Mueller Water Products, Inc.
Q2 2021 Earnings Call Transcript

Published: 4 May 2021

[Operator:]

Welcome and thank you for standing by. Your lines have been placed on a listen-only mode until the question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. And I'd turn the call over to Whit Kincaid.

[Whit Kincaid:]

Good morning, everyone. Thank you for joining us on Mueller Water Products second quarter 2021 conference call. We issued our press release reporting results of operations for the quarter ended March 31st, 2021 yesterday afternoon. A copy of the press release is available on our website, muellerwaterproducts.com.

[Scott Hall:]

Thanks, Whit. Thank you for joining us today. I hope everyone listening to our call continues to stay safe and healthy, and you are able to be vaccinated as we see the light at the end of the tunnel and emerge from the pandemic. Before turning the call over to Martie to discuss our second quarter results. I'll provide a brief overview of the quarter. We delivered a solid second quarter performance, resulting from our team members' focus on satisfying increasing demand despite continuing and new challenges from COVID-19 and inflation, especially material costs. Consolidated net sales exceeded our expectations as we reported a 3.8% increase in the quarter. Both infrastructure and technologies increased sales in the quarter. We increased net sales 1.5%, excluding the $6 million benefit from the elimination of Krausz Industries' one-month reporting lag. Net sales sequentially improved 12.7% versus the first quarter and compares with a 10.1% increase in net sales in the second quarter of last year. As a reminder, customers place orders ahead of our effective date for price increases, and as a result, shipments were particularly strong last year. We believe our end markets improved during the quarter, as municipal spending continues to recover from the pandemic and residential construction continues to see strong demand for single-family homes. Similar to last quarter, our project related businesses are still experiencing a slowdown resulting from the pandemic.

[Martie Zakas:]

Thanks, Scott. And good morning, everyone. I hope you and your families and associates are safe and healthy. I will start with our second quarter 2021 consolidated GAAP and non-GAAP financial results, then review our segment performance and finish with a discussion of our cash flow and liquidity. During the second quarter of this year, we generated consolidated net sales of $267.5 million, which increased $9.8 million or 3.8%. The increase in net sales was driven by the $6 million benefit from eliminating the one-month reporting lag, higher pricing and increased volumes at technologies. The benefit of eliminating Krausz's one-month reporting lag this quarter reflects net sales with an infrastructure for the month of March. Note that, March was a particularly strong month of Krausz, benefiting from the repair needs after the challenging winter weather in February. Overall, Krausz has performed very well since we acquired the business in December 2018.

[Scott Hall:]

Thanks, Martie. I'll review some of our key strategies, end markets and expectations for full year 2021. After that, we'll open the call up for questions. As Martie mentioned, raw material inflation accelerated during the second quarter, impacting our gross margins. Due to the magnitude of the inflationary increases, especially raw materials and the lag between pricing actions and realization, we experienced an unfavorable price-cost impact during the quarter. We have taken additional pricing actions beyond our initial price increases in December, which will help our price-cost position in the second half of this year. While the magnitude of the inflation will impact our conversion margins for the rest of the year, we do expect to get more price realization in our third and fourth quarters, which will carry over into 2022. Our teams remain focused on improving our conversion margin through both price realization and productivity initiatives to help offset the expected continued inflation in the second half of the year. Similar to the 2017-2018 inflation cycle, we expect to benefit from the multiple pricing actions after the cycle peaks. Our goal is to get price to more than cover inflationary pressures over the entire cycle, which we expect to continue into 2022. At the end of March, we announced additional restructuring plans to close two facilities in Aurora, Illinois, and Surrey, British Columbia. Most of the activities from these plants will be consolidated into the new facility in Kimball, Tennessee. The Kimball facility, which focuses on specialty valves, includes operations from three previously announced plant closures. The facility is strategically located between our foundries in Chattanooga, Tennessee and Albertville, Alabama. We have already begun to implement this restructuring and expect to substantially complete it by the third quarter of fiscal 2022. These actions in addition to our previously announced multiyear investment to modernize our manufacturing facilities, will help accelerate product development, drive additional operational efficiencies, reduce duplicative expenses and aid us in advancing our environmental initiatives.

