MUELLER WATER PRODUCTS

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode until the question and answer session. Today's call is being recorded. If you have any objections, you may disconnect at this time. I will now introduce your conference host, Mr. Whit Kincaid. Sir, you may begin.

Good morning. I hope everyone is safe and healthy. Thank you for joining us on Muir Water Products' second quarter 2020 conference call. We issued our press release reporting results of operations for the quarter ended March 31, 2020, yesterday afternoon. A copy of it is available on our website, MuellerWaterProducts.com. Scott Hall, our President and CEO, and Marty Zakas, our CFO, will be discussing the COVID-19 pandemic, our second quarter's results, and current market conditions. 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 as well as to address forward-looking statements and our non-GAAP disclosure requirements. At this time, please refer to slide two. This slide identifies non-GAAP financial measures referenced in our press release on our slides and on this call and discloses the reasons why we believe that these measures provide useful information to investors. Reconciliations between non-GAAP and GAAP financial measures are included in the supplemental information within our press release and on our website. Slide 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 September 30th. A replay of this morning's call will be available for 30 days at 1-800-835-8069. 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 8K later this morning. I'll now turn the call over to Scott.

Thanks, Whit. Thank you for joining us today. I hope everyone in the audience is doing well and is staying safe and healthy during this challenging time. Before we discuss our second quarter results for 2020, I will discuss the ongoing COVID-19 pandemic, which is affecting cities and countries around the world. Today's call is a little different given we have participants located in a number of locations. So I apologize in advance for any technical difficulties we may encounter. The COVID-19 pandemic has created significant challenges for our customers, communities, and employees. I am incredibly proud of how our employees have responded to the challenges. Our team members quickly stepped up to the challenge and our COVID-19 response team meets daily to share information and make quick decisions. Our most important priorities are keeping our employees safe, Protecting our communities and providing support to our customers. We eliminated nonessential travel for all employees and executed remote work procedures for support staff. With a focus on employee safety and engagement, we enhanced procedures for disinfection including reinforcing hand washing at all facilities, established processes for physical distancing, and increased frequency of communication to employees. We continue to operate as an essential business providing products and services to customers which are needed to manage and maintain our nation's critical water infrastructure. We implemented preparedness plans to keep teens safe while they work. These plans include operating our manufacturing plants and distribution centers with new physical distancing measures focused on safe distancing procedures and processes and usage of additional personal protective equipment. All of our facilities are operational We continue to proactively monitor our supply chain and have not experienced any material supply chain issues since the temporary closure of our Jingman facility, which is located near Wuhan in the Hubei province. Our commercial teams are focused on providing customer service, maintaining contact with our direct customers, and working closely with our distributors. We have adjusted our approach to leverage digital channels and processes to fill orders as required for physical distancing. I am inspired by how our teams are looking for ways to support their communities. Our Albertville, Alabama product engineering team is producing 3D printed face shields for frontline medical professionals caring for patients. The first round of face shields produced are in support of the Marshall Medical Center South in Boaz, Alabama. This contribution is important work that is providing much needed personal protective equipment for medical professionals who continue to risk their own lives to save others and battle the COVID-19 virus. I will now touch on our second quarter performance. I was really pleased with our strong performance in the quarter as we generated consolidated net sales growth of 10.1%. The increase was driven by increased shipment volumes across most of our product lines and pricing. In addition, It was a significant sequential improvement versus the 3.1% organic net sales growth in the first quarter of this year. The higher volumes were driven by strength in our end markets, especially residential construction. In addition, we believe customers increased orders in anticipation of price increases announced during the quarter. We improved our gross margin in the quarter, despite the startup costs associated with our large casting foundry expansion in Chattanooga. and expenses associated with addressing the COVID-19 pandemic. Excluding the Krause acquisition costs in the prior year quarter, our gross margin increased by 50 basis points. This improvement led to a 15.9% increase in adjusted EBITDA and 100 basis point improvement in adjusted EBITDA margins. Our strong second quarter results are a testament to the growth and performance we are delivering, as well as our team's ability to execute in an increasingly challenging environment. I will discuss current market conditions given the COVID-19 pandemic later in the call. Although we have delivered strong sales growth through the first half of the year, we expect a material slowdown in our end markets for the rest of our fiscal year, especially residential construction. However, our municipal customers are providing critical water, energy, and public works infrastructure services and continue to operate at reduced levels during this crisis. Due to the slowdown in orders we have seen in April, We are reviewing all aspects of our business and taking difficult but necessary steps including adjusting our production capacity to preserve liquidity and cash flow during this challenging period. Before I turn the call over to Marty who will provide more detail on our second quarter, I want to discuss why we believe that Mueller Water Products is in a much stronger position versus the last major recession. We have impressive longevity as we have been working with our customers for over a century We have a strong balance sheet with ample liquidity and a net debt leverage ratio of 1.6 times at the end of the second quarter versus 3.5 times at the end of fiscal 2008. We are a more focused company after selling U.S. pipe and anvil with a leading position in the water infrastructure market. Today, our end market exposure is more focused on municipal repair and replacement versus residential construction. Residential construction made up about 25 to 30 percent of our consolidated net sales in fiscal 2019, compared with approximately 50 percent in fiscal 2007. We estimate 60 to 65 percent of our core products are critical to utilities to maintain their networks. This gives us a strong base of business with additional sales coming from residential construction and project-related work. As a result, we have solid cash flow generation evidenced by consistently paying a quarterly dividend, even during the Great Recession. Finally, we have addressed legacy liabilities, including exiting multi-employer pension plans and settling the Walter tax liability with no future obligations. In summary, despite the near-term headwinds, I am confident in the long-term prospects for Mural Water Products as a leader in water infrastructure products and services. With that, I'll turn the call over to Margie.

