MUELLER WATER PRODUCTS

Welcome, and thank you for standing by. At this time, all participants are in listening-only mode until the question and answer session at today's conference. At that time, you may press star 1 on your phone to ask a question. I'd like to inform all parties, today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to Whit Kincaid. Thank you. You may begin.

Good morning, everyone. Thank you for joining us on Mueller Water Products' third quarter conference call. Yesterday afternoon, we issued our press release reporting results of operations for the quarter ended June 30th, 2023. A copy of the press release is available on our website, newerwaterproducts.com. Scott Hall, our president and CEO, and Marty Zakis, our CFO, will discuss our third quarter results, end markets, and current outlook for 2023. Following our prepared remarks, we will address questions related to the information covered on the call. As a reminder, please keep to one question and a follow-up, and then return to the queue. This morning's call is being recorded and webcast live on the Internet. We have posted slides on our website to accompany today's discussion. They also address forward-looking statements in 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. It discloses the reasons why we believe that these measures provide useful information to investors. Reconciliations between non-GAAP and GAAP financial measures are included in the supplemental information within our press release and on our website. Slide 3 addresses forward-looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward-looking statements. Please refuse 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 1-866-510-4837. The archived webcast and corresponding slides will be available for at least 90 days on the Investor Relations section of our website. I'll now turn the call over to Scott.

Thanks, Whit, and good morning, everyone. Thank you all for joining our third quarter earnings call. Our third quarter results came in below our expectations with both consolidated net sales and adjusted EBITDA below the prior year. We experienced a sequential decrease in orders during the quarter and manufacturing inefficiencies primarily associated with lower volumes and the ramp-up of our new foundry. We believe these lower order levels largely reflect the return to pre-pandemic lead times for most of our short cycle products, specifically iron gate valves and hydrants. Additionally, we believe the new residential construction end market continues to adjust to higher interest rates. As a result, we continue to be impacted by a more prolonged inventory correction than previously anticipated. Despite the challenges, I am encouraged by our execution in the quarter with the sequential improvement in adjusted EBITDA margin. Our past pricing actions across most product lines, again, more than offset ongoing inflationary pressures. Similar to the second quarter, water management solutions delivered strong results supported by an elevated backlog for hydrants and improved manufacturing performance. We expect the relatively low order rates for our short cycle products to continue in the fourth quarter. Also, we anticipate lower brass production levels relative to previous expectations. As a result, we are revising our annual guidance for 2023. We have taken actions to streamline our costs to help mitigate the headwinds from lower volumes, which I will address later in the call. We believe our end markets have strong long-term fundamentals. especially with the future benefits from the infrastructure bill. Our new foundry remains on track to fully ramp up by the end of fiscal 2024, positioning us to capture increased demand related to lead service line replacement projects. Though the external environment continues to evolve, we remain confident that we can return to pre-pandemic margins in 2025 after we get through the current transformational period. With that, I'll turn the call over to Marty to discuss our financial results.

