increasing 3.1%. Both higher pricing and increased shipment volumes of our core infrastructure products drove our organic net sales increase. We increased our gross margin by 290 basis points to over 34% in the quarter. Higher pricing, favorable product mix, and the addition of Krause more than offset increased costs from tariffs and inflation. Both infrastructure and technologies contributed to the gross margin improvement in the quarter. I was especially pleased to see technologies achieve break-even adjusted EBITDA in the quarter. This performance and the addition of Krause helped deliver nearly 20% consolidated adjusted EBITDA growth. During the quarter, we settled the Walter Energy tax liability with a $22.2 million payment to the IRS. After a significant effort managing and resolving a complex situation over the past four years regarding the obligation of our one-time parent company, we can finally put this matter behind us. For fiscal 2020, we expect to see continued favorable demand in our end markets driven by healthy municipal spending and improved residential construction. However, we remain cautiously optimistic due to continued uncertainty from global and domestic matters. After a solid start to the year, we are increasing our expectations for both net sales and adjusted EBITDA growth for fiscal 2020, which I will discuss in more detail later in the call. With that, I'll turn the call over to Marty.

Thanks, Scott, and good morning, everyone. I will begin with our first quarter consolidated GAAP and non-GAAP financial results, then review our segment performance. Our consolidated net sales for the quarter increased 10.3%, or $19.8 million, to $212.6 million. This increase was primarily driven by the acquisition of Krause, as well as higher pricing and increased shipment volumes at infrastructure. As Scott mentioned, we achieved organic net sales growth of 3.1% in the quarter. Our gross profit this quarter increased 20.8%, or $12.5 million, to $72.6 million. Gross margin of 34.1% improved 290 basis points over the prior year. This improvement was primarily due to higher pricing, product mix, and the addition of Kraus, and was partially offset by higher costs associated with tariffs and inflation, and approximately $500,000 of startup costs associated with our large casting foundry expansion in Chattanooga. Selling general and administrative expenses were $49.9 million in the quarter, An $8.9 million increase over the prior year. The increase was primarily due to the addition of SG&A from Krause, which accounted for about half of the increase, and IT-related activities, personnel-related costs, and professional fees. SG&A as a percent of net sales was 23.5% in the first quarter compared to 21.3% in the prior year. Our current expectations for full year 2020 are for total SG&A expenses to be about 20% of consolidated net sales. Operating income increased 27.7% to $20.3 million in the first quarter compared to $15.9 million in the prior year. Operating income included strategic reorganization and other charges of $2.4 million in the quarter versus $3.2 million in the prior year. Turning now to our consolidated non-GAAP results. Adjusted operating income increased 18.8%, or $3.6 million, to $22.7 million in the quarter. Both infrastructure and technologies increased adjusted operating performance in the quarter, which was partially offset by higher corporate SG&A expenses. Adjusted EBITDA for the quarter increased 19.5%, or $6.1 million, to $37.4 million. Adjusted EBITDA margin improved 140 basis points to 17.6%. Consolidated adjusted EBITDA conversion margin was 31%. For the last 12 months, adjusted EBITDA was $204.4 million, or 20.7% of net sales. As