Mueller Water Products, Inc. Price & Performance (MWA)

Good morning, everyone. Thank you for joining us on Muir Water Products first quarter conference call. Yesterday afternoon, issued our press release reporting results of operations for the quarter ended December 31, 2024. A copy of the press release is available on our website, newerwaterproducts.com. I'm joined this morning by Marty Zakis, our Chief Executive Officer Paul McAndrew, our President and Chief Operating Officer and Steve Heidrick, 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 Ben return to the 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 three addresses forward looking statements made on this call. This slide includes cautionary information identifying and 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 September 30. A replay of this morning's call will be available for thirty days at 66591, The archived webcast and corresponding slides will be available for at least ninety days on the Investor Relations section of our website. I'll now turn the call over to Marty.

Thanks, Whit. Good morning, everyone. You for joining our quarterly earnings call. I'll start with a brief overview of our first quarter performance. We are very pleased with our strong start to the year. We achieved record first quarter results for adjusted EBITDA in adjusted net income per diluted share. Our net sales growth of 18.7% as we experienced healthy order levels supported by resilient end market demand our focus on delivering outstanding customer service. Our disciplined execution on higher volumes led to a record first quarter adjusted EBITDA and a three forty basis points year over year improvement improvement in our adjusted EBITDA margin. Achieved a record first quarter adjusted net income per diluted share of $0.25 an increase of 92% compared to the prior year. [indiscernible] generated $42,000,000 of free cash flow in the quarter, after allocating $12,000,000 towards capital expenditures. These results were due to great execution from our teams as we lap an abnormally strong first quarter of free cash flow generation last year. We are increasing our guidance for 2025 net sales and adjusted EBITDA primarily to reflect our strong first quarter results and benefits from recent price actions. Our guidance delivers gross and adjusted EBITDA margin gains this year supported by our operational and commercial initiatives including the anticipated benefits from the recent closure of our legacy Brass Foundry.

Our updated guidance does not include any potential cost increases or impacts associated with the recently announced [indiscernible] Our latest price actions were communicated prior to the recently announced [indiscernible] As a reminder, and we are largely vertically integrated for many of our major product categories. We believe the proposed new tariffs would be a headwind that we could manage through with a combination of price actions and efficiencies as needed. Including delivering benefits from our manufacturing and supply chain efficiencies, I am confident that we can execute our key strategies while managing external challenges. I am excited that our new CFO, Melissa Rasmussen, will join Mueller early next month. After a comprehensive search, we are confident that she will help deliver long term value to shareholders. As a reminder, upon Melissa's arrival, Steve will transition to a consulting role through the end of fiscal twenty twenty five to help ensure a smooth transition. Since this is Steve's last earnings call, I want to take the time to thank him for his tremendous contributions over the years. He has provided strong leadership and counsel throughout his tenure. We all wish him the best in his future endeavors. With that, now turn it over to Paul to address some of our commercial and operational insights.

Thanks, Marty. Good morning, everyone. It's great to be with you. I'm excited about how we started the year. Order levels exceeded our expectations, mainly for our short cycle ion gate valves and hydrants. With normalized lead times, the strong execution of our commercial and operations teams, enabled us to do a great job fulfilling these orders during the quarter. We achieved an exciting milestone at the end of the first quarter when we ceased melting and casting operations at our legacy brass foundry and transitioned production to our state of the art foundry. Our teams are working to decommission the foundry site, which drove the inventory and other write downs at Waterflow Solutions in the first quarter. We continue to expect the closure of the legacy foundry to generate an 80 basis point to 100 basis point starting in the second half of twenty twenty five. Thanks to our team's great execution, we largely worked through our elevated backlog of service brass products in the first quarter. With normalized lead times for these products going forward, we anticipate that we'd experience year over year volume headwinds over the next few quarters our channel and customer inventory levels normalize. We remain excited about the multiyear volume and margin in front of us as we ramp up our capabilities and efficiencies at the new foundry.

