Mueller Water Products Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

There are 8 speakers on the call.

Operator

Our strategy to drive shareholder returns. I'll now start with a brief overview of our 2nd 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 margin 7 50 basis points to 36.9 percent supported by continued manufacturing and supply chain efficiencies, leading to our highest quarterly gross margin in more than 7 years.

Operator

With a record quarter for net sales and a strong gross margin along with SG and 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 $0.30 which increased more than 100% compared to the prior year quarter. Turning to sustainability, I am pleased to report that in the Q2 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 and 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.

Operator

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.

Operator

At the midpoint of our updated annual guidance range for net sales and adjusted EBITDA growth, the adjusted EBITDA margin is a 4 20 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 2nd quarter, leading to an improvement in gross margin. This strong conversion included outstanding performance at both our Irongate 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.

Operator

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 3rd quarter sales, which is reflected in our updated annual guidance.

Operator

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 Q2, 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. I am confident in our ability to continue our momentum as we look to leverage our leading market positions and investments to deliver more consistent execution and drive future sales and margin growth. With that, I'll turn it over to Steve.

Speaker 1

Thanks, Marty, and good morning, everyone. For the quarter, our consolidated net sales were 350 $3,400,000 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 at Water Flow Solutions partially offset by lower volumes at Water Management Solutions. As we've previously mentioned, we believe the lead times and backlogs for Irongate valves and hydrants have normalized. Based on order activity during the quarter, we also believe that valve and hydrant end market was healthy in this period.

Speaker 1

The differences in year over year volumes between Irongate 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 Q2, gross profit of $130,400,000 increased 33.3% compared with the prior year. Gross margin of 36.9 percent increased 7.50 basis points compared with the prior year and reflects our highest quarterly gross margin at over 7 years. The increase was driven by improved manufacturing performance and higher pricing.

Speaker 1

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 and A expenses of $63,700,000 were $500,000 lower than the prior year.

Speaker 1

Lower personnel related costs, 3rd party fees and engineering expenses were partially offset by higher incentive costs and inflationary pressures. Operating income of $63,500,000 increased 93% in the quarter compared with the prior year. Operating income includes strategic reorganization and other charges of $3,200,000 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.

Speaker 1

Adjusted operating income of $66,700,000 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 Q3 of 2019. Adjusted EBITDA of $82,200,000 increased 70.9% in the quarter. Our adjusted EBITDA margin improved 8.90 basis points to 23.3%.

Speaker 1

Similar to adjusted operating income margin, this is also the highest quarterly margin since the Q3 of 2019. For the last 12 months, adjusted EBITDA was $236,800,000 or 19.1 percent of net sales, a 4 70 basis point improvement compared with the prior 12 month period. Adjusted net income per diluted share more than doubled in the quarter, increasing 114.3 percent to $0.30 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.

Speaker 1

Net sales of $205,800,000 increased 30.9% compared with the prior year, primarily due to higher volumes of Irongate valves and service brass products, as well as higher pricing across most product lines. With normalized lead times, strong net sales growth for Irongate 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 $52,600,000 increased 246.1 percent 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 and A expenses.

Speaker 1

Adjusted EBITDA of $62,400,000 increased 171.3 percent 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 $147,600,000 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.

Speaker 1

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 serve an elevated backlog. Adjusted operating income of $29,000,000 decreased 9.1% in the quarter. The benefits from higher pricing, improved manufacturing performance and lower SG and A expenses were more than offset by lower volumes. Adjusted EBITDA of $35,700,000 decreased 9.8%.

Speaker 1

However, adjusted EBITDA margin improved 170 basis points to 24.2 percent despite the decrease in net sales. Moving on to cash flow. Net cash provided by operating activities for the year to date period was $62,200,000 an increase of $84,400,000 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 $10,100,000 in capital expenditures and invested $15,800,000 through the 1st 6 months.

Speaker 1

While spending through the first half of the year is $4,700,000 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 $89,100,000 to $46,400,000 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 70.1% for the first half of the year. During the Q2, we repurchased $10,000,000 in common stock. And as of March 31, we had $80,000,000 remaining under our share repurchase second quarter, our total debt outstanding was $448,700,000 and we had cash and cash equivalents of $179,200,000 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 $450,000,000 senior notes at a 4% fixed interest rate.

Speaker 1

We did not have any borrowings on 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 FirstNet 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.

Speaker 1

We believe municipal and new residential construction end 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 and 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 percent for fiscal 2024 as compared with 62.7 percent in fiscal 2023.

Speaker 1

With that, I'll turn it back to Martie for closing comments.

Operator

Thanks, Steve. I want to highlight a few key items before opening it up for Q and A. I'm 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 4 key strategic areas.

Operator

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.

Operator

That concludes my comments. Operator, please open this call for questions. Thank

Speaker 2

you. At this time, we'll begin our question and answer session. And our first question comes from Brian Lee with Goldman Sachs. Your line is open.

Speaker 3

Hey, everyone. Good morning. Thanks for taking the questions and kudos on the impressive execution here. Maybe a big picture question for you, Marty. You've had quite a tenure at Mueller.

Speaker 3

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 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 Mueller headed and where the best opportunity you see Mueller headed and where the best opportunities might be when it comes to that particular piece of the stool?

Speaker 3

Thanks.

Operator

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 8 months. And importantly, as we look out, we are a water focused company.

Operator

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, reenergized ourselves and that's really in and around our focus on the customer experience.

Operator

We are 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 ourselves and that and 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. With that, I want to I'll hit one other thing because I think it's important and I really appreciate the longer term question that you have asked.

Operator

When we look I think as Steve talked 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 are going to 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.

Speaker 3

That's all super helpful.

Speaker 4

And that's all super helpful. And the other

Operator

piece that I think you've 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.