compared with the prior 12-month period, we have increased latest 12 months adjusted EBITDA 10.3%, or $19.1 million, and improved adjusted EBITDA margin 80 basis points. NET INTEREST EXPENSE FOR THE 2021ST QUARTER WAS $7.4 MILLION AS COMPARED WITH $5.5 MILLION IN THE PRIOR YEAR QUARTER. THE INCREASE IN NET INTEREST EXPENSE IN THE QUARTER RESULTED FROM A NON-CASH ADJUSTMENT TO CAPITALIZED INTEREST AND DECREASED INTEREST INCOME DUE TO LOWER CASH BALANCES AND LOWER INTEREST RATES. OUR UPDATED FULL YEAR 2020 EXPECTATIONS ARE FOR NET INTEREST EXPENSE TO BE BETWEEN $24 AND $25 MILLION. Income tax expense was $3.1 million, or 23.1% of income before tax, as compared with an income tax benefit of $5.9 million, or 21.9% of loss before tax in the prior year quarter. The prior year quarter included a $7.7 million tax benefit on the Walter Energy accrual. We continue to expect our effective tax rate for 2020 will be between 24% and 26%. Our adjusted net income per share increased to $0.08 for the quarter compared to $0.07 in the prior year. Turning now to segment performance starting with infrastructure. Infrastructure net sales increased 12.1% or $20.8 million to $192.8 million in the quarter. This increase was due to $13.8 million in sales from crowds and a 4.1% increase in organic net sales this quarter, which was primarily driven by higher pricing and increased shipment volumes of our core products. Adjusted operating income for the quarter increased 15.5% or $4.8 million to $35.7 million. The increase was primarily due to higher pricing, product mix, increased shipment volumes and the inclusion of Krause, Partially offset by higher costs associated with tariffs and inflation, increased SG&A expenses, and approximately $500,000 of startup costs previously mentioned. Adjusted EBITDA for the quarter increased 16.3%, or $6.7 million, to $47.7 million, yielding an adjusted EBITDA margin of 24.7% and a conversion margin of 32% in the quarter. Moving on to technologies. Technology's net sales decreased $1 million to $19.8 million in the quarter, driven by lower shipment volumes at Metrology, which were partially offset by higher volumes at Ecologics. Adjusted operating loss improved $1.7 million from the loss of $3.7 million in the prior year, primarily due to product mix and higher pricing, partially offset by lower shipment volumes and higher costs associated with inflation. Technologies adjusted EBITDA also improved $1.7 million in the quarter to break even, as compared with a loss of $1.7 million in the prior year. Concluding with liquidity, cash used in operating activities for the first quarter was $12.4 million, with negative free cash flow of $27.6 million. Both cash flow from operations and free cash flow were impacted by the $22.2 million payment associated with the Walter Tax Settlements. As a reminder, our cash generation is generally stronger in the second half of our fiscal year due to the seasonality of our business. We invested $15.2 million in capital expenditures in the period, which was similar to the first quarter of the prior year. We continue to expect our capital expenditures will be between $80 and $90 million for 2020. At December 31, 2019, we had total debt of $446.4 million and cash and cash equivalents of $136.8 million. At the end of the first quarter, our net debt leverage ratio was one and a half times. Finally, on October 1st, we adopted new accounting requirements for leases. As a result, we recorded assets and liabilities of approximately $30 million each related to our operating leases, which had previously not been recorded on the balance sheet. I'll turn the call back to Scott to talk more about our results and outlook for 2020.