Thanks, Scott, and good morning, everyone. I hope you all are staying safe and healthy. I will begin with our second quarter consolidated GAAP and non-GAAP financial results, then review our segment performance, and finish with a discussion of our cash flow, balance sheet, and liquidity. We had strong second quarter sales growth with our consolidated net sales increasing 10.1% or $23.7 million to $257.7 million. This increase was primarily driven by increased shipment volumes across most of our product lines and infrastructure and higher pricing. Our gross profit this quarter increased 15% or $11.2 million to $86 million with a gross margin of 33.4%. We improved gross margin by 140 basis points over the prior year. The improvement was primarily due to increased shipment volumes and higher pricing, which were partially offset by manufacturing performance and higher costs associated with tariffs. Additionally, the prior year quarter included $2.2 million of costs associated with the Kraus acquisition. Excluding this impact, we generated a 50 basis points improvement in gross margins. Cost of sales in our second quarter of 2020 included approximately $1 million of startup costs associated with our large casting foundry expansion in Chattanooga. Selling, general, and administrative expenses were $49.3 million in the quarter, a $3.6 million increase over the prior year. The increase was primarily due to personnel-related costs, IT-related activities and professional fees, which were partially offset by lower T&E expenses as a result of travel restrictions and shelter-in-place orders. SG&A as a percent of net sales was 19.1% in the second quarter compared to 19.5% in the prior year. Operating income increased 61.3% or $13.6 million to $35.8 million in the second quarter compared to $22.2 million in the prior year. Operating income included strategic reorganization and other charges of $900,000 in the quarter, which are primarily related to prior restructuring activities and were $6.9 million in the second quarter of 2019. Turning now to our consolidated non-GAAP results. Adjusted operating income increased 17.3% or $5.4 million to $36.7 million in the quarter. The increase in infrastructure was partially offset by a decrease in adjusted operating income at technologies and higher corporate ST&A expenses. In addition, we estimate that expenses associated with addressing the COVID-19 pandemic impacted our consolidated adjusted operating income by approximately $800,000 during the second quarter. Adjusted EBITDA for the quarter increased 15.9% or $7.1 million to $51.8 million. Adjusted EBITDA margin improved 100 basis points to 20.1%. Consolidated adjusted EBITDA conversion margin was 30%. For the last 12 months, adjusted EBITDA was $211.5 million, or 20.9% of net sales. Income tax expense was $6.8 million, or 22.2% of income before tax, as compared with 26.4% in the prior year quarter. The lower 2020 second quarter effective tax rate is primarily due to increases in R&D tax credits and excess tax benefits from stock compensation. We anticipate that the effective tax rate will be between 23% and 25% in 2020. Our adjusted net income per share increased to 15 cents for the quarter compared to 12 cents in the prior year. Turning now to segment performance, starting with infrastructure. Infrastructure had a very strong quarter with net sales increasing 12.2% or $26.2 million to $240.3 million. This improvement was due to increased shipment volumes and higher pricing. The increased volumes were driven by many of our core product categories including iron gate valves, hybrids, specialty valves, and repair products. Adjusted operating income for the quarter increased 17.1% or $7.4 million to $50.8 million. The improvement was primarily due to increased shipment volumes and higher pricing. These benefits were partially offset by higher SG&A expense, increased costs associated with tariffs, and manufacturing performance, which included approximately $1 million of startup costs associated with the large casting foundry expansion in Chattanooga. Adjusted EBITDA for the quarter increased 14.8%, or $8.1 million, to $62.9 million, yielding an adjusted EBITDA margin of 26.2% and a conversion margin of 31% in the quarter. Moving on to technologies. Technologies net sales decreased $2.5 million to $17.4 million in the quarter, driven by lower shipment volumes at Metrology, which were partially offset by higher volumes at Ecologics. Adjusted operating loss was $4.7 million as compared with a loss of $3.6 million in the prior year, primarily due to lower shipment volumes, partially offset by favorable manufacturing performance and higher pricing. Technology's adjusted EBITDA was a loss of $2.6 million in the quarter as compared with the loss of $1.7 million in the prior year. Moving on to cash flow. Cash used in operating activities for the six-month period ended March 31, 2020, improved $26.1 million to $3 million, as compared with $29.1 million of cash used in the prior year. Cash flow used in operating activities includes the $22.2 million payment associated with the Walter tax settlement, which occurred in the first quarter of this year. The company invested $22.1 million in capital expenditures during the second quarter, bringing the year-to-date total to $37.3 million. Free cash flow for the year-to-date period improved $19.3 million to negative $40.3 million. We have a strong balance sheet and liquidity. As a reminder, our debt includes $450 million of 5.5% senior unsecured notes, and we also have an asset-based lending agreement with up to $175 million revolving facility. We did not have any amounts borrowed under our ABL at the quarter end. At March 31, 2020, we had total debt of $447.3 million and cash and cash equivalents of $111.3 million. At the end of the second quarter, our net debt leverage ratio was 1.6 times. We currently have no debt repayments prior to June 2026. Our 5.5% notes have no financial maintenance covenants. In addition, our asset-based lending agreement is not subject to any financial maintenance covenants unless we exceed the minimum availability threshold. We had approximately $159 million of excess availability based on March 31, 2020 data under that lending agreement. As a result, we believe that we are well positioned to face the impacts of the COVID-19 pandemic. I'll turn the call back to Scott to talk more about market conditions.