[Operator:]

Thank you. We will now begin the question-and-answer session. Our first question comes from Brian Lee with Goldman Sachs. Your line is open. Sir, you may ask your question.

[Brian Lee:]

Hey everyone. Good morning. Thanks for taking the questions. I guess just jumping into the guidance real quickly, Scott and Martie, can you quantify a bit how much is price? And then how much is volume if you're thinking about kind of the quantification of the increased growth outlook here for the year? And then what are the specific assumptions around price and then separately price-cost spread that are embedded in the outlook?

[Scott Hall:]

Well, what's embedded versus what, you know, the guidance understands that there's a range of outcomes that could happen, you know, to do with later inflation, I don't think that the copper market or frankly, the scrap steel market are going to remain flat, Brian. So you know, we have a range of cost and effect, if you will. But what I will say about that is that, you know, we now have a backlog that, you know, is basically priced about 60% prior to the February-March price increase and, you know, we won't see the benefit of those price increases until about 45 days after the, you know, after they were effective. So, you know, will be through April's volume still at previous pricing. And as you know, we have a 60-day to 90-day lag on average. What we don't do is, we don't announce price increases on the investor call. But what I will say is that, you know, the market has been rational in the past, I expect that the - if the continued pressure in copper resulting in higher brass, if the continued pressure in the scrap supply, pressure in pig iron, all of those raw materials continue, then I think that we should expect the market to react and that, you know, we'll have to recover those costs. But as to foods in the forecast, specifically, you know, we have a range of outcomes. I think, if you were to say that, you know, no shocks in inflation are contemplated, but that, you know, some steady increases from here could be handled, and we could still meet the guidance. That's basically how we think about it. What I'm most concerned about, though, is, you know, I can't remember where we are, I think we got as high as $4.60 in copper, but, you know, no $5 copper is contemplated of that.

[Brian Lee:]

Understood. Okay, fair enough. And then just a follow-up question I had was around the - some of the commentary you made around conversion margin, Scott, that was helpful. But if we think about the bridge here, I think you're insinuating a 20% or so EBITDA conversion margin for 2021 based on the updated guidance. Is the historical 35% to 40% long-term target still intact for that metric? And then is that something we could see exiting calendar 2021, given the pricing actions that are being you know, contemplated and are going to be passed through here moving through the year is that more of a 2022 event? Thank you.

[Scott Hall:]

Well, I think the only way we can answer that, Brian is, for you to look into the crystal ball and say, what's going to happen with price-cost through the last six months of the year. So to be clear, I believe in a stable market with, you know, stable commodity prices and stable material prices, no massive moves in the value of the US dollar as we've seen recently, that we are at 35% to 40% long-term flat conversion margin business. And we do that when you see flat and falling commodity prices. Through a period like this, where price-cost is going to have this lag, depending on how long that lasts, I think you're accurate in the implied conversion margins. So that kind of 20% to 30% range as we play catch up and we purge the backlog at you know, at the pre-price increase levels. I think the other thing that, you know, we have to watch is, where we are, especially with those project-based businesses, I mean, we can live with some delays. But I don't want those delays, you know, stretching out into 9, 12, 14 months while we're in an inflationary period. And we'll have to take actions and have subsequent negotiations on those where we can. So I think you're right in the near-term, it's probably in that 20% to 30% range. Once we get back to stability in the price-cost world, I think we'd go back, revert back to the 35% kind of number.

[Brian Lee:]

Okay, thank you. Appreciate it.

[Scott Hall:]

Thank you.

[Operator:]

Thank you. Our next question comes from Ryan Connors with Boenning & Scattergood. Your line is open, sir.

[Ryan Connors:]

Great, thanks for taking my question this morning. Scott, my question that I want to keep on this theme of the pricing for a second in the pass through and I think about the different types of sales that you make, you know, it's easy for me to understand how a builder in this environment, you know, puts in that infrastructure and has no problem kind of embedding that into the cost of $1 million house and that kind of sales right through. But then I think about, you know, the average municipal water utility kind of operates at breakeven, a lot less wiggle room to sort of accept the price. So if you kind of talk about the different dynamics you're seeing in those different markets and sort of the, you know, how you're faring in each of those and that the outlook and risk you know, in that context.