Thanks, Scott, and good morning, everyone. I'll start with our third quarter 2023 consolidated GAAP and non-GAAP financial results. After that, I will review our segment performance and discuss our cash flow and liquidity. During the quarter, our consolidated net sales decreased 2 percent to $326.6 million compared with the prior year. This decrease was primarily due to lower volumes at water flow solutions, partially offset by higher pricing in both segments across most of our product lines, and volume growth at water management solutions. Gross profit of $100.1 million increased 1.8% compared with the prior year, while gross margin of 30.6% increased 110 basis points compared with the prior year. As a reminder, the prior year quarter included a $4.5 million warranty accrual charge. Excluding the warranty charge, gross margin decreased 30 basis points. The decrease was primarily due to lower volumes at water flow solutions, unfavorable manufacturing performance, and higher costs associated with inflation, which more than offset benefits from higher pricing and higher volumes at water management solutions. We were pleased to see our gross margin improve 120 basis points sequentially despite the lower volumes. Additionally, higher pricing more than offset ongoing inflationary pressures as we continue to experience higher costs associated with materials and labor relative to the prior year. The level of total material cost inflation improved relative to prior quarters with a 2% increase compared with the prior year. Spelling, general, and administrative expenses of $60.6 million in the quarter were comparable with the prior year. Lower personnel, incentive, and IT costs helped offset inflation and the impact of foreign exchange. SG&A as a percent of net sales increased to 18.6% in the quarter as compared to 18.2% in the prior year quarter. Operating income of $35.6 million decreased 3.5% in the quarter compared with $36.9 million in the prior year. Operating income includes strategic reorganization and other charges of $3.9 million in the quarter, which were primarily related to severance and certain transaction-related expenses. Additionally, the prior year quarter included the warranty accrual charge mentioned earlier. Turning now to our consolidated non-GAAP results. Adjusted operating income of $39.5 million decreased $2.5 million compared with $42 million in the prior year. The benefits from higher pricing were more than offset by the decrease in volumes, unfavorable manufacturing performance, and increased costs associated with inflation. Adjusted EBITDA of $54.4 million decreased 5.9% in the quarter, leading to an adjusted EBITDA margin of 16.7% as compared with 17.3% in the prior year. As a reminder, During the quarter, we incurred $900,000 of pension expense other than service compared with a benefit of $900,000 in the prior year. For the last 12 months, adjusted EBITDA was $185.3 million, or 14.2% of net sales. Net interest expense for the quarter declined $400,000 to $3.8 million compared with $4.2 million in the prior year. The decrease in the quarter primarily resulted from higher interest incomes. Adjusted net income per diluted share of 18 cents decreased 5.3% or 1 cent compared with the prior year. Turning now to segment performance, starting with water flow solutions. Net sales of $150.1 million decreased 23.4% compared with the prior year. Higher pricing across most of the segment's product lines was more than offset by lower volumes for iron gate valves. Specialty valves experienced double-digit net sales growth compared to the prior year, driven by both higher pricing and increased volumes. Service brass product volumes were slightly lower than the prior year quarter due to manufacturing inefficiencies. Adjusted operating income of $12.7 million decreased 66.7% in the quarter. The benefits from higher pricing and lower SG&A expenses were more than offset by lower volumes of our iron gate valve products unfavorable manufacturing performance, and higher costs associated with inflation. Unfavorable manufacturing performance includes anticipated inefficiencies related to the new foundry and lower production levels of the current foundry. Adjusted EBITDA of $20.9 million decreased 54.3% or $24.8 million, leading to an adjusted EBITDA margin of 13.9% compared with 23.3% last year. Moving on to water management solutions. Net sales of $176.5 million increased 28.6% compared with the prior year due to higher pricing across most of the segment's product lines and increased volumes, primarily in hydrant and water application products. Adjusted operating income of $40 million increased 142.4% in the quarter. Benefits from higher pricing and increased volumes more than offset unfavorable manufacturing performance largely due to higher costs from outsourcing, the impact of foreign exchange, and higher costs associated with inflation. Adjusted EBITDA of $47.6 million increased 100.8% or $23.9 million in the quarter, leading to an adjusted EBITDA margin of 27% compared with 17.3% last year. Adjusted EBITDA conversion margin for the quarter was 61%. Moving on to cash flow. Net cash provided by operating activities for the nine-month period ended June 30, 2023, increased $32 million to $52.5 million compared with the prior year period. The increase was primarily due to improvements in working capital in the third quarter, including a sequential decrease in inventories. During the nine-month period, we invested $32.4 million in capital expenditures, which is $4.3 million lower than the prior year period. Our free cash flow for the nine-month period increased $36.3 million to $20.1 million compared with the prior year period due to the increase in cash provided by operating activities and lower capital expenditures. We did not repurchase any common stock in the third quarter, and as of June 30th, we had $100 million remaining under our share repurchase authorization. As of June 30th, 2023, we had total debt outstanding of $447.5 million, and cash and cash equivalents of $141.2 million. At the end of the third quarter, our net debt leverage ratio was 1.7 times. We did not have any borrowings under our ABL agreement at quarter end, nor did we borrow any amounts under our ABL during the quarter. As a reminder, we currently have no debt financing maturities before June, 2029. Our total liquidity increased to $303.5 million as of June 30, 2023, giving us ample capacity to support our strategic initiatives. I'll turn the call back over to Scott.