Thanks, Marty. I will provide some additional insights into market conditions and how we are adapting. After that, we'll open the call up for questions. We have withdrawn our annual guidance due to the uncertainty of the duration and magnitude of the COVID-19 pandemic, as well as the timing of the recovery. We do expect that COVID-19 will have material effects on all of our end markets in the near term. Our primary end market is the municipal repair and replacement segment, which accounts for approximately 60 to 65% of consolidated net sales. Although water utilities are essential service providers, The economic and operational effects of shelter-in-place orders and physical distancing practices are being felt by all to varying degrees. They have shifted their priorities, leading to delays for some ongoing projects and postponement of new projects. As a result, we expect to see a significant near-term sales volume decline in the project-related areas of our business, which primarily affect our metering, leak detection, and specialty valve products. To be clear, we believe that the majority of our products for the municipal end markets are essential for water utilities to do their planned and unplanned repair and replacement work in this environment. Residential construction is the second largest end market for our core products and made up approximately 25 to 30 percent of consolidated net sales in 2019. Based on our organic sales growth through the first half of the year, increased housing starts and industry commentary, Residential construction had strong momentum going into March of this year. However, given the economic impacts from COVID-19, we anticipate a sharp decrease in activity as new residential construction significantly slows down with builders focusing on their existing lot inventory. Our exposure to the residential construction market is much lower than it was prior to the Great Recession. Additionally, the opportunities for growth are much healthier, as average housing starts are below the long-term average, and there are fewer developed lots in inventory. However, we believe this portion of our sales will feel the most near-term pressure driven by the sharp decrease in economic activity and high unemployment. The smallest end market for our brass and repair products is for downstream natural gas distribution which represents less than 10% of consolidated net sales. Similar to water utilities, we expect this end market to slow down with delays in some ongoing projects and postponement of new projects, but to a lesser degree. We are well positioned with many of our products being used for the mandated repair and replacement of gas distribution lines. We expect this end market to experience the least near-term pressure. In summary, we are assuming a material slowdown in our end markets for the second half of our fiscal year, especially residential construction. Based on our current outlook, We expect our third quarter to be the most challenging quarter of this year. With our April orders down approximately 25% versus the prior year, we anticipate that our consolidated net sales for the third quarter could be 20 to 30% lower than prior year quarter. After discussions with our channel partners, we expect them to meaningfully lower their inventories during the quarter. We believe that the federal government's direct and indirect efforts to support citizens and businesses will help our end markets begin to recover during the second half of the calendar year. However, the timing and magnitude of the recovery remain highly uncertain. Given our fixed cost structure, especially for our core products, the decrease in volumes will lead to a higher decline in adjusted EBITDA for the third quarter, resulting in elevated decremental margins. We are reviewing all aspects of our business and taking action as needed. This includes adjusting our production capacity to preserve liquidity and cash flow during this difficult period. In April, we began implementing temporary furloughs at some of our manufacturing plants as we adjust to market conditions and manage inventory. We have also implemented furloughs for most salaried employees, salary reductions for our senior leadership team, and reduced fees for our board of directors. In addition to eliminating all non-critical business expenses, we are evaluating further actions as the change in market demand evolves. We will look to find the right balance between maximizing our cash flow from operations and continuing to invest in the business in anticipation of the markets returning to a more normalized level. With this in mind, we are reducing our capital expenditures for the full year 2020 to between $70 and $75 million dollars versus our prior guidance range between $80 and $90 million. Given the strength of our balance sheet and liquidity, we will continue to prioritize completing the remaining large capital projects we reviewed last quarter. These are the Specialty Valve Manufacturing Facility in Kimball, Tennessee, and Brass Foundry in Decatur, Illinois. However, given the timing of the completion for the Brass Foundry, we are pushing out some of the spending associated with this project. which could impact the completion date as well as the timing of the benefits. When it comes to our other strategic priorities, we will continue to focus on making appropriate investments to further incorporate technology into our infrastructure products while also modernizing our manufacturing facilities and operations. Given the liquidity position on our balance sheet, our capital allocation priorities will continue to focus on capital investments and returning cash to shareholders We recently approved our quarterly dividend, which is payable in May. We did allocate $5 million for share repurchases in February prior to the pandemic. However, after further review, we are temporarily suspending our share repurchase program to provide additional flexibility. We are reviewing our M&A priorities and anticipate that discussions will continue, but do not expect to execute anything in the near term. We will continue to review our overall approach to capital allocation as we learn more about the length, severity, and recovery of the crisis. In conclusion, we are continuing to stay abreast of the events surrounding COVID-19 knowing that the situation is very fluid. As events unfold, we will take action as needed. Our most valuable assets are our employees and our customers, and their respective communities depend on us. During this critical time, We will now begin our formal question and answer session. If you have a question, please unmute your phone, press star 1. Only record your first and last name. To withdraw your question, you may press star 2.