[Scott Hall:]

You're great and thanks for the opportunity to kind of delve into it a little bit, Ryan. So Ryan is absolutely right, for everybody on the call that we have, you know, kind of multiple pricing structures, you have everything from supply agreements, where prices are fixed from - for 12 months, and then you know, you have renegotiation periods, and you can renew after 12 months, you know we'll go back to bed, then we have the spot market, which is really where most of the contractor work is done. And so, you know, as a developer decides he's going to, you know, develop some lots, you know, get a bid, you probably have, you know, a 90-day window, where the distributor will be holding prices to the contractor, which is why the distributors get a 30-day notice on when we're doing price increases for the spot market. And then you have, let's call it the, you know, the structure of the water utilities, where there is channel power, they can enter into supply agreements, and kind of force a fixed price for a period of time. But then when there isn't channel power, so if it's, you know, if the math, you think about Ryan knows this that you know 50,000 water utilities out there, the distributors and ourselves certainly are not going to enter into supply agreements, you know, with a bottom 49,000 water utilities or probably 49,500. So the vast majority of the market, the contractor market and the water utility market operate in the spot market with supply agreements. And that's why you often hear us talk about price increased amounts, and then we talk about yields, because obviously, we can't just unilaterally increase prices, you know, at a LADWP or a New York City, we have to wait for the negotiating window to open. And so, you know, yields generally are in that, you know, 40% to 60% with 50% being the most likely outcome of announced price increase. So yields end up being you know, if you have a 3% price increase, yields will tend to be in that 1.4% to 1.7% range, depending on what your mix of supply agreement to spot market is. That explain it?

[Ryan Connors:]

Okay. It does. And is it safe to say that I can paraphrase that, it is a bit more of a - there's more complexity and challenge in the municipal side than in, say, the developer side. I mean is that a fair statement?

[Scott Hall:]

Absolutely. Because I think there's a lot of guessing as to what the volumes will be, from which part of the water utility side is buying spot and which part is buying under a supply agreement.

[Ryan Connors:]

Yep, yep. Okay. That's very helpful. And then my other one, you know -

[Scott Hall:]

One thing I want to make clear, though is that, when we have distributors that enter into supply agreements and we are not part of the agreement, we do not honor the supply agreement. That's the distributors' risk at that point.

[Ryan Connors:]

Got it. Okay, interesting. My other one is, you know, it seemed like small potatoes, but it was material enough that you call it out in the press release and Martie talked about in her remarks, you know, travel and trade show events, you know, those expenses down. How do you see that new normal emerging there? The big industry events going to be as important as they used to be and those expenses will ramp back up? Or are we going to be in more of a virtual, you know, kind of world in terms of those events going forward? Or are those events are smaller or and to what extent does that stuff creep back versus maybe a structural change there?

[Scott Hall:]

I'm hopeful that they creep back, because frankly, I think that the interaction of multiple water utilities with each other at these trade shows, at these conferences talking about what is possible, especially as we tried to accelerate the digitization of the water utility industry are critically important. I know you've been to a lot of them, GWI and others. And I think that the coming together of the minds to talk about what's possible and how applications and what different problems are, is invaluable. And, frankly, the richness in the virtual world, while it's been very, very good. It's not the same as, you know, the in-person meetings. And so I'm hopeful, especially as it relates to the digitization of the water industry, that the technology leadership kind of events get back to in-person. But I think that the number of travel days for sales calls or for, you know, some of the more routine things that we've learned how to effectively do will be reduced. So I think the snapback costs will be at a percentage of their historical level. You know, I don't think we'll ever get back to exactly where we were, but a little bit lower. But I really do hope that the things like ACE and WaterWorld and things like that do get back to in-person.

[Ryan Connors:]

Yep, couldn't agree more. Hopefully and even look forward to seeing you there when they do. Thanks for your time today.