Thanks, Marty. I will provide some additional insights into key areas and then comment on our full year 2020 outlook. After that, we'll open the call up for questions. Going forward, we are continuing to focus on executing our key strategic priorities. These include accelerating new product development, developing a fully integrated technology platform for infrastructure monitoring, driving operational excellence, and modernizing our manufacturing facilities. Our goal is to deliver above-market organic net sales growth and improvements in our margins from productivity initiatives and continued price-cost realization. Our organic net sales in the first quarter performed well as we benefited from higher pricing as well as higher volumes in our core valve and hydrant and leak detection products. During the quarter, our natural gas and metrology product sales experienced headwinds versus the prior year. Our natural gas product sales experience what we believe is a temporary slowdown in sales. We expect that sales will improve through the balance of the year as our end markets normalize. For metrology products, our 2019 sales benefited from a significantly stronger backlog entering the year. Our current backlog is meaningfully lower than the prior year due to an inconsistent pipeline of large orders. As a result, we expect our metrology sales to be flat this year. In recent years, we have focused on developing stronger partnerships in the distribution channel. As a result, we have enhanced our partnership with Ferguson, one of our largest customers, for many of our metrology products and have seen a greater percentage of our metrology sales go through their distribution channel. Recently, we worked with Ferguson to win a $34 million multi-year AMI water meter contract for Newport News, Virginia. This contract win is an example of how we were able to differentiate ourselves with our technology for remote disconnect meters. We could start benefiting from orders associated with this contract in the fourth quarter of this year. I was pleased with the gross margin improvement we generated in the quarter. This was driven by a combination of increased volumes of our core valve anhydrins, which are some of our higher margin products, and improve price realization. During the first quarter, we benefited from carryover pricing, which included two price increases for iron products and more than offset the impact of increased costs from tariffs and inflation. We recently announced additional price increases in the US and Canadian markets for many of our infrastructure products, which will be effective in February and March. The timing of these announcements is comparable to the prior year. Although raw material costs are not currently contributing to inflation, we expect this higher pricing will help offset the anticipated increases in material costs and other inflation for the balance of the year. The execution of our key capital investment projects to accelerate the modernization of our manufacturing facilities, equipment, and processes is well underway. We have major projects driving capital spending above historical levels In order to both deliver above-market sales growth by broadening our product capabilities and expand gross margins. As we have previously discussed, we have three large projects underway including the large casting foundry expansion in Chattanooga, Tennessee, a new brass foundry in Decatur, Illinois, and a new specialty valve manufacturing facility in Kimball, Tennessee. These transformational projects are forecasted to account for approximately $130 million of capital spending. Based on current timelines, we expect that these projects together will drive approximately $30 million of incremental gross profit in 2023 through both operational efficiencies and sales growth. As mentioned previously, we expect capital expenditures as a percent of consolidated net sales to decrease to less than 4% in fiscal 2023. We have nearly completed the large casting foundry expansion in Chattanooga. We expect to begin producing product with our own castings by the end of the second quarter. As a reminder, this was a large multi-year investment in our Chattanooga facility to expand domestic manufacturing capabilities for large valves and introduce additive manufacturing technologies to our foundries. This includes one of the largest 3D printers in the world, which will help decrease time to develop new tooling and shorten turnaround times for our customers. This investment will help us further differentiate ourselves in the marketplace. Historically, we have focused on small valves, which are less than 12 inches, as they are used much more frequently. Increased population density and urbanization are driving a greater need for large valve sizes. Although today the market for large gate valves in North America is less than 30% of the gate valve market, we expect large gate valves to grow at a faster rate than small valves. As a result, this investment will add additional flexibility and capabilities for new product development and help us provide a broader range of products to our customers. In addition, it helps with product efficiencies through insourcing and provides more products which will satisfy our customers' Made in America specifications with less reliance on sourcing valve bodies from China. As with any large project and new capabilities, We expect there to be a ramp-up this year and anticipate that we will ultimately recognize the benefit of this project in fiscal 2021. The impact of the startup costs until full ramp-up of these new operations is included in our annual guidance and was $500,000 this quarter. I will wrap up my comments with a review of our updated expectations for full year 2020 results. During fiscal 2020, We expect to see favorable demand in our end markets, driven by healthy municipal spending and improved residential construction. The residential construction market appears to be improving based on the Housing Start data reported for our first quarter. It's still early in the year, and we continue to see a wide range of predictions for housing growth in 2020. For our fiscal year, we anticipate residential construction growing in the low single-digit range. Municipal spending, which accounts for the majority of our end markets, continues to be healthy. For our fiscal year, we expect the municipal end market will grow in the low single-digit range. Despite continued uncertainty from global and domestic matters, we are increasing our expectations for growth in both net sales and adjusted EBITDA for fiscal 2020. Based on our current expectations for end market growth, We anticipate that our 2020 full-year consolidated net sales growth will be at the high end of the 3-5% range we previously provided. This growth will be driven by higher pricing, increased shipment volumes, and the contribution from Krause in the first quarter. Additionally, we expect adjusted EBITDA growth to be at the high end of the 4-8% range we previously provided. I am confident that we are in position to accelerate our transformation to become a municipal and residential solutions company with a growing percentage of our products incorporating technology. The traditionally conservative water and wastewater utilities are increasingly more open to using digital tools to deliver more benefits to their stakeholders with limited resources. Not to mention, many face significant challenges from the aging infrastructure. We expect technology-enabled products to achieve significantly higher growth rates than some of the traditional products in the water utility industry. In fact, the overall digital water market is expected to grow at a 6.5% compound annual growth rate between 2019 and 2030, as forecasted by Bluefield Research. The segments most relevant to our growth strategies, like asset, network, and information management, are forecasted to grow even faster. With our market leading positions and extensive installed base of infrastructure products, we are well positioned to take advantage of these trends. Today, we have a number of products addressing these segments, including Ecologics pipe condition assessment services and fixed leak detection solutions, Metrology's advanced meters and communications equipment, smart hydrants, pressure and water quality monitors, and most recently our Centrix software platform. In summary, we are well on our way to incorporating technology into our infrastructure products while also modernizing our manufacturing facilities and operations. As a result, we believe we will be able to deliver above market sales growth and drive margin expansion and earnings growth while also continuing to return cash to shareholders. And with that operator, please open the call for questions.