The first question is coming from Dean Dre, RBC Capital Markets. Your line is open.

Thank you. Good morning, everyone. Good morning, Dean. Good morning, Dean. Hey, can we start with the range that you're giving for the second quarter? And, look, I completely understand and appreciate how fluid this is, how there's lots of uncertainty. But the bias here is, at least from the muni side, you've got a pretty good line of sight on the maintenance side. So why would there be such a wide range, you know, 20 to 30 percent? What would take you to the low end? What would take you to the high end, if we could start there?

Okay. Great question. Thanks. And I think the biggest wild card in this is, from our discussion with our channel partners, is what does the inventory deleverage in the channel look like? You know, we know they're out there in their statement saying that they're going to remove protect their liquidity by removing hundreds of millions of dollars of inventory from the channel. And I think that's the biggest piece of it. I think you should think about this 10% first half growth that we've had. Certainly we're not sitting here saying that we believe the markets are up 10%. We know that after our Q4 last year that there was a fair deal of inventory taken out of the channel. and now through the first two quarters of our fiscal year this year, we've seen some of that come back in and certainly they were relatively bullish as residential was strong, especially Corn, Maine and Ferguson, some of the big guys and have been bulking up. We had announced our two price increases, one for brass and one for the iron business and as a result, I think a lot of the growth in our Q2 was actually in channel inventories. So I want to be clear on the call to everyone. We do not believe the market will be down 20% to 30%. We believe we will experience that in the near term, as the market will be down probably, let's say, 0% to 10%, and we will see the impact of the channel reducing its inventory position and getting very lean. I believe that most of our partners, Dean, are going to be protecting their liquidity very, very carefully.

Scott, I'm so glad you added that last point about the market size or what the market dynamic would be 0% to 10% because that makes so much more sense. Do you have a sense of how much the pull forward contributed in the fiscal second quarter?

It's hard for me to give a number, but I would say that if you were to think about – Everybody else reporting, and not that, I would say the, I think of it as about 50-50, you know, think about 50% of it really being growth and the strength of the market, January, February, a little softness in March, and then the other half kind of building inventories as a result of the announced price increases, trying to take advantage, the channel taking advantage of the lower cost in the first couple of months. But there's nothing scientific about that. I think of that kind of 50-50 in that range there, Steve.

Great. That's helpful. And then how about any chance you can size the potential decrementals if maybe taking the two ends, the 20% and 30%, what the decrementals might look like in the second quarter? And then for the balance of the year, where might you be managing decrementals to?