[Scott Hall:]

Okay. Thank you, Ryan.

[Martie Zakas:]

Thanks.

[Operator:]

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

[Deane Dray:]

Thank you. Good morning, everyone.

[Scott Hall:]

Good morning, Deane.

[Deane Dray:]

Hey just like to finish up the thought here on price-cost. And I frankly learned a lot and, Scott, your explanation about the mix. You know, it's not until you're in a situation like this, where some of those nuances really do come through. So I appreciate the explanation. And when you referenced the yield of the 40%, 50% on the price increase. And you said it really does depend on the mix. Is there any consideration of elasticity of demand? I mean, do you have customers going elsewhere? And is that part of the idea that you get a lower yield because of your competition? And just any context or color there would be helpful.

[Scott Hall:]

Yeah, I think we've been fairly successful. It's drawing conclusions from past price increases, where we've been the only person out there with a price increase, then watch what happens with demand. And I feel like, you know, the stickiness of our products with utilities is really, really high. So I think that, you know, you really have to kind of be egregious in your treatment, either on price or delivery of utility before they just kind of throw up their hands and say, okay, we're going to start buying from one of your competitors. With that said, you know, when we go in and we have a recent discussion about what's going on with costs, we have a recent discussion about going on with, you know, what the drivers of price increases and inflation are, you know, the market has been very rational. And so I think that the, you know, recent events, you know, the American dollars, there's two pieces here. One is, real inflation, demand is actually growing and we see shortages and increased prices for scrap and other things. But the other thing is a lot of these commodities are global commodities and the value of the US dollar has declined. And as a result in US dollars, there's been kind of this double whammy, one real price inflation and two, our dollar not going as far as it used to causing, you know, kind of stack on inflation. And so I think that customers understand that. And yes, I think there is you know a fair deal of price elasticity. But we believe that most of our customers have bought into the value proposition. There will always be an element of the market team that does everything on price, I think a bigger risk and where it's not as elastic and the competitive situations are more you know team, if you will, is on the project-based business, big public bids, big projects with lots of scrutiny.

[Deane Dray:]

Sure, that's really helpful. All right, so separate question on that $30 million of gross margin benefit with the new plants. I get that there would be cost savings just because of the efficiencies of the new operations, but you are assuming some higher sales. Are these new products that you would be you know some of the larger castings that you can do yourself? I recall that might be an issue. But just if you could flesh out maybe size, but then new sales opportunity is with these plants?

[Scott Hall:]

Yeah, sure. I think the biggest driver of sales growth, when you think about the $30 million is this. When we finished the new Decatur plant, it will be more capable than the plant that we built in 1918. So, you know, it will actually have a lot more milled capacity, a lot - have a lot faster changeover for materials, it will have a lot of ability to expand the kinds and types of alloys that we that we melt. And as a result, we'll be able to enter new product areas as well. So there is of course, more capacity in Kimball then say in Aurora, there is you know, more capacity as a result of large casting foundry, but the bulk of the sales increase comes from the new capability associated with a brass foundry. And I don't want everybody to get too focused on that. I mean, there is a piece that sales, but if you think about the elimination of, you know, the Hammond, Indiana, Surrey, British Columbia, Aurora, Woodland, Washington, you know, five plant managers go to one, five controllers go to one. So it really a lot of it is the reduction of the duplicative costs associated with running five relatively small facilities as opposed to putting those five facilities into a single, you know, operating structure which Kimball can handle that's where the bulk of the $30 million comes from.

[Deane Dray:]

That's helpful. And just last question from me. It'll be for Martie. Just some context of the Krausz that elimination of the one-month lag, I don't know. But shame on me for not knowing there was always a one-month lag. But how did that happen? Because I mean, you acquired it back in 2018. And just, you know, are there other components or businesses that are on a different calendar? Thanks.