Thanks, Marty. I will provide additional comments on our third quarter performance and markets and updated full year outlook for 2023. After that, we'll open up the call for questions. We are seeing lower order rates for most of our short cycle products. With lead times returning to pre-pandemic levels and end markets continuing to adjust to higher interest rates, we are experiencing a more prolonged inventory correction than previously anticipated. During the third quarter, hydrants and service brass products both benefited from elevated backlogs. However, starting the fourth quarter, our short cycle backlog was close to normalized for hydrants and iron gate valves, while backlog for service brass products remains elevated. We are working closely with our channel partners to understand sell-through and channel inventories for our short cycle products at the local level. While the fundamental growth drivers of our business remain intact for the longer term, we have updated our view on order levels for the fourth quarter. As a result, we continue to adjust plant spending, including labor schedules, to improve our conversion margins on the anticipated lower volumes. During the third quarter, we improved brass production with a sequential increase in pounds produced, which translated into our highest quarter of sales since 2021. We made further progress, on the ramp up of our new foundry with increased production levels. We have our sand system installed along the pouring line designed for high turnover, high mix products. As anticipated, we are experiencing inefficiencies in startup costs associated with the new foundry. We are working through the engineering and technical challenges associated with the new foundry equipment and lead-free brass alloy. We are over halfway through the tooling for our highest volume parts and have slowed the new tooling process to focus on increasing production levels. We have trained and transitioned second shift team members to the new foundry to increase production levels. Despite the progress we have made, production levels for both foundries were below expectations, leading to underabsorption and outsourcing costs. Overall, outsourcing costs improved sequentially to approximately $5 million in the quarter, which was flat to the prior year. As a reminder, most of the outsourcing costs relate to brass parts used in iron gate valves and hydrants, with the hydrant portion impacting water management solutions. We expect production levels for the rest of the year to improve as we continue to refine processes with the new equipment. We anticipate the third line ramping up in 2024, which will help us simultaneously process new tooling and ramp up production level. We remain confident that we will meet our goal by having the new foundry fully ramped up by the end of fiscal 2024. This achievement will allow us to close the current foundry and eliminate outsourcing costs, primarily those associated with brass parts, ultimately helping us to return to pre-pandemic margins in 2025. To better align our cost structure with anticipated volumes and position us for more profitable growth, we have taken actions to reduce our SG&A spending. During the third quarter, we restructured our sales and marketing organization to bring our business teams closer to customers. While we take a more disciplined approach to our go-to-market strategies, we will remain focused on improving business processes that enhance our customers' experience and strengthen our channel relationships. Additionally, we have taken actions to streamline other G&A expenses, including corporate G&A, to drive efficiencies in our support functions. In total, these actions are expected to deliver approximately $25 million in annual SG&A savings, which will improve future sales growth leverage and help mitigate inflationary pressures. Based on the timing of the actions, we expect most of the savings to occur in fiscal 2024 with some benefit this year. Turning to our end markets and current 2023 outlook. The new residential construction market continues to provide headwinds and drive uncertainty for our channel partners and their customers. Though the seasonally adjusted annual rate for total housing starts was around 1.4 million for June, total housing starts were down 11% year over year during our third quarter. This was driven by a 14% decrease in single family starts. Over the last 12 months, total housing starts have been down 13% with a 22% decrease in single-family housing starts. Even though demand appears to be stabilizing, due to a variety of factors, we believe activity levels compared with the prior year will continue to decline and reflect a normalization below 1.4 million total starts. While the slowdown isn't affecting all areas of the U.S. equally, it is influencing local distribution inventories to various degrees. The municipal repair and replacement market continues to help partially offset the anticipated slowdown in residential construction activity. We remain excited about the benefits of the infrastructure bill ramping up over the next 12 months. Our large capital projects significantly expand our domestic capacity for specialty valves, large gate valves, and service brass products, which can be used in lead service line replacement projects. I will now briefly comment on our outlook for the balance of 2023. As mentioned earlier, we are revising our annual guidance based on current expectations for the channel inventory normalization and our anticipated brass production levels. Based on projected order rates for our short cycle product, we now anticipate a double-digit year-over-year decrease in volumes for the year. With short cycle backlog close to normalized, with the exception of service brass products, We anticipate that annual consolidated net sales will be between flat and down 2% compared with the prior year. Adjusted EBITDA is expected to be flat to down 5% compared with the prior year. As a reminder, our annual adjusted EBITDA guidance includes a $7.7 million headwind from higher pension expense other than service, which is excluded from adjusted operating income. Additionally, We expect working capital improvements relative to 2022 to drive improved free cash flow for the full year, primarily driven by opportunities to improve inventory levels. Moving on to our key takeaways for the quarter. We believe our end markets have strong long-term fundamentals, including the accelerating age of our water infrastructure and benefits from the infrastructure bill. Our product portfolio and manufacturing footprint align well with the challenges facing water utilities. We expect service brass products and specialty valves to see the largest benefit with additional benefits for iron gate valves, hindrances, and repair products. When our significant period of capital investment comes to an end, we will be well positioned to drive operational improvements and commercial strategies. We believe that there is a substantial long-term margin improvement opportunity for Mueller. In addition to the benefits from our large capital projects, especially the new foundry, we are focused on improving operational and supply chain efficiencies and cost-out initiatives, including a more streamlined approach to SG&A spending. We have a strong balance sheet with ample capacity to support our strategies with a balanced and disciplined approach to cash allocation and a consistent track record of returning cash to shareholders. Looking beyond 2023, We expect improved operations and manufacturing efficiencies to lead to net sales growth and a significant increase in margins as we look to get back to pre-pandemic margins in 2025. I would like to thank our dedicated team members for their hard work and resolve as they continue to navigate the challenging external environment and focus on servicing our loyal customers, executing our operational initiatives, and delivering on our strategic initiatives to grow and optimize our business beyond 2023. And with that, operator, please open this call for questions.