Well, that's a great question, one we've kind of thought a lot about. I think in the third quarter, our decrementals will be the worst. And the reason is that is because I have, with the leadership team, we spent a couple of days together in virtual meetings talking about what the recovery looks like. And I want our investors to understand that we've run two contingencies. Contingency A is The probability we see for both of those recoveries, the rapid jump in a near term, let's call it RQ4, and the probability of the slower recovery, we estimate to be equally probable at this point. We don't know how much of a jump we'll get. when the economy starts up again, but certainly it won't be as bad as it was in April. So that's a long way of saying we have elected to keep our powder dry. We have not laid off any of our hourly workforce. We entered into MOUs with all of the unions, and we gave ourselves max flexibility here in Q3 to make sure that if there is a pop, we have all of our operators, we have no learning curve, we have The right inventory position, we have the right skills mix on the floor. And so basically done a little bit to reduce our fixed costs as a result of the furloughs and the reductions to pay for the leadership team and the board. But on the whole, we have maintained max flexibility so that we can be the strongest coming out of this and as strong as we were going in. As a result of that, To get to your point, I think our decremental margins will be the highest. If you think about our fixed costs being approximately 20-25% of our costs, and you take away 20-30% of the volume, plus you have a measure of inventory reduction, I think you could easily get into the 40s or 50s percent. Now, obviously, it's up to us as managers to then mute that by taking SG&A actions, by taking plant actions. and we anticipate doing that. The reason we didn't give guidance is because I don't want to assume all the eventualities, but it will be our most challenging quarter on a detrimental margin basis. But I want to assure everybody, it's not because we're being slow about doing layoffs or Cutting costs or anything like that is, you know, we actually see a low interest environment. And this is either going to be something the country shrugs off as a blip for six weeks. And we go back to, you know, six, seven, eight percent unemployment, which I don't think would be a bad situation from being down what looks like 20. If we got back to six quickly, I think you'd see us be in a good position to come out of this with growth again.

Appreciate all the callers. Best of luck to everyone. Thank you.

Thank you, Dean.

The next question is coming from Brian Lee of Goldman Sachs. Your line is open.

Hey, Scott. Good morning, everyone. I hope everyone's doing well. Thanks for taking the questions. Maybe just a follow-up on Dean's. I know you're not giving specific guidance, Scott, and you're reserving a little bit of dry powder here, but to the extent that This isn't a six-week V-shaped type of recovery, and you do have to manage a little bit through the cost structure. If Q3 is the worst quarter from a decrementalist perspective, you're saying kind of 40s, 50s range, where do you think you can manage that down to if you had to sort of start to drive some more structural changes in the cost structure, let's say moving through the year, if that happened to be the case?

That's a really tough question. You have your fixed and you have your step fixed, and certainly I'm not sure how much of that I want to get into, but you should expect that the decrements, we're kind of a 35% gross margin business, I believe. Your decrements are going to be in the 40 range even in the best of cases because you've got to look at what the elements of that 20 to 25% of fixed costs are. You're not going to get rid of the fact that you've got a lot of depreciation. We are a vertically integrated manufacturer so we will look a little different than a lot of the peer set that we tend to look at in water. I think that our depreciation load and, you know, just our fixed utility load and things like that are going to be a little tougher to get out. But sizing the business, you know, I just want to give everybody some confidence that we, this is not our first rodeo. I mean, we've been through these downturns in the 80s, the 90s, dot-com bubble in 2000, 2008. I mean, it's, what do you do? You reduce the amount of indirect labor you have handling materials. Operators get their own materials. You look at what efficiencies are. You look at staffing levels. You look at all of those things that we would need to flex, and we will. So I think that the good news is we're a high gross margin, high EBITDA business. The bad news is your decrements get tougher to manage when you're already sitting there at 21% EBITDA margin business.

Okay, yeah, fair enough. I appreciate the color. And then also on fiscal Q3, you mentioned this is going to be by far the worst quarter here moving through the crisis, and I appreciate some of the color around inventory trends. You know, it's more specific to your view than the market outlook. But, you know, in the context of not giving Foyer a guy, you know, you are calling for Q3 to be the bottom here for you. Is there anything besides the inventory data specific that you can point to, other indicators that, you know, you're looking at to make that call right now? And can you kind of walk us through a little bit?

Sure. So I think the most important thing we've done in the last, We are watching the order intake at the channel as opposed to at just what is coming through. So the sell-through that we look at at the channel is, you know, it's kind of, I think, a better indication of where the market is. And you see some people that are just basically flat year over year through, you know, the first quarter. 35-40 days of the quarter and then you see a bunch of people that will be down 0-10% kind of depending on the region where you see the activity and so I think there is a lot of uncertainty of how it comes out in terms of the rest of the quarter but I don't think there's any question that right now we believe April will be the bottom. It'll have the double whammy of inventory adjustments along with the least amount of economic activity because basically every state was closed for some period of time in the month of April. And the Northeast, basically the alliance of the Northeastern governors have basically shut down that whole territory for 45 days. So the color I think you should take is that we're kind of in the trough in April As these states start to open up, even partially, we'll start to see improvement in the sell-through for the channel. And, you know, we'll kind of grow from there, I think. And so, you know, to try and say, is it 25 percent? Is it 22 percent? Is it 27 percent? I don't know how much inventory is going to come out of the channel. But I do know that the underlying demand for muni is going to be Pretty steady. And I do know that, you know, we're not going to go to zero housing starts. So, you know, I know that that will also not, you know, just be 35% of our business taken out. And so, you know, to answer the question directly, we're not. It's really cloudy. The visibility is a demand profile. But from what we've seen, we think we've given you a fairly fair range. Okay, thanks, guys. I'll pass it on.