The phone lines are now open for questions. If you would like to ask a question over the phone, please press star 1 and record your name. If you'd like to withdraw your question, press star 2. Thank you. And the first question in the queue is from Michael Wood with Nomura Instanet. Your line is now open.

Hi, good morning. Great job this quarter. The infrastructure gross margin stepped up versus last quarter despite the seasonally slower sales. Was there anything unusual there? I know you typically experience a seasonal gross profit margin decline, so I'd love it if you can just talk about what drove margins higher, whether they're sustainable, and how that compared to your expectations.

As we said in the prepared comments, I think it was a combination of things, certainly infrastructure. You know, the Kraus Impact along with pricing were probably the two largest driving items. And then the mix that we mentioned that we got with hydrants and iron gate valves being a larger portion of sales also skewed the margin. You know, as long as we're talking about sustainability, I believe as long as we keep those kinds of mixes with IVH, then we'll have favorable trends throughout the year.

And how should we think about the three projects contributing to that $30 million of gross margin improvement? Is it roughly $10 million each, one larger or smaller than the other? And can you just talk about how long it takes once a plant's up and running to get the plant efficiencies?

I think you should think about it that the Brass Foundry is certainly the largest project of the three and that the $30 million is going to be frankly fairly lumpy with the first piece coming from improvements as a result of the Chattanooga large casting foundry being virtually complete by midway through this year and then the balance with Kimball and Decatur having a much longer fuse and the bulk of the The bulk of the savings coming in the back half as a result of Decatur and Kimball.

Just finally, I wanted to ask on the guidance. It seems early in the fiscal year to increase guidance, so just wondering if you could shed some more light on maybe the top one or two things that you're seeing that gives you the confidence and the visibility. Thank you.

I think that the biggest thing is when you come out of the gate at 10.3, and you do the weighted average math for the rest of the year, I feel confident that we should be able to maintain implied organic growth rates in that 3.5%, 4.5% range given bookings and the state of the market. We also put the language in there that we're cautiously optimistic given some of the global domestic uncertainties and certainly we recognize as we're in the early days of the coronavirus that that there could be some supply chain impact. And so nodding to what's been a strong order book through the first four or five months, but at the same time recognizing there's some risks on the horizon. Great. Thank you.

Next question in the queue is from Brent Thielman from D.A. Davidson. Your line is now open.

Thank you. Hey, Scott, maybe just touching on that last point, I mean, anything in particular you're looking at related to supply disruptions or risks that you're monitoring? I'm assuming with no change in the guidance, you know, you don't see a lot, but just curious where you might see it show up.

Yeah, so I think with our facilities in China, we have a great handle on what they produce, how they produce, what's at risk, what the timeline of the month being and running in that is. But, you know, what I think the uncertainty for all of, you know, National Association of Manufacturers, MayPi, and other organizations is how much of your domestic supply chain is dependent on components from a foreign supply chain, and what does that foreign supply chain's dependence look like, especially in the Webei province, Yubei province in China. So I think that's the part that we're all are scrambling, frankly, to figure out where resource components are two or three steps back in the supply chain. And I think that's where the real risk to manufacturing lies in the next, let's call it, 12 to 16 weeks.

Yep. Okay. And then can you just talk about how Krause is integrating or benefiting from the integration in the Mueller? I mean, it seems like are seeing pretty good growth. Are they seeing faster core growth in their business and sort of benefiting from the synergies and kind of distribution channel you've brought to them?

Yes, I believe that everything that we identified in our synergies case, when we made the acquisition, we've tracked quarter by quarter. And I would say that without question at the aggregate, we're very pleased with the acquisition, how it's performed. where we've gotten growth, the introduction to existing Mueller customers, and conversely, very pleased with exposure to some of the traditional Krause customers of Mueller products. And in the aggregate, you know, I would give it an A. The team's done a very good job of integrating the sales teams and a very good job of harmonizing, you know, programs across our customer base. But, you know, we still have room for improvement and we're going to continue to to measure and manage, measure and manage, measure and manage all the way through the process until we get to our fully integrated state, which I think is another year away.

Okay. And then any views or, I guess, expectations built in related to kind of larger municipal CapEx projects, which some of your larger products and valves are attached to you, is this going to be a stronger year based on what you can see today?

