MUELLER WATER PRODUCTS

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. During today's Q&A session, if you'd like to ask a question, please press star then 1. Today's call is also being recorded. If you have any objections, you may disconnect at this time. I would like to turn today's meeting over to your host, Mr. Whit Kincaid. Thank you. You may begin.

Good morning, everyone. Thank you for joining us on Mueller Water Products' second quarter conference call. Yesterday afternoon, we issued our press release reporting results of operations for the quarter ended March 31, 2024. We also issued a press release providing an update on our leadership team and board refreshment. Copies of the press releases are available on our website, MuellerWaterProducts.com. I'm joined this morning by Marty Zakis, our Chief Executive Officer, and Steve Heidrichs, our Chief Financial Officer and Chief Legal Officer. 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 also posted slides on our website to accompany today's discussion. They also 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. It discloses the reasons why we believe that these measures provide useful information to investors. Reconciliations between non-GAAP and GAAP financial measures are included in the supplemental information within our press release and on our website. Slide 3 addresses forward-looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward-looking statements. Please review slides 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 the 30th of September. A replay of this morning's call will be available for 30 days at 1-866-360-8712. The archive, webcasts, 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 Marty.

Thanks, Witt. Good morning, everyone. Thank you for joining our earnings call. It is an honor to continue in the role of CEO, and I thank the Board for placing its trust in me to lead Mueller at this critical juncture. Mueller plays an essential role in helping our customers deliver clean and safe drinking water to hundreds of millions of people. I get to work with the best team in the industry, and we will continue to build on the power of our industry-leading brands and deep channel and end customer relationships. I look forward to working with Paul and the rest of the team as we continue to execute on our strategy to drive shareholder returns. I'll now start with a brief overview of our second quarter performance. We had a fantastic second quarter. reflecting the progress our teams have made executing our operational and commercial initiatives to deliver long-term, sustainable growth. We achieved record quarterly net sales with a strong sequential increase in volumes, supported by our continued enhancements in customer experience. We improved gross margins 750 basis points to 36.9%, supported by continued manufacturing and supply chain efficiencies, leading to our highest quarterly gross margin in more than seven years. With a record quarter for net sales and a strong gross margin along with SG&A leverage, we delivered over 70% adjusted EBITDA growth compared to the prior year. We also achieved record quarterly adjusted net income per diluted share of 30 cents, which increased more than 100% compared to the prior year quarter. Turning to sustainability, I am pleased to report that in the second quarter, MSCI upgraded Mueller to its highest ESG rating of AAA. This rating is a great accomplishment and a testament not only to the critical products and solutions we provide for our municipal customers in their communities, but also the hard work and dedication of our team members, suppliers, and customers. We look forward to sharing our continued progress in the next annual ESG report, which will be published later this year. We are increasing our annual guidance for net sales and adjusted EBITDA. These increases reflect our strong first half performance and order activity across most product lines, as well as our belief that overall end market demand is healthy. Municipal repair and replacement activity remains very resilient, and the new residential construction end market is improving relative to a challenging 2023. We are targeting record gross margin for 2024. The significant expected increase primarily reflects benefits from the actions we have taken over the past year to drive efficiencies in our operations. At the midpoint of our updated annual guidance range for net sales and adjusted EBITDA growth, The adjusted EBITDA margin is a 420 basis points expansion, reflecting our expected improved operational performance. Our teams have worked diligently on improving lead times while controlling costs and driving manufacturing, material, and freight efficiencies. Our execution allowed us to leverage the increased volumes in the second quarter, leading to an improvement in gross margin. This strong conversion included outstanding performance at both our iron gate valve and hydrant manufacturing facilities. We also expect to have an additional tailwind in the near future from the completion of our new brass foundry project and closure of our old brass foundry by the end of calendar 2024. Our commercial teams continue to do a great job working with our customers. We were pleased to see the strong sequential increase in order activity this quarter across most product lines, which was primarily driven by favorable end market demand. We believe some of this order strength was due to the timing of our price increases and positive sentiment moving into the construction season. We believe that net sales growth in the quarter versus the prior year would have been close to flat without the pull forward. With normalized lead times, we expect this pull forward to impact our third quarter sales, which is reflected in our updated annual guidance. Our team continues to do an admirable job dealing with the impacts of the Israel-Hamas war on our repair products business while also working to satisfy customer demand. As expected during the second quarter, we experienced higher costs associated with labor, materials, and freight. Our accomplishments this quarter and through the first half of the year are a testament to the progress we've made with our transformation, especially considering the external headwinds our teams have faced. With that, I'll turn it over to Steve. Thanks, Marty, and good morning, everyone.