The next question is going to be from Ryan Connors, Bonnie, and Scattergood. Your line is open.

Great. Thanks for taking my question. Hope everybody's well. So, you know, I don't want to beat the dead horse, but I appreciate the distinctions you draw, Scott, between the business and the portfolio now versus the last cycle. Certainly valid, but just to play sort of devil's advocate, I mean, one of the lessons of the last recession was that there was this Correlation between housing and municipal infrastructure spending, which is, of course, because tax receipts are a big part of those local government revenues. So we actually saw a pretty big decline in municipal, albeit on a two- or three-year delay. And so those two markets actually ended up behaving similarly, but housing was kind of a leading indicator on where Muni was headed. and then you see things like AWWA surveying their membership a couple weeks ago and saying 68% of U.S. water utilities as of a couple weeks ago are planning budget reductions heading into budget discussions. Most of them are on a June fiscal year. We just don't want to see people making the same mistake twice and making the same call that was made in 2008 which is Muni will be resilient when in fact we've seen that wasn't the case in the past. So what is it that gives you the confidence to to call the bottom with all those things in mind.

Yeah, I think it's a fair point. I told you we had a virtual meeting with our senior leadership team and something we dwelled on a great deal. I think, in a nutshell, the two biggest differences between eight and today for Muni is, A, the most important is that crisis was a crisis of liquidity. And what basically happened was the ability to borrow that was evaporated, not just for homeowners, but if you think about the whole banking system, what happened. And even munis found it difficult to raise money. And the idea of taking on debt when a lot of their projects were then in question is probably the biggest reason we see them getting very inexpensive money right now to do the upgrade. That's point A. Point B is We're 11 years on in the aging of this infrastructure. I can't get into the actual specifics, but suffice it to say that even in March and April, the amount of great fits, you know, that Krause kind of coupler product, all grew appreciably. Why? Because we're into the kind of The point of the curve, the bathtub curve, that the amount of money that's going to have to go to emergency repair is going to continue to increase. And so those are the two big drivers. And the last but not least is I believe that this time, as we start talking about stimulus, that unlike the last time in 2010, when I think you actually froze the market with ARRA, you actually had projects that got left on the sideline. I think this time, you know, lessons learned in Washington that any stimulus will qualify for water upgrades as opposed to kind of the Obama ARRA period freezing municipalities from actually pulling the trigger on projects as they waited to see what they could get.

Yeah, in essence they had to understand some of the provisions of the ARRA which really put a lot of the water projects on hold as they had to get in there and specifically say well what does it mean for Buy America? Is there a small component of this project that wouldn't qualify? So they delayed a lot of the spending and so I think it was more a timing of the spending that you saw that a lot of it we attributed back to the provisions of the The more the detail of the ARRA, not the fact that there was money available.

Right, and the way they made the money available, too, I think, if you recall, Ryan, will likely change this time as well.

Got it. Okay, very fair. My other one has to do with technology, which I guess we discussed a little bit last year on the call. It seems like there's a bit of a catch-22 there where you've got to keep up on innovation and R&D. If you want to stay relevant in terms of your product line. But then again, obviously the business was already unprofitable even before COVID. So without some pretty sharp cost reductions, it could become a pretty big drag on earnings. So how do you manage the balance between having to do some things but yet making sure that you're keeping up with the Joneses? Because obviously some of the larger players will just keep plowing money into R&D.

Yeah, I think that... The mission critical, you know, if you think about these economic downturns, one of the exercises you do is you go down the road five years and you say, you know, you try and do the visioning purpose of who are we, why do people buy from us, what's the selling proposition, what are we known for, those kinds of things. And if you think about our tagline of where intelligence meets infrastructure and you think about smart hydrant, a smart valve, informatics, diagnostics, you know, our Centrix platform, and those things are all critical to our long-term success and leading Mueller through the digital disruption of the water space just as electrical and gas and all the others have gone through in the years before. Then it gets pretty clear that we have to keep the communications and we have to keep the software piece and software as a service piece at our very core. We have to be able to develop sensing and transducer technologies whether it be around pressure, temperature, turbidity, all of those things that we talk about. The thing that I think is fair and that the team has to face into is in and of itself a meter with or without smarts, with or without communication radios, with or without diagnostics has to be economical. And I think it's... We're living with the puts and takes of that being a very lumpy business. So sales were really poor in the metrology business, but bookings were really good. Why? Well, we won Newport News, and we had the announcement out there, and so we'll run for a while where it looked like our bookings were really good until we win the next thing. So until you get scale in meters, we're going to have this lumpiness. Meters is the window on what's happening on the communications technology and the most information-rich point to do your data analytics. And so I think we have to be there. So I take the criticism that we have to be more profitable at it, we have to manage it better, but I also know that if I'm going to be where I want to be in five years, I need that window on the world.