[Martie Zakas:]

Yep, no, great. Thanks for the question, Deane. So you're exactly right. Going back to when we acquired Krausz in December of 2018, we made the determination at that time, given the business, given that its headquarters and operations were in Israel, we made the determination from an accounting perspective to report it on a one-month reporting lag. And very pleased that after two years of our ownership that we were in a position to eliminate the lag at Krausz and put it on the same reporting schedule as the rest of the company. Teams done a very good job just to get us up to that place. So really what that means is, when we look at the quarter, second quarter of this year, we are reporting four months for Krausz rather than the usual three that we would report. So we've got the month of December, January, February and March that reported in the second quarter of this year. And that's why just from a transparency perspective, we wanted to make sure that we called out what the impact of that was. So you know, in essence, this is going forward, because, if you will, we were short a month after acquiring it, and we've added that month back in essence this quarter. So anyway, call that out. And we should - it'll be, if you will, on a regular basis going forward.

[Scott Hall:]

And if may, Deane, you know Martie's team has done a great job. The business was a sole proprietorship and not necessarily closing monthly, kind of more of a quarterly close, time to close at the end of the month became something that we evaluated and Martie rightly made the call to put it on the lag and her team has done a tremendous job to put the systems in place, but they can close within our six, seven-day timeframe at the end of every month.

[Deane Dray:]

You know, I had forgotten that that was an Israeli company. And so I fully appreciate the accounting challenges and getting that done. And just if I can sneak one other one. And since we're on the topic, are there other Krausz like deals out there? Because it seems like fixing water main breaks is going to be a growth industry for a long, long time. And Krausz has been such a homerun there. So hopefully there's some other adjacencies for you. Thanks.

[Martie Zakas:]

Yeah, no, look, I absolutely agree just to spend a moment commenting on Krausz. You know, if you go back to the strategic rational that we laid out for Krausz, I think, you know, very pleased with the performance that we've seen over the last couple of years, you know, from a manufacturing, from a customer and importantly, from a, you know, expanding our product line, it - we saw it as a great opportunity. And I think you know, even despite pandemic and other things we've been very pleased with the performance that we've seen out of - Krausz that's grown nicely probably, you know, on average, just about 10% on a compound growth rate. So, you know, I would say good, comparable acquisitions for Krausz would be great going forward. You know, it's just the kind of thing that we would, you know, ideally like to continue to bring into our portfolio.

[Deane Dray:]

And, Scott, is there other Krausz that's out there?

[Scott Hall:]

Yeah, I think that, you know, there are other people involved in, you know, repair, I think there's materials going on saying, you know, how do you splice in this kind of pipe with your infrastructure's this and there's, I think there's a lot of activity there. And as you know, I'm very bullish that the break frequency is going to continue to increase. And so there are many companies out there that you know, on our radar and that certainly, that break-fix part of the business is certainly something we would invest in if we could find the right asset for the right price.

[Deane Dray:]

Thank you.

[Scott Hall:]

Thank you.

[Operator:]

Thank you. Our next question comes from Joseph Giordano with Cowen. You may ask your question.

[Francisco Javier Amador:]

Hey, good morning, guys. This is Francisco on for Joe. I wanted to ask about what you guys are seeing on the muni spending side, maybe talk a little bit about where you see the budgets going both in terms of CapEx and OpEx?

[Scott Hall:]

Yes. So I'd like to start by saying, I think that budgets, you know, are one thing, but anybody who's been listening to me for a while, knows that I believe that what we'll call the planned budgets are going to continue to get squeezed by water municipalities, I think that, you know, there is a fixed amount of money. And as we've seen the break-fix part of the business, we saw it in Tulsa with the freeze, we saw it in Texas when they had the weather in February, that more and more of the budget is going to have to go to kind of fixing what breaks, because the frequency of breaks continues to increase. And so I think that the water utilities, if they want to increase or do their planned CapEx, their emergency spending budgets are going to have to increase or they're going to have to be willing to live with going over budget. I think that the federal stimulus could help them with some of their big CapEx, so that they can devote some more of their, let's call it operating budget to break-fix. But, you know, I still think in front of us, the same thing I've been saying for the last, you know, three or four years is that, budgets by necessity will have to increase, I think we'll have some timing bumps over the next, you know, 5 year to 10 year horizon, but water, water infrastructure, wastewater, wastewater infrastructure, stormwater and stormwater management and retention of stormwater all are going to face, you know, 100, 150, 200 basis points better than GDP spending, into the foreseeable future to kind of fix the mess we've created. So I think you'll see a dip in the near-term. But in the 5 year to 10, year windows, 5 year and 10-year windows, budgets have to increase in all three of those.