For the quarter, our consolidated net sales were $353.4 million, an increase of 6.2% compared with the prior year. Net sales primarily increased due to higher pricing across most product lines, with higher volumes of water flow solutions partially offset by lower volumes of water management solutions. As we've previously mentioned, we believe that lead times and backlogs for iron gate valves and hydrants have normalized. Based on order activity during the quarter, we also believe that valve and hydrant end market demand was healthy in this period. The differences in year-over-year volumes between iron gate valves and hydrants are primarily related to the timing of backlog normalization and channel and customer destocking. In the prior year quarter, hydrant shipments benefited from serving an elevated backlog. In the second quarter, gross profit of $130.4 million increased 33.3% compared with the prior year. Gross margin of 36.9% increased 750 basis points compared with the prior year and reflects our highest quarterly gross margin in over seven years. The increase was driven by improved manufacturing performance and higher pricing. Our continued improvements in manufacturing performance were primarily driven by improved productivity, including labor, material, and freight efficiencies. This improvement also includes benefits from lower brass outsourcing costs. Higher pricing more than offset inflationary pressures, which mainly related to labor inflation. Total materials costs were slightly higher, primarily due to inflation related to purchased parts, which was partially offset by lower raw material costs relative to the prior year. For the quarter, total SG&A expenses of $63.7 million were $500,000 lower than the prior year. Lower personnel-related costs, third-party fees, and engineering expenses were partially offset by higher incentive costs and inflationary pressures. Operating income of $63.5 million increased 93% in the quarter compared with the prior year. Operating income includes strategic reorganization and other charges of $3.2 million in the quarter, which have been excluded from adjusted results. These are primarily related to the leadership transition, severance, and certain transaction-related expenses. Turning now to our consolidated non-GAAP results for the quarter. Adjusted operating income of $66.7 million increased 98.5% compared with the prior year, primarily due to favorable manufacturing performance and higher pricing, which more than offset inflationary pressures. Our adjusted operating margin improved 880 basis points to 18.9% compared with the prior year. This is the highest quarterly gross margin since the third quarter of 2019. Adjusted EBITDA of $82.2 million increased 70.9% in a quarter. Our adjusted EBITDA margin improved 890 basis points to 23.3%. Similar to adjusted operating income margin, this is also the highest quarterly margin since the third quarter of 2019. For the last 12 months, adjusted EBITDA was $236.8 million, or 19.1% of net sales, a 470 basis point improvement compared with the prior 12-month period. Adjusted net income for diluted share more than doubled in the second quarter, increasing 114.3% to 30 cents per share, which is a quarterly record. Turning now to quarterly segment performance. I'm pleased to start with Water Flow Solutions, where our operations and business teams led the segment to an outstanding quarter. Net sales of $205.8 million increased 30.9% compared with the prior year, primarily due to higher volumes of Iron Gate valves and service brass products, as well as higher pricing across most product lines. With normalized lead times, strong net sales growth for Iron Gate valves benefited from a sequential increase in orders, as well as lapping low orders and shipments in the prior year quarter, primarily due to channel and customer inventory destocking. Net sales growth for service brass products benefited from improved manufacturing efficiencies and serving an elevated backlog, which we continue to lower. Adjusted operating income of $52.6 million increased 246.1% in the quarter. The benefits from increased volumes, favorable manufacturing performance, and higher pricing more than offset increased costs associated with inflation and higher SG&A expenses. Adjusted EBITDA of $62.4 million increased 171.3% and our adjusted EBITDA margin also improved significantly to 30.3%. This is the highest quarterly adjusted EBITDA margin the water flow solutions segment has ever achieved. Turning to quarterly results for water management solutions. Net sales of $147.6 million decreased 16% compared with the prior year. This was primarily due to lower volumes across most product lines, partially offset by higher pricing across most product lines. Net sales for hydrants were down double digits compared with the prior year quarter. Although our lead times are now normalized and we saw a sequential increase in orders, the prior year quarter's sales benefited from very strong hydrant shipments as we served an elevated backlog. Adjusted operating income of $29 million decreased 9.1% in the quarter. The benefits from higher pricing, improved manufacturing performance, and lower SG&A expenses were more than offset by lower volumes. Adjusted EBITDA of $35.7 million decreased 9.8%. However, adjusted EBITDA margin improved 170 basis points to 24.2% despite the decrease in net sales. Moving on to cash flow. Net cash provided by operating activities for the year-to-date period was $62.2 million, an increase of $84.4 million compared with the prior year. The increase was primarily a result of higher net income and improvements in working capital compared with the prior year, which includes a smaller increase in inventories. During the quarter, we invested $10.1 million in capital expenditures and invested $15.8 million through the first six months. While spending through the first half of the year is $4.7 million lower than the prior year period, we do expect spending to be higher in the second half of the year. Our free cash flow for the year-to-date period increased $89.1 million to $46.4 million compared with the prior year, driven by higher cash from operations and lower capital spending. Free cash flow as a percent of adjusted net income was at 70.1% for the first half of the year. During the second quarter, we repurchased $10 million in common stock, and as of March 31st, we had $80 million remaining under our share repurchase authorization. At the end of the second quarter, our total debt outstanding was $448.7 million, and we had cash and cash equivalents of $179.2 million. Our balance sheet remains strong, with our net debt leverage ratio at 1.1 times at quarter end, no debt maturities until June 2029, and our $450 million senior notes at a 4% fixed interest rate. We did not have any borrowings under our ABL agreement at the quarter end, nor did we borrow any amounts under our ABL during the quarter. In March, we amended our ABL, which extended the maturity date to March 2029 and lowered our applicable margins. I will now review our updated and improved outlook for fiscal 2024. Based on our strong first half performance and current expectations for the rest of the year, we are increasing our guidance for both consolidated net sales and adjusted EBITDA. We now anticipate net sales will be between flat and down 2% as compared with the prior year. We believe municipal and new residential construction and markets will continue to be healthy in the second half of the year. In addition to raising our net sales expectations, we are significantly increasing our guidance for adjusted EBITDA as a result of our strong first half operating and margin performance, coupled with our current expectations for favorable end market demand. We now anticipate that our adjusted EBITDA will increase between 23% and 27% compared with the prior year. This includes an expected increase in our total SG&A expenses reflecting higher incentive compensation and personnel investments. Additionally, we expect our free cash flow as a percentage of adjusted net income to be more than 75% for fiscal 2024, as compared with 62.7% in fiscal 2023. With that, I'll turn it back to Marty for closing comments.