Got it. Well, listen, I really appreciate the thorough response. Thanks for your time.

Thank you.

The next question is coming from Andrew Biscaglia of Barenburg. Your line is open.

Hey, guys. You know, if you could take that technologies comment one step further and just talk about kind of in this environment, I know, you know, a lot of people were piloting your Ecologics products, but can you talk about what the conversations are like there? And then, you know, is Ecologics positioned specifically You know, beneficially to be, you know, kind of a bigger cost savings, you know, more differentiated leak detection product out of this downturn, you know, would that be attractive to these people piloting?

Yes, I think, thanks for the question. I think yes, to answer quite, you know, and it's not just us. So, you know, I don't want to sit here and say, yeah, we are the only game in town. I think in general, there is a feeling that through this downturn, that those that were technology-enabled and those that are technology-savvy had better control of their network through the stay-at-home piece of the social distancing and all the rest of it. So I think that Bluefield recently came out and said that they think that the impact of the pandemic will be that it will actually aid in the adoption process around things like acoustic leak detection, around electronics, around remote monitoring, around the digitization, if you will, of the water infrastructure. And I believe that to be true as well. And so to answer the question succinctly, the answer is yes, we do see that and we do believe that. And the conversations have been relatively favorable. If you can imagine going with your backhoe to fix a leak and getting it right the first time as opposed to punching holes in the ground every five feet. I think you can see the attractiveness of it for our users.

Yeah. Okay. And you had all these kind of long-term plans to retrofit and build new facilities. Where do you stand with that based on what's going on in this downturn now? I know you cut your cap back a bit, but if you could provide some color, how do you think about that?

Sure. So I think that, you know, thanks for the question. Something I wanted to get into is, we've talked to our employees in Hammond, Indiana. The announcement is out there. We will be closing that plant. So it's full speed ahead in Kimball, Tennessee. We're going to continue with that capital program. We're going to continue to consolidate capabilities in there. We're going to be able to make, you know, big hydrogates along with the big valves that Hammond's making. So that's still a go in all of the Timetable Expenditures and Savings on Track. We've elected to delay spending in Decatur. If you think about Decatur, Andrew, about half the money, or think of it as half and half, about half the money came from improvements to mixing, the ability to have sleeves, the ability to quickly change between business brands or Brass or Silica Brass, all of those things. But then there was a whole bunch of savings or payback associated with the fact that we would actually have more capacity. The capacity would allow us to serve more markets. And so there was a growth element in 2023 associated with Decatur. So we kind of kept all of those plans, but we've delayed them. And we've pushed the schedule for Decatur's Go Live out by delaying the purchase of some equipment. Calculated risk. On the one hand, you know, we're being told that you'll have to wait. It's going to push the timeline for the project down. But we also know that on these big capital projects that if everybody's starting to pull their horns in, you know, the lead times could change. And so we have to look at what that recovery curve looks like. And, you know, if we need the capacity and and we need to pull that timeline back in. I still think we have some levers left but really what we're doing is delaying the Decatur Brass Foundry. Think of it as a year. So we'll be pushing some spending out of this year into next year and beyond.

Okay.

Thank you.

The next question is coming from Joe Geradano of Cowan. Your line is open.

Hey, good morning guys. Good morning Joe. Hey, so I just want to keep going on the technologies a little bit. You know, just I appreciate what you said about the critical nature of the communications and the software, but, you know, just looking back at the business now, you know, back to the last, I don't know, call it six years, it's been unprofitable at a range of like $80 to $100 million top-line run rate. Most likely that run rate has to go towards the low end, I'd assume, in this kind of environment where projects are going to be more challenged. You know, what's... I... I understand you're saying you have to do it more profitably, and I get that, but how does that happen? A lot of what's happened in the last couple of years has been in pretty good municipal markets. So now, if we have a more challenged one, what gives you the confidence that sustained profitability at a lower run rate is realistic for that business? How viable is it as a going concern?