So thanks for that, and I'm happy to get into it. I think that In the large valve market, you will see far more project-based. It's not going to be the routine maintenance kind of thing. There will be some lumpiness in that. The fuse on these things tends to be much longer timelines. Jobs that are bidding for a 72-inch valve today are likely not going to be in an install phase for another 12 to 18 months and sometimes even longer And so we expect the large gate valve and the large butterfly valve markets behave very much like the Henry Pratt business where we have a fairly significant carry forward of backlog with longer fuses on big capital projects. And so I think that to call it a meaningful impact in the current fiscal year would be a misnomer. We look at it more in the things we're bidding now, you know, 54, 60-inch or 72-inch valve being installed in fiscal 21. So I do not anticipate a huge lift this year from large valves.

Yep. Okay. I appreciate it. I'll pass it on. Thank you.

Thank you.

Next question is from Dean Dre with RBC Capital Markets. Your line is now open. Thank you. Good morning, everyone.

Good morning, Dean.

Hey, and just congrats on resolving that tax overhang. I know that was annoying and it did take cash to do it, but it is resolved. So just a moment of appreciation for that. Thanks.

Thank you.

Scott, I was really interested in hearing more regarding when you listed all the different technologies at Mueller today that you're developing between the ecologics, metrology, the smart hydrants, centrics. You say you like to measure and manage. What's the deployment of these? What's the take rate of these technologies? What's the contribution either this year and the ramp in the next couple years? I know each one of them is different, but from our perspective, this is where all the growth is going to be, the higher growth, the higher margins that will come through. Maybe in terms of triage, the most important ones, just expectations of take rates and growth and contribution. And maybe we can start there, please.

Okay, so that's quite a lot. So let me speak in general, Dean, and then you can ask follow-up questions. I think the most mature technologies that we have right now relate to obviously AMI being the most mature where there is a fair deal of take by water municipalities. That business has transitioned in my three years from about, let's call it 70-30 between AMR and visual read to 30% AMI to now that the business is majority kind of AMI dependent, software revenue dependent, project management dependent. and so you know it's the most mature and so when we talk about the meter business we're really talking more about radios, collectors, hubs being a bigger and bigger portion of sales going forward. When you think about the next most mature it would have to be in both pipe condition assessment and our fixed leak detection from the Equishore DX and I think those two things in particular, are kind of in their nascent stage of kind of exploding. I think people estimate that market to be between $100 and $200 million today, growing over the next, Bluefield uses 19 to 30, so we'll use that, to something that could be north of a billion and a half kind of dollars by 2030. And, you know, You have to look at pipe condition assessment, and does that include the related services of repair of the pipes? Does it include the other aspects? But it's the next most mature, and we really expect those two technologies for that business to kind of double every three to five years by the numbers. But we're starting with relatively small numbers, and so its impact is not going to be as huge, if you will, in the in the near term. And then last but not least, I would take all of this water quality piece as it relates to smart hydrants, pressure, flow, water quality monitoring, as it relates to sampling stations, flushing stations, and those kinds of things, and say it's the least mature. But it has the most potential for revolution, if you will, in what bringing smart water means. I think that there is a view out there by some people that says we will continue to see large utility-owned wireless infrastructure being deployed for five to ten years. Certainly if you looked at people's values, multiples, what prices are being paid, you would say that we are going to be in the utility-owned deployed wireless network for maybe three or four more generations or iterations of the technology. And we believe that 5G and what we understand of its power requirements, that that maybe has one or even two generations left, and that 5G with its tremendous bandwidth will probably put us in an environment in water with more mesh networks and more kind of backhauling over 5G cellular for multiple devices. And that's why we think once people realize the amount of bandwidth that could be available at a smart hydrant hub and the vast number of data points that can be connected to it through a mesh network, we could have kind of a step change in potential adoption in a 5G world. We continue to believe and we continue to develop both an AMI solution with backhaul over AMI, backhaul over LoRaWAN, backhaul over cellular, both mesh and unique. Because we're not in the business of betting on which one will win. And so we've maintained all along we're the open architecture solution where if you invest, You will have max flexibility at a future date. And, you know, that's kind of been our take. So now the second part of your question is, what does the take rate look like? Well, we have launched customers with Centrix. As you know, we've had successful launches in fixed leak detections. We have more than 50 pipe condition assessment customers. We're well on our way to establishing acoustics and sound I think now it's really a matter of educating our customers and being obviously economically viable for them to want to adopt these technologies. And for that, we think we have both the best business case and the most, let's call it lowest risk implementation methods to determine the health of the utility. So we feel very bullish about it. Now, will that translate into, you know, 8%, 9%, 10% growth rates? In a normal environment, I would say yes, absolutely, and we should be very bullish about it. But as I've said many times to people on the phone, we're also in now the 10th year of an economic expansion that gives us pause to say, well, you know, trees don't grow to the sky. What does spending look like? What do interest rates, long-run interest rates look like? And so, you know, we've tempered that a little bit. But we have not given multi-year guidance.