Thanks, Steve. I want to highlight a few key items before opening it up for Q&A. I am excited about what we've accomplished so far this year, especially given the uncertainties in the external environment. I am thankful for our talented and committed employees who are doing incredible work focusing on serving our customers and driving manufacturing material and freight efficiencies while also executing our large capital projects. There is still work ahead of us, and we are primarily focused on executing initiatives in four key strategic areas. We will continue to drive operational improvements to deliver the benefits from our capital investments. We are making changes to accelerate sales growth and capture the benefits from favorable long-term end market growth trends through product innovation and service. We are also increasing collaboration and teamwork throughout the organization to create a culture of talent development. enabling us to execute on our targets and make Mueller a preferred place to work. We are well positioned to execute on our strategies to improve margins and increase free cash flow to support future investments. I am confident in our strong foundation of talented and committed employees, industry-leading brands, and deep distribution channel and direct customer relationships. That concludes my comments. Operator, please open this call for questions.

Thank you. At this time, we'll begin our question and answer session. If you'd like to ask a question, please press star then 1 on your phone. Please remember to unmute your phone and record your name clearly when prompted. If you'd like to withdraw that question, you may press star 2. Again, to ask a question, please press star then 1. And our first question comes from Brian Lee with Goldman Sachs. Your line is open.