Well, I think the creation and focus on an $80 million quote segment versus, you know, in a billion-dollar business is still one that garners way more attention than it ought to. You should think of it as a $4 million loss last year, which is basically all development costs. I mean, are you going to stop developing software and equipment for Ecologics? Are you going to stop development of you know, HydroGuard. Are you going to stop development of sampling stations, transducers, centrics, all of that stuff? If you are, then yeah, you can sit there and say, yeah, that $3 million isn't worth it, that $4 million, whatever it was, is it worth it? You know, I want out and I want to see profitability there. But if you take a longer view of the business and you say that they're all merging and that you do believe there's a digital disruption taking place in the water space, then You've got to look at the business holistically. And if you look at the business holistically, I think you'll say, you know, you've got a 20% even to business. And how do you protect your share of that profit pool in five years? And the way you do that is to make sure that profit pool doesn't get eaten away by the people who come in and provide the data and analysis. Go back, Joe, and say exactly what I said two years ago, which is if you look at every industry that's gone through digital disruption and then you take the profit pools and you look at how much of the profit pool shifted from the equipment manufacturer to the information provider, the insights and solutions provider, you will see that the bulk of the profit pools over time move towards information, not just the utility of the product. and we have a very profitable business, a great business with an iconic brand and this investment that we're making in technologies is what will ensure that that 20% remains viable in the future and will maintain your profit pool. And so I don't think of it as, as you said, a stand-alone entity. I see it as If you take an automotive example, it's like OnStar or Audi Connect. It's your GMC link. Whatever it is you want to use, it's providing users information on their car so that it does more than it used to do to get you from point A to point B. That's what we're doing. I take the criticism. I understand if you want to say they should make money on meters in and of themselves. I'm not going to argue with you. I agree. We've got to get scale. We've got to continue to have a better operating performance, which I would point out in the quarter we had better operating performance from operations again at the meter business. But we can't just give up on the digitization of valves, hydrants, and our brass products. It's going to happen. Maybe you and I fundamentally disagree with each other on where to go with this. But I am not, and I'll keep saying it, I am not concerned that we had, whatever it was, $4 million in negative ETH for the quarter. Because I do believe that team is making huge progress with Centrix, with Ecologics, with Analysis, with the development of transducers, with the development of HydroGuard, with the development of sampling stations. I just feel it's where all of our new products come from, and I feel good about it.

Has there been discussion internally about like, I don't know, if this is all one segment and then that's just considered like R&D for the core business rather than a standalone segment that loses money? Might be easier to digest for people?

Look, I appreciate your question. It was a few years back that we made the determination to break technologies out into a separate segment. As much as anything, it was a desire to provide more transparency through for investors. You know, there's certainly a lot of considerations when you go through and you determine what the segments are, but that was really a lot of the thinking behind it in terms of why we broke it out. But certainly, you know, it's something that I would say in terms of segments, that's something that we do continue to look at going forward, but appreciate that any changes have – require a lot to get there, but that was the reason that we did it several years back.

Let me also say that one of the things that we and the board, our board of directors is committed to is frank, transparent, robust discussion of issues and trying to hide something or not. When I came in, I said, look, however people think about the business, if there's a technology one, an infrastructure one, that's fine. We will deal with it frankly, openly, and in a transparent manner. And so this is one of the downsides of that is, gosh, Scott, you're plowing a lot of money into this technologies thing with not a lot of sales coming out of infrastructure. But if you don't buy my premise, then you should say this is not a good idea. But if you do believe that water infrastructure is going to digitize, Thank you. You know, before we wrap up, I wanted to just kind of say a couple of things.

Things I wanted to touch on that didn't come up.

When I look at our long-term positioning, I remain comfortable that we are still moving in the right direction. I think the large casting foundry in Chattanooga is going to play very well into this renewed sense of Buy America. The fact that we're vertically integrated, the ability to move castings into a nearby facility in Kimball that's coming online as expected. I think... Our ability to rapidly adopt digital technology and integrate it into the core products that are very important in delivering clean, safe drinking water to the public continues to leave us in a leading position so we can punch above our weight in our discussions with large utilities about where they go next. I think they recognize the work from home and shelter in place is going to change the nature of their Business Model as well, and they have to phase through not just the commercial water delivery aspects of it, but what the premium is going to be on water quality and think about it as more points of light. I think that we have long-term flexibility. I think that we have a great technology roadmap. I think that we're in a good position to come out of this. You are going to see a bump, I believe, once we turn the country back on. You know, we're probably sitting at 18 or 16, 18, 20 percent, pick your number, unemployment. But when we come back and we open restaurants, we'll get a bump when the states start to open up. How much will that impact resi construction, muni, and all the other aspects of the economy remains to be seen. We have driven for max flexibility. We understand what it does in the near term, our Q3, but frankly, we're not running the business for just Q3. We're running the business for the long term. And so I like where we are, and I like the flexibility we have, and I want to say that I'm very excited that we are on the right path. This is going to be a temporary near-term bump, and it doesn't, I think, need to be as serious as we have started to make it. So with that as my final note, I think that you should think that we have opportunities as a nation when we get through this health care issue and we're back on the horse riding, we're going to get ready for the next normal and Mueller will be well positioned to be ready for the next normal. And on that note, operator, I would like to have you end the call.

This will conclude today's conference. All parties may disconnect at this time.