Scott, I know I asked a pretty complex question, but I admire how thoughtfully you clicked through all the different technologies. I really appreciate the answer, and we do consider this to be the exciting part of the story, and I'll stop there. Thank you.

Thank you.

Next question is from Brian Blair with Oppenheimer. Your line is now open.

Good morning, everyone. Nice start to the year. I was hoping we could circle back on the quarterly cadence baked into your guide. I know you've touched on some of this, but you had a very strong first quarter, relatively easy second quarter comp, and then it seems like your guide contemplates flat to down operating profitability in the back half. So I guess two parts to that. One, am I correct in what is assumed in your guidance structure? And two, if that is the case, what are the specific points of conservatism that looking into the fiscal third and fourth quarter, admittedly more difficult comps, but on top of that, what drives the conservative stance?

Brian, I'm going to give that to Marty. As you know, we don't guide to quarters. We guide to the years. So I'm not sure what the inference is. And I'll leave that to the higher mathematical brains in the room, Marty.

Well, you know, I think just starting off, I think I'd understand one piece is certainly in our first quarter is the last quarter that we have Krause as additive on a year-over-year base. So as we move into the second half of our year, or sorry, the last three quarters of our year, you know, Kraus will have been in the prior year's results. So I think that's certainly, you know, a portion of what we saw with the growth rate in first quarter on net sales. And I think as you heard, with the guidance now towards the upper end of the net sales range that we gave, you know, with the baked-in addition of Kraus this quarter, that sort of implies continued organic net sales growth going forward. And we would say with that it also implies continued growth from an adjusted EBITDA perspective as well without any particular guidance with respect to the quarters other than, as you know, we're typically going to see stronger growth in the second half of our year due to the seasonality of our business.

Okay, I appreciate the color there. And I also appreciate the additional detail you've offered on the large project investments, particularly the $30 million in incremental gross profit step-up. I just wanted to clarify that as we look out to 2023, that is truly incremental. as an additive to the more normalized margin progression that you've spoken to, upward of 100 basis points of gross margin improvement each year via your typical productivity initiatives and drop-through.

Right. So I kind of expected that question because – so let me say that it was mostly additive, that there's a – think of it as a third of it coming from – from volume and absorption and incremental profit on that. Think of two-thirds of it kind of coming from operational efficiency. So the question being asked, if I could restate it, is, you know, you outlined 50 basis points net, 100 basis points of productivity a year, 50 basis points net after you reinvest in engineering and some of the other things. Can I use the 50 basis points and, you know, 20-ish million of it as the – or is there some overlap? And the answer is there is a slight amount of overlap. If you think about the math and you think about what's going on with depreciation and you think about the depreciation offset with it, then there is by definition incremental productivity that has to take place. But I think for the purposes of modeling, I am confident that we can find the The noise, if you will, in other productivity initiatives and other capital projects that we still have faked in and be out years that are not fully available for us to see today, because if we can see them, we do them. But, you know, I trust from my 20-odd years of doing this that there will be cost-savings projects that will allow us to say that this is out of this. So I think you should think about it that way, kind of the 50 bases net. Improvement, and then the $30 million.

Okay, excellent. And the last one for me, on capital deployment, your balance sheet's obviously in good shape. You do have these large projects underway, but still have decent capacity. So I assume if something Krause-esque came along, you could pull the trigger on it in terms of deploying that capital. Would you, at this stage of Kraus integration, be able to take on another deal that size and the complexities that come with it?

Yes, I think what I said to everybody when we bought Kraus is that we would not do deals for 90 to 180 days. We're well beyond that now, and I feel like the playbook from the team on the integration and where we are with integration that I'm eager to... to exercise those muscles as an organization again. But, you know, it's got to be the right deal at the right price. And so, yes, we would. Nothing to disclose today.

Got it. Thanks again.

Thank you.

Next question in the queue is from Joseph Giordano from Cowan. Your line is now open.

Good morning, guys. This is actually Francisco Amador on for Joe. What's your outlook for profitability for tech for the rest of the year, and do you guys have a longer-term outlook as well?