Hey, everyone. Good morning. Thanks for taking the questions, and kudos on the impressive execution here. It may be a big picture question for you, Marty. You've had quite a tenure at Mueller. You've seen a lot of change at the company over the years, and you're not necessarily new to the CEO role as it becomes your full-time responsibility, though. How are you thinking about kind of the The strategic priorities, I know you touched upon a few here at the end of the call, but what's kind of changed here as you're taking on the role? Obviously, the company is in a different spot, but as you think about strategic priorities in that role, can you kind of speak to what you think you can change or enact change going forward? And then one thing I think in particular I'd be curious to hear your take on is you mentioned sales growth and product innovation. Can you elaborate a bit more on kind of where? you see Mueller headed and where the best opportunities might be when it comes to that particular piece of the stool? Thanks.

Great, yes. Thanks, Brian, and thanks for the question. Look, I think one of the most important things I'm going to say is, look, we have been continuing to lead change, not just today going forward, but I think even looking at the last eight months. And, you know, importantly, as we look out, we are a water-focused company. We do have a long history within the business, but I think in many ways the time has never been better for us to really leverage many of the products that we have together. And importantly, as we say, when we look at the opportunity, as we have aging infrastructure, as we have continued focus on water-starved areas, and importantly, particularly how different regions are going to need to focus on improving their ability to provide water and provide water at a reasonable cost to all their customers. We have, over the years, looked to broaden our portfolio. We're a full-service provider as we look across valves, hydrants, Certainly brass products, and I can emphasize brass products here because with the emphasis with the infrastructure bill and the designated funds for the lead service line replacement, I think importantly our role with the service brass products that we provide and importantly with the additional capacity that we have just brought on with our new brass foundry and the echo brass product that we have, which has many sustainability benefits, I think that is one of the additional products and services that plays well as we look forward. The other piece that I want to talk about, and it's an area where we have, I think, re-energized ourselves, and that's really in and around our focus on the customer experience. We have focused on improving our delivery lead times. We are looking to even further deepen the relationships that we have with our customers. And overall, enhancing that customer experience that we think will also further to promote our sales and that in the breadth of products and services that we offer, I think is helpful. In and around the area of technology, I certainly think that the areas that we focus on with our leak detection, with our pipe condition assessment, looking to get into pressure management, and again, looking to bridge ways for the municipalities to gain more intelligence in and around what their systems have and the solutions to help them better manage it. And that's where I think increasingly you're going to see us look to link the infrastructure products that we have and how they can be used and we can bring more intelligence to those products. And I think we will absolutely continue along those lines as well. You know with that I want to hit one other thing because I think it's important and it really appreciates of the longer-term question that you have asked when we look I think it's deep talk through when we look at the capital structure that we have that we put in place when we look at the Capacity that we have and the flexibility that we have we are positioned to look to broaden our product portfolio and or deepen our product portfolio. And I will say that we will continue to look for those right opportunities at the right valuations to allow us to continue to grow, not only organically, but inorganically as well. That's all super helpful. Sorry, you've seen, but I want to hit on the operations piece as well. because with some of the internal realignment that we have recently done, part of that has been a further investment in and around our operations capabilities and, importantly, I think a real forward vision in terms of how we can continue to improve our operational performance for our margins to continue to grow over time.

Yeah, maybe that's a good segue into just the second question I had, a little bit more mundane and less big picture, and then I'll pass it on. When you think about this kind of seven-year high in gross margins, you mentioned specifically price and manufacturing improvements. How sustainable do you kind of see those two pillars? It seems like you still have some outsourcing benefits that are still to come, and then price sounds like it's something that's moving into your wheelhouse in terms of something you can leverage. But can you kind of speak to sort of the impacts on gross margin this quarter between the two buckets and then how you think about them going forward as having sustainability? Thank you.

Absolutely. So in and around price, I think when you look over certainly a longer term period, I think we have generally benefited from price over the longer term. And our objective, as we said, is always for price to more than cover any of the inflationary costs that we are experiencing. Not to delve too much into the history, but I think, you know, with sort of the level of inflation that we had, coupled with some of the challenges with COVID and demand levels, that, you know, it was a challenging period. But I think, you know, we've gotten back into, you've seen this quarter, we're probably sort of mid-single digit in and around pricing. I think we told you last quarter that we had implemented a price increase across most of our product lines in February. And as we called out in our script, we do think as a result of the price increase that we announced in February, importantly, our ability to manufacture and ship product with shorter lead times, we think that caused a little bit of a pull forward of some of the shipments into our second quarter. So I think pricing, I would say we would expect to continue to benefit covering inflationary costs and preserving margin as we go forward. I think with respect to gross margin, I think we will continue to challenge ourselves to improve our operational efficiencies where we can. We did see some of that benefit during the quarter. I know we also called out some of the lower outsourcing costs that we had. I think we'll be at a point where we'll pretty much anniversary, that is, we're moving into the second half of our year, but I think that was a benefit where we look to improve our overall cost structure. But I would say we do continue to see opportunities to improve our material labor and freight efficiencies, and certainly volume leverage can also help us as we move forward as well.