Thank you. We will now begin the question and answer session. If you'd like to ask a question, please press star 1, unmute your phone, and record your name clearly. Your name and company is required to introduce your question. If you need to withdraw your question, press star 2. Again, to ask a question, please press star 1. It'll take a few moments for the questions to come through. Please stand by.

Operator, we show questions in the queue. Are you going to?

And our first question is from Dean Dre from RBC. Go ahead. Your line is open.

Thank you. Good morning, everyone.

Good morning.

Maybe we can start with the destocking. phenomenon. And look, we're seeing this across pockets of the industrials and also in life sciences. Yesterday, short cycle electrical products with Wesco. There's a common theme. This is the backside of the whole COVID product shortage. Lead times are now getting back to normal. And it really becomes a question of how long does it take to work through the system? It's not a question of execution. It's just, you know, absorption as long as in market demand stays steady. So Scott, from your perspective, what has surprised you so far on the destocking side? So the hydrants and iron gates seems to have worked itself as we'd expect shorter cycle, but what's unique about service brass and why would that be taking a bit longer?

Well, I think the service brass is somewhat related to our ability to produce. So as I said in my prepared comments, we still have elevated backlog levels in service brass. And I think that the delay that you're seeing in us working that off is really a result of continued poor uptimes and poor performance at the old foundry. And in fact, during the quarter, we ultimately took the second shift off the legacy foundry and moved them to the new foundry and adjusted, because we've just not been able to get the throughput on the machines that we need to satisfy customer demand. And so really what you're seeing in the quarter was, albeit higher throughput, approximately 110 individuals being trained up on the new equipment, so kind of changing the tires while the car is running down the highway. But we expect the recovery in brass to be pushed out. So what you're seeing in gate valves and hydrants is probably two quarters away in brass. So that the channel will be full with all of this bulge of backlog finally getting shipped out. And then we'll see a market order slowdown. With regard to gate valves and hydrants, I do want to say that I think that the channel has had sell-throughs decline year over year, basically on the back of their service to the resi market.

All right, that's helpful, and we see where that's connected. And just, look, I don't think anyone's expecting the new foundry ramp to be necessarily linear. and we appreciate the data points that you've been giving us. The idea here on, you know, the offset to this is the outsourced activity, and it was a reference about higher costs. Was that you were putting more volume through outsourced on the brass side, or was that just a year-over-year comparison? And just kind of, you know, if you could give us some dimensions of how much on outsourced activity and what the expectation reset now is. on how that eventually ramps down.

Yes. So, you know, what we tried to convey is that sequentially outsourcing went down by about a million bucks. Year over year, it was basically flat. Higher costs were associated in the foundries combined associated with the off-shift moving from the old system to the new system. So we basically had a few weeks of, you know, OJT or on-the-job training for for the operators who were on the off shift at the old foundry, now on the off shift at the new foundry. But for approximately three, four weeks, most of those individuals were working days as they learned their job shadowing other members. And so those costs associated with the ramp up, those nonproductive labor hours, they were all driving the year over year increased costs to produce a pound of brass.

Our next question is from Joe Giordano from TD Cohen. Go ahead. Your line is open.

Hey, guys. Good morning. I just want to understand kind of like we've been talking about these stocks. So, like, I guess some modest revisions. Okay. I don't think anyone go crazy on that. The magnitude is so large that, like, I almost feel like how is it caught so off guard for this type of magnitude of change, like, over, you know, three months ago when we were already talking about these stocks?