As expected during the first quarter, we continued to experience headwinds for our Krausz repair products, relative to the prior year quarter. As a result of the Israel Hammers War, Our teams focus on improving our supply chain partnerships, and ramping up production levels has helped us to decrease our lead times and we are beginning to reduce elevated backlog levels With our customers and employees as our main priorities, we expect to continue to experience margin headwinds throughout the year as we reduce backlog, through increased production. With a focus on delivering outstanding customer service, our teams are improving operational excellence increasing supply chain efficiencies and developing advanced manufacturing capabilities to drive productivity across our facilities. We are poised to benefit from disciplined investments in our commercial and operations capabilities, along with the closure of the legacy brass foundry. For 2025, our increased expectations imply more than a 200 basis point year over year improvement in gross margin at the midpoint of our annual guidance. With that, I'll turn it over to Steve, so he can take you through the financials.

Thanks, Paul, and good morning, everyone. For the first quarter, consolidated net sales increased 18.7% to $304,300,000 compared with the prior year. This increase was primarily due to higher volumes mainly for iron gate valves, hydrants and specialty valves, as well as higher pricing across most of our product lines. As we've mentioned in previous quarters, our lead times and backlogs for IronGate valves and Hydrants have normalized. So year over year volume increases at Water Flow Solutions and Water Management Solutions include the benefit from lapping the channel and customer destocking in are you? The increase in specialty valve volumes benefited from lapping the production challenges we experienced in the prior year. In the first quarter, gross profit of $103,000,000 increased 19.4% and gross margin of 33.8% increased 10 basis points year over year. Benefits from higher volumes, favorable price costs and improved manufacturing performance more than offset write downs associated with the closure of our legacy brass foundry at Water Flow Solutions as well as impacts of the Israel Hamas war on repair products in management solutions. Excluding $3,300,000 in write downs associated with our legacy Brass foundry closure, our gross margin was 34.9%. 120 basis point improvement compared with the prior year.

For the quarter, Pressures higher third party fees and personnel related costs. Operating income increased 107.9% in the quarter to $47,400,000 compared with the prior year. Operating income includes $1,700,000 strategic reorganization and other charges, primarily related to the leadership transition and severance. Additionally, we incurred $3,300,000 in inventory and other asset write downs associated with the closure of our legacy brass foundry. Both of these items have been excluded from adjusted results. Turning now to our consolidated non GAAP results for the quarter. Adjusted operating income in the first quarter was $52,400,000 an increase of 78.2% compared with the prior year. The increase was primarily due to higher gross profit and lower total SG and A expenses. Our adjusted operating margin improved five seventy basis points to 17.2% compared with the prior year. Adjusted EBITDA came in at $63,500,000 an increase of 41.7% in the quarter. We achieved an adjusted EBITDA margin of 20.9% in the quarter which was three forty basis points higher than the prior year, and slightly better on a sequential basis. These are first quarter record levels for adjusted EBITDA and adjusted EBITDA margin. For the last twelve months, adjusted EBITDA was $303,400,000 or 22.3% of net sales, a five sixty basis point improvement compared with the prior twelve month period.

Net interest expense in the first quarter declined $1,700,000 year over year to $1,600,000 primarily due to higher interest income. Our effective tax rate increased for the quarter to 22.9% as compared with 15.4% in the prior year. As a reminder, our income tax rate in the prior year benefited from a $1,600,000 income tax benefit associated with the This tax benefit was offset by the release of a 1.6 other expense. Excluding the tax benefit, our effective tax rate this quarter was comparable to the For the quarter, we increased adjusted net income per diluted share by 92.3% to $0.25 compared with the prior year. This is a record for our first quarter. Turning now to quarterly segment performance, starting with Water Flow Solutions. Net sales increased 23.6% to $174,600,000 compared with the prior year, primarily due to higher volumes of iron gate and specialty valves, as well as higher pricing across most product lines. With normalized lead times, strong net sales growth for IronGate Valves and benefit from healthy order levels as well as lapping low orders and shipments in the prior year. Which were primarily due to channel and customer inventory destocking. Specialty valve volumes benefited from lapping the production challenge Adjusted operating income increased 40.9% to $38,600,000 in the quarter.