So, you know, we do not give guidance by segment, and I found it to be kind of a trap in the past, and so I'm not going to get back into it. But I will say that I expect tech to do exactly what it did in the first quarter, which is to show operational improvements quarter over quarter over quarter over quarter, through taking necessary actions both on the manufacturing floor and the market from a pricing perspective and from a deal point of view to make sure that we continuously improve profitability. I am not interested in being the largest meter manufacturer in the world and not making any money. I am interested in being profitable, and we are going to continue that march. I think since I've gotten here, You know, we've gone from a $15-ish million loss, and we've been steadily merging that down. At the same time, we've steadily merged that down. We've launched the Centrix platform. We've launched MyNet4. We've launched multiple radios in the LoRaWAN network. We've gotten a lot of really good technology out of the group that we can apply to infrastructures and team has done a good job showing good progress. Will it eventually get profitable? Of course. That's why we invest. But I think that we're going to have some time left. And I would point out again, if you listen to Marty in her section, we know we've got a ways to go in ecologics and continued investment there. It has to get scale in order to be profitable. And then I think the whole of the segment will be good.

Great, I appreciate the detailed answer, and it's certainly encouraging to see the margins improving there. And then, when does the impact from price increases last year in infrastructure start to fade out, and do you guys have any more price increases planned for the year?

Yeah, so just to give you a reminder, this is sort of the last quarter where with a lot of our products, we've got the benefit of two price increases. The one that we implemented last back in September of 18 as well as the February of 19. So going forward, we have announced price increases for a number of our infrastructure products, you know, sort of in that February-March timeframe. And so I'd say from that piece, we're, you know, reasonably comparable on a year-over-year basis, but this would be the last where you'd see the benefit of a couple of price increases.

Okay, great. Thank you. If I could squeeze in just one quick one on the outlook for interest expense. I noticed it's about $3 million higher than what it was last quarter. Is this related to the capitalized interest or lower cash interest, or what exactly is driving the increase?

I'd say largely certainly looking at the quarter for the non-cash adjustment for capitalized interest, and then I think as well just a small piece with just lower interest income outlook going forward.

Okay, excellent. Thank you for your answers.

Next question is from Brian Lee with Goldman Sachs. Your line is now open.

Hey, guys. Thanks for taking the questions this morning. I guess starting with technologies, you know, the Q1 conference was obviously tough, so I can appreciate the 5% revenue decline year on year, but just wondering how should we be thinking about growth in this segment for the next several quarters? You know, comps seem to be getting easier here. Thank you for joining us.

kind of distribution model. And we've got a lower backlog as we've ceased the elephant hunting at lower prices. And we've recognized improved performance. We've recognized improved both from a cost perspective and from an operating perspective. So I think that we're going to continue to run the business that way. So you should think about the meter business kind of being flat for the year. The growth part of technologies ought to be in our fixed leak detection and our high-condition assessment business. That's where we're focusing selling resources. That's where we're focusing our marketing resources so people can start to get a broader-based acceptance of the Echo Shore DX product line. And you know we've got good penetration at San Jose and Connecticut and other big customers, marquee customers that are using this technology successfully to find leaks in their networks. This will be the years of getting it out into a much broader acceptance arena. That number, what that growth should be, we're not disclosing any of that for obvious reasons. I think that we'll have relatively slower growth because of the flat meter business,

Helpful. I appreciate the call there. And then just a second question and I'll pass it on. I might have missed this, but the EBIT conversion margin in the quarter, we get to something like high teens if our math is correct. So wondering if that sounds like it's about in the right ballpark and if you have any thoughts on the trend line kind of moving through the rest of the year in the context of your historical targets of 35% plus. I know you have a A number of different initiatives moving through the years, so wondering how we should be thinking about that conversion margin model. Thank you.

Look, I think overall, as we think about conversion margins, you can absolutely find some lumpiness as you think about it on a quarterly basis. You know, so I'd sort of, you know, I think you've got implicit with the guidance we've given where the conversion margin falls out from that, but you know, certainly on a quarterly basis, it's There can be lumpiness.

Fair enough. Thanks, guys.

Next question in the queue is from Walter Liptak with Seaport Global. Your line is now open.

Hi, thanks. Good morning, everyone. I wanted to ask about Krause. You guys didn't call out what the contribution was, either in percentage or or whatever for the quarter. And since this is the last one, I think we're at synchromental. I wonder if we can get that number.