[Francisco Javier Amador:]

Thank you, that's helpful. And as a follow-up in terms of the technology segment, it's nice to see the increase in sales. Can you maybe talk about longer-term where you see it going and when it turns to profitability?

[Scott Hall:]

Yeah, I've kind of gotten out of the crystal ball game with that. I think that, you know, we've seen operational improvements at the plants. I think this quarter, we saw sales growth that didn't translate into EBITDA. I think a lot of that had to do with, you know, other market conditions where we spent money to, you know, retain and to gain customers. But notwithstanding that, you know, I expect the business to continue to improve its operating margins as a result of manufacturing and pricing actions in the meter business. Take the meter business and put it to the sides in technologies, I expect the Echologics business, the Smart Hydrant business, the Hydro-Guard business, the Sampling Station business, I'm looking for those businesses to start to fuel the growth of technologies, because all of those new products, everything that we you know have introduced over the last three years in electronic enablement, adoption for those will be critical and I expect them to be successful and I expect them to start, you know, turning a profit and contributing to the technology segments, you know, in the years to come, '22 through '25. And so, will it be enough to get the whole segment profitable? We shall see. I - but I am, you know, I'm continuously encouraged by the progress the sales team is making with introducing these new products to our customers. And I think, you know, reminder to everybody, all of our Echologics' customers are now looking at acoustics on Sentryx. All of our customers that are on Sentryx, you know, we have data analysis services that are being done in Toronto. And so you know, we'd like to see more and more of that happen as we put more sensors in the market. And I believe that the long-term annuity, if you will, for the data services after that we'll continue to grow.

[Francisco Javier Amador:]

Thanks.

[Scott Hall:]

Thank you.

[Operator:]

Thank you. And our last question comes from Walter Liptak with Seaport. Your line is open. You may ask your question.

[Walter Liptak:]

Hi. Thanks for taking my question. I wanted to ask one about the two factory relocations? And wondered about some of the timing of the move and the cost related to that? How are we going to see that show up in the financials?

[Scott Hall:]

Well, I think that the - most of the activities from the two facilities we just named Aurora, and Surrey, that are going into Kimball. They were not part of the original plan announced at the end of 2019 when we acquired the Kimball facility. But as you know, we're constantly evaluating our footprint, and we will always communicate any actions we take to our employees first prior to sharing it with public. But the biggest change in the operating landscape has been the pandemic. And I think the pandemic impact on the project related portion of the business, you know, reevaluated some of the timelines for the sales ramp up of existing products and some of the new products as well. And in order to stay on track with our financial targets, we elected to close those two facilities. Now, how is it going to work you know, financially? Let me say that both those projects, paybacks are just like the others, you know, kind of sub 4 years, 3 years in that range. But it is kind of improving that the $30 million as we adjusted our, let's call it jumping off point for sales for the others. Incrementally though, we are not changing our CapEx outlooks as we have explained in the past. And so you'll see that we found the CapEx for these two closures, basically by removing the CapEx of those plants would have probably spent in the future anyway. And so I see it as being CapEx guidance neutral. And basically, gross margin improvement neutral.

[Martie Zakas:]

Yeah. And well maybe just to expand on the other piece. You know, we've estimated that you know, could be total expenses running around $14 million. I think, as you saw, we called out this quarter, specifically $2.4 million that was an inventory write-down that was part of our cost of sales within infrastructure. Additionally, we had some other expenses that we called out under, you know, in our restructuring and other charges line. And, you know, I would say, you know, going forward, as we said, we expect that to be complete by our third quarter of fiscal 2022. And, you know, as we look at the other costs going on - going forward, which will be termination benefits and some decommissioning costs, moving costs, et cetera. I think by and large, you will see those flow through other restructuring charges, but we'll, you know, generally try to ensure that you're understanding the financial statements going forward as well.