All right. All super helpful. I'll pass it on. Thank you.

Thank you. Our next question comes from Joe Giordano with TD Cowan. Your line is open.

Hey, good morning, guys. Hey, good morning, Joe. Hey, so I wanted to just ask on, like, if you look back over the last year, there's just been huge volatility in the guides, both directions. I mean, we're happy to see it in the positive direction this time, but both directions have been huge up and down moves. And then also, like, the actual performance relative to the guides has been huge volatility. So you've had volatility. quite extenuating circumstances over the last year with what's going on internally and the inventory situation and channel partners. But, like, can you kind of talk through the internal modeling process and how you feel, the comfort level you have about the ability to forecast the businesses from here?

Certainly. So, I'd say, look, overall, you know, one of the areas that we're certainly going to try to do is to give you the explanations for why we have the guide that we have, as well as to provide you insights into what our performance was and why our performance was what it was. Look, I think as we take a look at our outlook for 2024, I think importantly, as we moved from our first quarter, and I will remind you, we did see our net sales down about 18% in the first quarter. And certainly the explanation that we provided then is we were still experiencing in our 2023 servicing a very elevated level of short cycle backlog, which was a situation that I will say we had not experienced at the company. I think as we look at where we are today, most of the destocking that we felt had been done largely with distributors was behind us. Our short cycle backlog at this point in time, with the exception of service brass, we would call pretty much back in the normalized level. Now, I'll remind you, on a year-over-year basis, hydrants were still elevated in our prior year, and that's why you're seeing some of the differential in the net sales performance between our water flow solution segment and our water management solution segment. But I think as we move through the year, It was pretty much towards the end of the third quarter and into the fourth quarter of 23 by the time we'd gotten that hydrant backlog down. But I think as we look at where we are today, a lot of those disruptions from supply chain, from COVID, from the very elevated and fast rise in inflation, I think a lot of those factors caused some of the challenges that we had, but I'd say destocking is largely behind us. The service brass backlog is still higher than what we would call normalized, but importantly, we continued to reduce that short cycle backlog this year. I would say our delivery times are back to normal with respect to our iron gate valves and hydrants. and we have continued to reduce the delivery times across most of our service brass products. So I think we're seeing some of that return, and I would say the guidance that we have just provided for our 2024 certainly reflects what we have seen in the order patterns as they have progressed through the first six months of our year. I hope that answers your question, Joe.

Thank you. And just to follow up on the portfolio question from earlier, I mean, you know, we're bringing in new board members and there's a refresh going on. I'm just curious as like, you know, as you think about where to go as a company, should we be on the lookout for kind of departures or kind of pivots anywhere? I know we talked about, you mentioned linking infrastructure with your technology products. And we've talked about that in the past. I think the reality of that has probably been slower than people would like to see? And just curious as to how you think about, like, now that you're in the permanent role, like, is there, like, a pivot somewhere coming? How should we think about that?

So, look, I think with respect to the leadership changes that were just announced, we've got nothing else planned at this time. I think, importantly, as I referenced, the team, we have made some changes over the last eight months. We had an internal realignment, and with that realignment, our focus was looking to invest further in and around our customer experience and in and around our customer relationships. Additionally, as I just said, we have looked to enhance our overall operational expertise and investment there. And I think sort of the other area that we've said is internally and from an employee perspective, culture perspective, we have really looked to emphasize more collaboration across the company with real emphasis on performance and accountability. So I think a lot of that is what we have been working on internally across the company, and I think you are, you know, we are realizing some of those benefits as we look at the performance that we had this quarter. Thanks, guys.

Thank you. The next question comes from Brian Blair with Oppenheimer. Your line is open. Thank you. Good morning, everyone.

Good morning, Brian.