Yeah, I think what we said and we'll continue to say is that you should think about it as consolidated. Even the margins for the business would be about equal. But we're not getting into what pieces are trading in as we negotiate buckets of products. We're decidedly not disclosing that. So I think, Walt, if you think about it in the context of kind of at par with the consolidated results, you'd be pretty close.

Okay. All right. Great. And then the CapEx startup cost, you called out, I think, a half million dollars of incremental costs in the first quarter. Is that something that continues on, or was this lumpy where we had extra costs this quarter, but then they ramped back down in the second and third quarter?

What I would say we did, we called out the roughly $500,000 this quarter for the large casting foundry, which includes depreciation. And as we said, we expect to start production by the end of the second quarter. And what I would say is startup costs are expected startup costs for the balance of the year are incorporated into the guidance that we have provided.

Okay, yeah, I heard that. I guess the question is, does the half a million keep ramping? Is it another half a million or more in the second quarter and then continuing to ramp through the year?

Yeah, we called out the dollar amount in the first quarter. We do expect more through the balance of the year. and that is incorporated in the guidance that we have just provided.

If I could just ask the last one on Ferguson and the tech margins. Is there something structural that changes with the Ferguson relationship where you have better visibility to profitability in the tech segment now?

No, I wouldn't say it's better visibility or that the lumpiness of the jobs will go away or anything like that. I think what it is is that on the contrary to the way we used to do it, you know, you go elephant hunting for these multi-year contracts and, you know, you look at the average price point on a contract, you look at the average price point in the replenishment market and there's a significant spread. I'm not going to say how much, but just it's better business. It's better business from a flow perspective and it's better business from a You know, a yield perspective. And so, yeah, it's not got some of the complexity, and we would take more of it. I'd be happy to have more distribution business.

Okay, great. Sounds good. Thank you.

Thank you. And the last question in the queue is from Jose Garba with Gabella. Your line is now open.

Hey, good morning, guys. Good morning, Jose. Hey, Scott. I noticed you guys bought in that Pratt J.V., Just, I guess, talk about kind of any structural difference that you guys are undertaking now that you guys kind of bought that in a small amount. Go ahead, Marnie.

Yeah, so let me just start off. So this was a joint venture that we entered into in 2014. Just to be clear, if you think about it from a financial statement perspective, Since we entered into that joint venture, we have always consolidated the results within our operations. So as you look at it, you won't see anything different from that perspective. It was just the small amount of the equity interest that was factored out. But we did acquire the balance, the non-controlling interest that we had of about 51%. It was just a little over $5 million. It's a small business. It's part of our Pratt brand and gives us capabilities largely in the industrial valve segment of the business, and we think it's a good opportunity. It's a business that we've certainly watched for the last five years, and we'll continue to look to grow that business and integrate it as we need to.

So I guess nothing strategic, difference?

Well, I would say the strategic rationale to take it over was to be in control of both the brand and the product offering. We like the industrial space. There are certain applications there that we think have long-term growth capabilities and that we think we can also bring some technology to that will give us an ability to be successful against the traditional competitors there. Are you asking me are we going to go into flow control in the industrial and bump up against the Emersons, et cetera? No, not interested in doing it. We have our niche. We believe it's got some attractiveness to it. That's why we bought it out.

Okay, fair enough. And then you talk quite a bit about the technology's new product introductions. I guess if you could talk about on the infrastructure side, your new product pipeline kind of going into this year and then compare that to where you've been.

Yeah, I think that we've been working tremendously. I'm not going to say or announce something here that we plan to announce at ACE or something, but I think you've seen at the last couple of ACEs some new restraints. You've seen some integration of hydrants and the Kraus products. You've seen some integration of valves in the Kraus products. You've seen some early indications of a new insertion valve. There's been Many, many things that the infrastructure team has been working on that over the past three or four product entry windows we have launched. And the pipeline is full for the year. That is to say that when we review our product development pipeline and we look at our engineering resource availability, we currently sit for the year at a deficit. That is, we have more projects than we have resources. We go through the prioritization process and come up with what we'll be launching next. If you come to ACE or you come to WEFTEC, hopefully you'll see some things you have not seen before. You know, so let me be there. Thanks very much, guys. Thank you, Jose. Operator, thank you. I believe that ends the queue and you can wrap up now.

This concludes today's call. Thank you for your participation. You may disconnect at this time.