[Walter Liptak:]

Okay. Are you building any inventory or, you know, kind of trying to protect against any kind of disruptions related to these moves? Are they small amounts where we shouldn't get any of that?

[Scott Hall:]

No, I think it's fair to say there will be, you know, in a mid-term kind of inventory build, anybody who's done this knows that while you do your double breasting and the new plant is coming up running its PPAPs, the old plant is continuing to look after customers, that when you go to that, you know, final shutdown period, that inventory will be somewhat higher as you protect the new plants processes to get up the learning curve. And then anybody who's gone through, you know, multiple plant consolidations, it sounds like you have all probably know that we'll have a slight increase in inventory for you know, 90-day or 120-day period as you live through the learning curve.

[Walter Liptak:]

Okay, all right, great. And then, you know, I enjoyed the discussion of the different pricing structures too. And one of the questions I had though, is, with the distributors, what percentage of your sales flows through your distribution channel partners?

[Scott Hall:]

You know, I think that the number to use there in general is around kind of a 60

[Martie Zakas:]

Yeah. Yeah, in our Q, what we do is, we call out our net sales to our largest distributors.

[Scott Hall:]

Right.

[Martie Zakas:]

So.

[Scott Hall:]

But please understand on this pricing thing, just to be clarifying then is, there are some distribution sales that are fixed price. So we walk hands with a Core & Main or we lock hands with a Ferguson for instance in, you know, in the meter contract, we have an agreement with Newport News, with Ferguson, it's a three-way agreement, where the pricing structures are agreed to, and what the negotiating windows are, what the max increases can be, those kinds of things. So, not all distribution sales are spot sales. And I don't want anybody to get confused about that story.

[Walter Liptak:]

Okay. All right. Great, thank you.

[Scott Hall:]

Well, thank you. Thank you, operator. Look, I'm really very happy with our second quarter results, you know, as I had guided in the past, I expected this to be our toughest quarter due to the strong comp from a previous year. And frankly due to the fact that, you know, a year ago on this call was the call where we took away guidance. And you know, we had kind of rolled back up some of our accruals, because the uncertainty was tremendous. And here we are, you know, a year later, into the pandemic, I think the team at the plants has done a great job satisfying the strong demand. I think that the housing market has been a pleasant surprise. I think that the theses that we had as an investment that, you know, continue to focus on this break-fix part of muni has been rewarded as you know, I think when you look around water people like ourselves and certainly some of the pipe guys and others have done very, very well through the pandemic. And when you consider that, you know, we're kind of first two quarters of this year, kind of post-pandemic compared to the first two quarters of last year, which were virtually all pre-pandemic to post up 6% growth, I feel like the team has done a great job. And it would be even higher if the backlog hadn't grown in the first half. And so I'm very bullish. And I know that's why, you know, we basically take our guidance from, you know, 4 to 6 to 8 to 10. And I think that you know we've seen good resiliency among our customers, among our distribution partners. And I think that, you know, in general, we're starting to see a fairly much more bullish environment as we go forward. Reflecting on the past 12 months, I think we're clearly in a different frame of mind than we were last May. And I think we're approaching the next 12 months in a great position, with a lot more confidence to get through the external challenges and continue to focus on executing our key strategies. You know, I think the engineering team going to remote work when you do the project reviews to see where they are at product development, you remain impressed with the resiliency of that team to continue to collaborate to use all these new virtual tools and to keep schedules on track to keep budgets on track. And so I'm encouraged by that. And I think, you know, just finishing with a strong balance sheet, a healthy cash generation, we're really well positioned to benefit all of our stakeholders on our path to becoming a world-class manufacturing company, and an innovative industry leader, bringing technology to water and continuing down the path that you know, that we set two years ago. So I thank you for your continued interest in our company. And I look forward to talking about next quarter with you in 90 days or so. So with that, operator, we'll will close the call.

[Operator:]

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