Speaker 3

Yes, 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 7 year high in gross margins, you mentioned specifically price and manufacturing improvements. How sustainable do you kind of see those 2 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 2 buckets and then how you think about them going forward as having sustainability?

Speaker 3

Thank you.

Operator

Absolutely. So in and around price, I think when you look over certainly a longer term period, I think as 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 with sort of the level of inflation that we had coupled with some of the challenges with COVID and demand levels that it was a challenging period. But I think 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.

Operator

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 Q2. 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 or 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.

Operator

I think we'll be at a point where we'll pretty much anniversary that as 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.

Speaker 3

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

Speaker 2

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

Speaker 5

Cowen. 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 has been huge up and down moves. And then also like the actual performance relative to the guys, there's been huge volatility. So you've had quite extenuating circumstances over the last year with what's going on internally and the inventory situation at channel partners.

Speaker 5

But like can you kind of talk through the internal modeling process and how you feel the comfort level you have level you have about the ability to forecast the businesses from here?

Operator

Certainly. So I'd say, look, overall, 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 move from our Q1 and I will remind you, we did see our net sales down about 18% in the Q1. 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.

Operator

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 remind you on a year over year basis, hydrants was 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 Solutions segment and our Water Management Solutions segment. But I think as we move through the year, it was pretty much towards the end of Q3 and the first into the Q4 of 'twenty three by the time we've 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 were caused some of the challenges that we had, but I'd say destocking is largely behind us.

Operator

The service brass backlog is still higher than what we would call normalized, but importantly, 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 hydrant and we have continued to reduce the delivery times across most of our service brass products. So I think we are 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 1st 6 months of our year. I hope that answers your question, Joe.

Speaker 5

Thank you. And just to follow-up on the portfolio question from earlier, I mean, we're bringing in new Board members and there's a refresh going on. I'm just curious as like, 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 you mentioned linking infrastructure with your technology products and we've talked about that in the past. I think the reality of that is probably been slower than people would like to see.

Speaker 5

I'm just curious as to how you think about like now that you're in the permanent role, like should we is there like a real a pivot somewhere coming or how should we think about

Operator

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 8 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.

Operator

And I think sort of the other area that we said is internally and from a employee 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 were we are realizing some of those benefits as we look at the performance that we had this quarter.

Speaker 5

Thanks guys.

Speaker 2

Thank you. Our next question comes from Brian Blair with Oppenheimer. Your line is open.

Speaker 4

Thank you. Good morning, everyone.

Operator

Good morning, Brian.

Speaker 4

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

Operator

Yes. So as we look with the guidance that we have just given in and around the second half of the year, I think 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 for the as we've looked to the second half of the year, I know you just as a result of 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 Krausz repair products. We've got higher costs largely with labor, materials and freight.

Operator

We did experience some of those in our Q2. As a reminder, we really didn't have any in our Q1. But we do expect that we will continue to have those higher costs as we move into the 2nd 6 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 around some of the material costs that we have, which could also be reflected in the purchase part.

Operator

Additionally, from an SG and A perspective, I think you saw us increase our guidance a little bit in and around SG and 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 cyber security protection investments.

Speaker 4

Okay, understand. And your up to full year guide implies around 20% margins, so that achieves assuming execution continues the fiscal 'twenty five 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 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 2025, 2026 or any medium term kind of timeframe?

Operator

Yes. So I'd say 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 look to 20 25 and I think certainly as you point out with the Q2 and the outlook, we're certainly moving in that direction, but specifically other than looking to hit and move above the pre pandemic margins, that's where we are today.

Speaker 4

Got it. All right. Thank you for taking my questions.

Speaker 2

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

Speaker 6

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

Speaker 1

Good morning.

Operator

Great. Thank you, Deane.

Speaker 6

Hey, maybe we can start off with the 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?

Speaker 1

Yes, 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 frouters 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 2 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 into 2026.

Speaker 6

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

Operator

Yes. Look, that's a great question. And it's a think of it more as a step function because they're going to they're just certain 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 boundary is running. So we do not expect it to be linear just because of all the basic, the lights on, the maintenance, importantly for the workforce that's there, etcetera.

Speaker 6

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?

Operator

Dean, I probably think of it maybe a little here's the way I'm thinking about it. I think with the timing of the price increase, I think number 1, 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.

Operator

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 just I would say, one of the call outs in terms of explaining part of the strength of our 2nd quarter net sales growth.

Speaker 6

It's really helpful. Thank you.

Speaker 2

Thank you. And the next question comes from Mike Halloran with Baird. Your line is open.

Speaker 7

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, 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?

Operator

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 with respect to Waterflow 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.

Operator

And I think that's 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. 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 'twenty three 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 we just as we experienced in our Q2, we do expect that we will have higher labor and freight and material costs and anticipate that in the second half of the year.

Operator

That said, we're looking for continued favorable price cost, I would say, across both of the segments as well as underlying manufacturing performance.

Speaker 7

That's super helpful color. Thank you, Marty. Maybe shifting gears a little bit to the capital deployment side, it's starting to feel like 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 and A side and broadening and deepening the product portfolio as you mentioned during your prepared remarks?

Operator

Yes. So I'd say, look, in and around the M and A front, I think 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 a lot of the probably are 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 as we talked about, I think from a capital structure perspective, we are in the right 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 certainly with the improvements that we're seeing from an operational performance perspective, I know that we are all excited about where acquisition opportunities could be.

Operator

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.

Speaker 7

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

Operator

Great. Thanks. Great. Well, operator, I will go ahead and close out the call today. I'll say thank you for everyone joining us.

Operator

I wanted you to know that I'm 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 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.

Operator

With that, operator, we'll conclude the call.

Speaker 2

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

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Earnings Conference Call
Mueller Water Products Q2 2024
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