Yeah, I think what's fundamentally changed in our view of the fourth quarter is the pace at which we will start to see the flow through come back in. And I think that, you know, originally we felt like our fiscal fourth quarter would still be a strong construction cycle quarter for both Muni and Resi and that the channel will have depleted its excess inventory levels. And we would start to see flow through in June and July in gate valves first, because if you recall, it was the one that we exhausted the backlog there first last year. This Q3, we basically exhausted the backlog for hydrants and worked through all of that. So if you looked at the flow-through models, you would have said we should have seen increased orders activity in gate valves back to kind of pre-pandemic volume levels. in June and July. We have not observed those booking rates. In fact, those booking rates have been less than 50% of those. So we've, you know, checked with the channel to see, you know, what the recovery looks like. And I think what we have is a softening demand from construction for the channel, along with ending the construction season. So I think that the recovery to flow through is going to be muted. And so what we're now thinking, Joe, is that As we traditionally go into the winter months and we lose basically half the country's ability to do, you know, any meaningful work that's really break-fix in the north at that point, that we're not going to really start to see those kind of pre-pandemic levels again until our second quarter next year when we start to start loading for construction. So we're going to have this gradual increase. creep back up as opposed to the recovery we were forecasting only 90 days ago. And I think the recovery length is going to be extended by about two quarters.

So are you saying that the actual sell-through from your distributors to the ultimate customers, is that deteriorating pretty quickly too? I guess the real thing that everyone needs to calibrate is, like, Yes, this is weaker. Fourth quarter is going to be significantly weaker. Is 2024 demand, like, materially different than what we thought it was three months ago?

No, I don't think so. I think that the channel's inventories are going to be enough to get us through the end of this construction season. And so the rate to go fill it back up to just have it sit there in the winter months, I think there's low appetite for that. So I think the non-construction season in our Q1 and Q2 for seasonally adjusted, normally they are our lowest quarters. So I think that there's enough inventory in the channel that we're going to have a difficult booking fourth quarter. And I think we'll start to see recovery for bookings in our Q2.

Our next question is from Ryan Connors from North Coast. Go ahead. Your line's open.

Good morning. Thanks for taking the question. I wanted to ask on the price side. You know, it seems like price was actually pretty positive in the quarter and kind of an offset that precluded things from being, you know, maybe even tougher. So I wanted to get – can you remind us sort of how much price you think you took in the last couple years and how sustainable that side is to the extent some of this, you know, continues to push right a little bit into 24 as Joe kind of – you know, intimated there. I mean, is price going to continue to be something that can offset some of this or are we kind of getting to the end of that rope as well?

Well, I think that, you know, price for the quarter was double digits, really on the strength of hydrants. So if you think about what was in the tail end of the, you know, what was kind of stuck in the backlog, Ryan, really all those pricing actions we took in the, during COVID and then, you know, kind of through the inflationary period now, are all paying dividends. As you know, this industry, the way it normally works is there's a February price increase. It's an annual price increase and you're given a window to get your load in so that we encourage people to put stock in place in the February, March, and two weeks of April timeframe so that we can kind of level load our factory and not just kind of try and spike during the summer months when the construction season is the highest. And so I think the whole price structure will return to normal for the industry. That's certainly what we anticipate, and we would expect to get price kind of in that February window. But we don't announce anything until we talk to our customers. The other thing I would like to point out is that, you know, I think we're seeing a significant slowdown in inflation. It was, you know, I think raw material prices have continued to move in the different directions. So that also helped the, you know, the sequential margin improvement.

Yeah. Okay. Fair enough. And then the other was kind of bigger picture. I mean, given how long, you know, we're kind of almost a year into this, these manufacturing uptime issues and production issues. And given how that's kind of dragged on a bit, I mean, you have to imagine competition must be selling against you on that. You know, and trying to pick up share. I mean, what are the market share and competitive sort of ramifications of what's this process you're going through on the production side?