Excellent quarter. I guess somewhat of a follow-up to Joe's question in terms of, you know, guidance visibility. Maybe we can level set a little bit more on back half expectations, you know, appreciate the color on Q2, pull forward. Can you offer some finer points on how you know, how that influences your team's Q3 and Q4 expectations, both, you know, top line and EBITDA margin progression?

Yeah, so as we look with the guidance that we have just given in and around the second half of the year, I think, you know, overall first half of our year, we saw net sales down and we are looking for net sales growth with the recent guidance that we just gave in the second half of the year. I think importantly, as we look more now on the profit line or the bottom line and what our expectations are as we look to the second half of the year, I know you just referenced the bit of pull forward that we think we saw as a result of the timing of the price increase. We talked about some higher costs that we expect to continue to have in and around our Kraus repair products. We've got higher costs largely with labor, materials, and freight. We did experience some of those in our second quarter. As a reminder, we really didn't have any in our first quarter, but we do expect that we will continue to have those higher costs as we move into the second six months of the year. With respect to inflation, probably impacted more by labor inflation, I would say, in the first half of the year. but as we look out into the second half of the year, we think we could see more inflationary pressures in and around some of the material costs that we have, which could also be reflected in the purchase parts. Additionally, from an SG&A perspective, I think you saw us increase our guidance a little bit in and around SG&A as we move to the second half of the year, and some of that guidance is really coming from differences in and around our incentive accruals, inflation, personnel investments, as well as additional cybersecurity protection investments.

Okay. Understood. And your update for your guide, you know, implies around 20% margin so that, you know, that achieves, assuming execution continues, the fiscal 25 outlook that your team had in place for a while. And you walked through a lot of good guys in terms of margin outlook and an opportunity that still lies ahead for your team. Is there a new margin target that you're willing to speak to if we think about fiscal 25, 26, or any medium-term kind of time frame?

Yeah, so I'd say, you know, looking out beyond 2024, I'd say we haven't put anything out there at this point. I think absolutely right to call out what we had been saying is that we did have an expectation that as we looked at gross margin and EBITDA margin, we felt that we could get back to the pre-pandemic margins as we looked at 2025. And I think certainly as you point out with the second quarter and the outlook, we're certainly – you know, moving in that direction, but specifically other than looking to, you know, hit and move above the pre-pandemic margins, that's where we are today.

Got it.

All right. Thank you for taking my question.

Thank you. And our next question comes from Dean Dre with RBC Capital Markets. Your line is open.

Thank you. Good morning, everyone. And I'll add my congrats to Marty and Paul.

Great. Thank you, Dean.

Hey, maybe we can start off with any more specifics on the new foundry. I know there are limitations in terms of comparisons. You can't say necessarily what inning or how many SKUs or product certification, but just any color in terms of where you stand on the process of being closer to a full ramp.

Yeah, Dean, our foundry teams are continuing to improve the operations in the new foundry. And as you can see, this translated into higher year over year production volumes and better sales through the foundry. The new frowder is using new equipment, which pieces of it continue to be installed and we're focused on ramping up the production volumes there to satisfy the backlog while continuing to work through our tooling process. We do expect to close the old foundry at the end of calendar 2024, which does continue to run today. We think that the impact of the duplicative costs of running two foundries is around 80 to 100 basis points as a headwind to gross margin. And with the closure of that facility, we expect to see that benefit coming in 2025 and carrying over to 2026.

Those duplicative costs, those ramp down, we can just assume linearly or to be any kind of step function as you eliminate outsourcing.

Yeah, no, look, that's a great question. And think of it more as a step function. because they're just certain, you know, when you're running the foundry, they're just certain basic fixed and other costs that you're going to have as long as that south foundry is running. So we do not expect it to be linear just because of, you know, all the basic, you know, the lights on, the maintenance, importantly for the workforce that's there, et cetera.

That's great. And then, Marty, Just the idea on the pull forward. You've put through price increases before in the past. Was the magnitude of the pull forward surprising at all? I know that's a high-quality problem to ask about more business coming through in the quarter. But just the idea, did the pull forward surprise you in any way?