The benefits from higher volumes, lower amortization and favorable price cost more than offset higher SG and A expenses and unfavorable manufacturing performance. Manufacturing performance included the inefficiency associated with operating two brass foundries and prior year benefit associated with serving an elevated backlog for service brass products during the first quarter of last year. Adjusted EBITDA increased 21.8% to $44,700,000 and adjusted EBITDA margin was 25.6% compared with 26% in the prior year. Turning to quarterly results for Water Management Solutions. Net sales increased to 12.7% to $129,700,000 compared with the prior year. This increase was primarily due to higher volumes of hydras as well as higher pricing across most product lines. Similar to IronGate valves, strong net sales growth for Hydrants benefited from normalized lead times and healthy order levels, as well as lapping low orders and shipments in the prior year, which were primarily due to channel and Adjusted operating income increased 82.8% to $27,600,000 in the quarter due to benefits from higher volumes. Favorable manufacturing performance lower SG and A expenses, including benefits from amortization and foreign exchange, and favorable price cost which more than offset the impacts of the Israel Hamas war on repair products.

Adjusted EBITDA for the quarter increased 47.5% to $32,600,000 with adjusted EBITDA margin improving five ninety basis points to 25.1%. Moving on to cash flow. Net cash provided by operating activities for the quarter was 54,100,000.0 a decrease of $13,800,000 compared with the prior year period. The decrease was primarily driven by changes in working capital, including other current liabilities such as incentive compensation. Partially offset by higher net income. As a reminder, our payables increased in the first quarter of last year largely related to delays caused by the cybersecurity incident. We invested $11,900,000 in capital expenditures in the first quarter as compared with $5,700,000 in the prior year. This increase was primarily driven by increased expenditures in our foundries and timing of spending in the prior year. Our free cash flow for the first quarter decreased $20,000,000 to $42,200,000 compared with the prior year due to the decrease in net cash provided by operating activities and higher capital expenditures. For the first quarter, free cash flow as a percent of adjusted net income was 108%. At the end of the first quarter, our total debt outstanding was $449,500,000 and we had cash and cash equivalents of $338,200,000 We continue to have a strong and flexible balance sheet.

With a net debt leverage ratio below one no debt maturities until June 2029, and $450,000,000 senior notes at a 4% fixed interest rate. We did not have any borrowings under our ABL at quarter end, nor did we borrow any amounts under our ABL during the quarter. We ended the quarter with $500,000,000 of total liquidity. Including $163,000,000 of excess availability under the ABL. I will now review our increased outlook for 2025. We are increasing our guidance for both consolidated net sales and adjusted EBITDA. We now expect consolidated net sales to be between 1.3 which represents a year over year increase between 4.25.7% This guidance takes into account our first quarter performance, expected benefits from recent price actions for many of our products, and current expectations for end market demand. In addition to raising our net sales expectations, we are increasing our guidance for adjusted EBITDA to reflect our first quarter performance and updated expectations for net sales and total SG and A expenses. We now expect that our adjusted EBITDA will range between $3,000,000 and $315,000,000 reflecting year over year growth of 8.9% to 10.6%. This achieves a 22.6% adjusted EBITDA margin for the year at the midpoint of our guidance range.

Reflecting a 90 basis point year over year improvement We continue to expect our second half adjusted EBITDA This is primarily driven by the seasonality of net sales and continuing manufacturing including anticipated benefits from the closure of our legacy brass foundry, along with operational and supply chain efficiencies. We are maintaining our free cash flow expectations to be more than 80% of adjusted net income in 2025. This outlook continues to assume our capital expenditures are between $45,000,000 and $50,000,000 for the year. As Marty mentioned, our updated guidance does not include any potential impacts from the recently announced tariffs. While the tariffs may impact our supply chain and increase costs, we would seek to secure alternative sourcing to mitigate costs or increase pricing as necessary. With that, turn it back to Marty for closing comments.