Well, I think interestingly, both our competitors in brass have now announced increases in capacity. One is building a brand-new foundry. We feel like we have a three-year head start on them. And one is going to try and modify an existing footprint and add melt and mold capacity. And that's in the public domain. You can look at the various. So I think that they are now realizing what we identified three years ago with not just lead service line, but, you know, dependence on Chinese bismuth. a lot of the other factors that kind of spurred us into investing in the foundry. I think if you were to criticize us, you would criticize us and say, when we paused the project in Q3 of 2019, you know, it cost us, it might have been 2020, sorry, it cost us more than the three months we paused because of the supply chain implications, inability to get equipment in and things like that. And I think that that is fair, but I would say in brass, um, we have not been able to keep the old foundry running at even its historical, um, rates as we've had more and more difficulty even getting parts, uh, Walker beam table parts, uh, Cinto parts. I mean, it's been, it's been, you know, a very challenging engineering environment, um, for our team. And, um, And I think that is fair criticism, that we should have been able to keep that kind of daily throughput at the old foundry for longer than we have. But as I said in my comments, this quarter we have had to, I just finally said, take everybody off that second shift at the old foundry. Let's get them getting productive at the new foundry because there are just too many complex technical and engineering challenges at the 100-year-old foundry. As for the brass, I mean, sort of the iron side of the business, yeah, I think we've had share moving back and forth as lead times jockeyed. You know, when we were inside our two competitors there on gate valves, I think we took share. While they were inside us on lead times and hydrants, I think we probably lost some share. So I think it's been kind of an opportunistic, but I don't think the share in either direction, either the share we gained in gate valves or the share we lost, potentially in hydrants is permanent by any sense of the imagination. These are all service-related projects.

Again, as a reminder, please press star one on your phone and record your name if you have a question. Our next question is from Walt Liptack from Seaport Research. Go ahead, your line's open.

Thanks for taking my question. I want to go back to one of the earlier questions and just better understand, like, you know, You know, we have been talking about destocking, but, you know, why was the visibility on this destock? So, you know, why didn't we get a heads-up on it? And then maybe as the follow-up, and then maybe as the follow-up, you know, it's good to see you taking costs out of SG&A. Was this something reactionary that you guys did, or was this a response to, you know, like a quick response to what's happening with the destock in the channel?

Well, I think that first and foremost, the SG&A, the percent of sales is something that Marty and I review every quarter. You know, we look at where we've placed our bets, both in marketing and in, you know, selling initiatives. I think we got out of ACE and we looked at where the market was and thought we were a little heavy in cost to serve in a couple of our businesses and started with the selling restructuring. But I'm a firm believer that, you know, once we got into the downturn of having to lay off the hourly personnel as well as doing the sales restructuring, that, you know, we create a sense of urgency. And I think we went after the G&A costs during our fourth quarter. Certainly we'd had done the planning in the third quarter. And so Yes, to both. Yeah, it was partly a response to the declining outlook, but it was also part of a more proactive look at our cost to serve in selling and marketing. And so that's why it was done in two steps. And, you know, we will continue to watch SG&A as a persona sales, and we'll continue to watch our cost to serve various customer groups and make sure that we're making money and have the ability to get leverage as we grow sales. With regard to your first part of your question, I think that the first thing, you know, I would rephrase it like, what do I think the failure mode was in the drawdown in inventories? And I think it really comes down to what we thought the sell-through rates were going to be through the construction season. So if you think about the construction season for May, June, July, and August, and you say, okay, the sell-through rates for gate valves are going to be X, and the sell-through rates for hydrants are going to be Y, and then we check with the channel. And, you know, I thought May showed some nice recovery. June was certainly a disappointment, and then July was we knew we were not getting the sell-through in the channel to warrant return to booking levels at that kind of pre-19 or pre-2020 kind of daily rate. And so the sell-through, I think, was the, you know, an over-optimism perhaps, but not as much going through the channel in those summer months that we've previously experienced in previous years was the failure mode, Walt, for how we have come to a different point of view. I think the other thing that investors should know is even though the sell-through might be higher in June, July, August, September, albeit lower than we anticipated, that doesn't mean they're going to refill and carry a ton of inventory November, December, January. I think that that's not how the industry has worked. And so I think the compound of a slow kind of buy rate or sell-through rate and their willingness to put in an amount of inventory is really compounded to create this showroom. So I hope that clears it up.

Okay. Yeah, it does. Thank you.

I show no further questions at this time. I will now return the call back to Scott Hall. Go ahead.

Thank you, Operator. Look, thanks to everyone for joining us on today's call. Obviously, this is a transformational time for both Mueller and the water industry in the U.S. I believe we are poised to benefit from the accelerating age of our water infrastructure and increased federal spending. We're focused on driving the operational improvements and commercial strategies, as we believe there is a substantial long-term margin improvement opportunity for Mueller and for our shareholders. I'm confident we can grow net sales and significantly increase margins over the next two years as we look to get back to pre-pandemic margins in 2025. I thank you for your continued interest in our company, and operator, please conclude the call.

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