Dean, I probably think of it maybe a little differently. Here's the way I'm thinking about it. I think, you know, with the timing of the price increase, I think, number one, it was the ability that we had to deliver and ship the product, which was a piece of it. I think the other piece of it is reflective of the market outlook. And as we talked about all the destocking that had been done which we thought was pretty much by the end of the quarter. I think in terms of looking at the end market, we've talked about the municipal market sort of being fairly resilient, and certainly the residential construction market in a much better position than it was last year. You know, that said, we know that still the high interest rate environment that is reflected in mortgage rates does impact the demand somewhat. But I really think it was probably those factors that came into play. So it's, you know, it's just I would say one of the call-outs in terms of explaining part of the strength of our second quarter net sales growth.

That's really helpful. Thank you.

Thank you. The next question comes from Mike Halloran with Bayard. Your line is open.

Hey, good morning, everyone, and congrats on a great quarter. And, Marty, congrats on the formal announcement. A quick one here on margins. As we think about the cadence, particularly in WFS margins, You know, how much should we be thinking about the margin levels kind of tracking with revenue as we move into 3Q and 4Q and we think about the impact of the pull forward? Or rather, should we be more focused on the kind of the sequential trend and the impact of the internal initiatives and the pricing? Just trying to think about which kind of item, which line item we should be keying more off of.

So good question. Let me sort of hit some of the things I think to think about as we look at that. I will say, you know, with respect to water flow solutions, I think we would say that the strong net sales growth that we saw through the first half of the year I think we can continue to expect, due to the year-over-year comparisons and certainly continued growth from iron gate valves and service brass products, as I said, we're continuing to work down that elevated backlog. We also, I think, from an operational perspective, we are continuing to get the improved labor material and supply chain efficiencies out of WFS as well. And I think that's, you know, that and the volume growth that we see with iron gate valves will certainly all be drivers as we look at water flow solutions for the year. You know, on water management solutions, I think we have seen on a year-over-year lower net sales, certainly net sales for our hydrants were down double digits. compared with the prior year quarter. Although importantly, and now I'm going to shift you to sequential, we did see on a sequential basis an increase there, both from orders and shipments perspective. But on the year-over-year, we had such strong hydrant shipments in 23 due to that elevated backlog that that's a difference year-over-year. I will also call out within the water management solutions segment That is where we have our repair products, and we have referenced that just as we experienced in our second quarter, we do expect that we will have higher labor and freight and material costs and anticipate that in the second half of the year. That said, we're looking for continued favorable price costs, I would say, across both of the segments as well as underlying manufacturing performance.

That's super helpful, Keller. Thank you, Marty. Maybe shifting gears a little bit to the capital deployment side, you know, it's starting to feel like, you know, the team is getting their feet under them a little bit. Can you maybe talk about how you're thinking about the cultivation and the funnel on the M&A side and broadening and deepening the product portfolio, as you mentioned during your prepared remarks?

Yeah, so I'd say, look, in and around the M&A front, I think, you know, we can – it's easier for us, I would say, to identify what we think would be the right additions to our portfolio, not only to broaden our portfolio but to deepen our portfolio. I think, you know, a lot of the – you know, probably some of the challenges are really – just in and around the availability of where we think could be some nice add-ons. That said, I think, you know, as we talked about, I think from a capital structure perspective, we are in the right, you know, we are well positioned with respect to our capital structure availability under the ABL and certainly the flexibility that the capital structure affords us. And I would say, you know, certainly, With the improvements that we're seeing from an operational performance perspective, I know that, you know, we are all excited about where acquisition opportunities could be. And as I said, we've got, I think, the team focused in and around that. It's just finding the right opportunities. And importantly, at the valuation that we think will be additive for our investors over the long term.

Appreciate the time this morning. I'll pass it on.

Great. Thanks.

Another quick reminder, if you'd like to ask a question, please press star then one. One moment to see if we have any questions.

Great. Well, operator, I will go ahead and close out the call today. I'll say thank you for everyone joining us. I wanted you to know that I am really honored and excited to continue in the role of CEO, continuing to work with an exceptional team that we have at Mueller, including Paul with his recent promotion to President and Chief Operating Officer. We play a critical role in the business that we're in, helping our customers deliver safe, clean drinking water. We do believe that we are uniquely positioned to address the challenges that we are all seeing across the country with aging water infrastructure. with the breadth of our products and solutions. With that, I'm confident that Mueller will continue to deliver profitable growth in the months and years ahead, and I thank you all for your continued interest and support of Mueller. With that, operator, we'll conclude the call.

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