Thanks, Steve. I want to provide a few closing comments before opening it up for Q and A. Their continued dedication and passion for helping our customers and communities is the engine for our future success. While we are pleased to be increasing our annual guidance for 2025, we are mindful of the uncertain external environment including potential policy changes. Thanks to our team's disciplined focus on serving We are poised to drive net sales growth, and future margin improvements beyond 2025. We have positioned ourselves to accelerate sales growth capture the benefits from favorable long term end market growth trends through product innovation and service. We believe we can capture the benefits from the investments needed to address the aging North American water infrastructure, associated with federal infrastructure bill particularly with lead service line replacement projects. We are continuing to drive operational improvements to deliver the benefits and expand our capabilities. We are increasing collaboration and teamwork throughout the organization to create a culture of talent development. Enabling us to execute on our strategic opportunities I am confident that the actions we are taking will further strengthen Mueller the long term. This concludes our comments. Operator, please open the line for questions.

We will now begin the question and answer session. Our first question comes from Joe Triodaro with T. D. Cowen, your line is open. You may ask your question. Hey, guys. Good morning. Good morning, Joe. I'm just curious like how are you thinking about well, one, what's the price embedded in the guidance? And then like how are you thinking about volumes from here? Is the comps Very, very different now that the lead times have normalized and you kind of get past those big declines from prior?

Let me start off. So as we look at the guidance that we have given for sales, through the balance of 2025, Our sales guidance does assume benefits from both volume as well as price. As we look at our 2025, we think we'll have normal season And that normal seasonality is a reminder sort of between the construction and the non construction seasons tend to see lowest sales in Q1. Sequential increase in Q2 and then higher again in Q3. With respect to carryover pricing, which certainly benefited our first quarter as well as the price actions that we just announced. We do think that we'll benefit from price realization probably somewhere in the low to mid single digit range. In and around volumes with respect to our guidance, we expect growth from both IronGate valves and hydrants. As we said, we're back to normalized lead times, which helps us convert [indiscernible] order level activity into shipments. That said, we do expect some headwinds as we're lapping record consolidated sales in second quarter. Additionally, we benefited from some of the elevated service brass backlog in the prior year. And expect that will be a headwind. We think overall as we look at our end markets looking at residential construction, as well as the municipal end market.

We think that they're they'll be primarily resilient, but I will note that there's a lot of uncertainty in and around the external environment. Certainly, with what we see in and around mortgage rates, tariffs, inflation global tensions, labor availability and any potential policy changes. I think the last comment I want to give you in and around the guidance is just a reminder that in the guidance, we have not assumed any meaningful impact from funding from the infrastructure bill.

Interesting. That was going to be my my follow-up on the infrastructure funding. Like even though that How do you get a read on your customers like for projects? Are things moving Or is there fear that like I don't even know if some stuff can be changed, but like the thought of maybe we go in there and we change call like we stop funding for lead pipe removal or we change implementation dates. Is it impacting the timing of breaking ground on certain new projects that your customers? Good morning, Joe. This is Paul. We continue to monitor the infrastructure bill and how many RFPs continue to come through that avenue then. And we do see a trend of increasing of infrastructure bill activity but it's not that meaningful or material change from the prior quarters that we've discussed. I think the positive here is we are very well positioned to supply from being a U. S. Vertically integrated company and we don't anticipate any changes from the administration and around the infrastructure bill.

Great. Thanks guys.

Thank you. Our next question comes from Brian Lee with Goldman Sachs. Your line is open. You may ask your question.

Hey, good morning, everyone. Thanks for taking the questions.

Maybe just a follow-up on the previous question. Just you said at the the outset, Marty, that order levels exceeded expectations. It sounds like the outlook obviously appearing to be more robust given the guidance increase and specifically called out short cycle iron gate valves, hydrants. Could you kind of talk about what you're seeing there in the ordering environment? How much of this is just the inventory cycle playing through? How much of this is just new organic demand upside to whatever expectations you might have been anticipating coming into the year?

Yes. So I think importantly and if we look at what it have been our excuse me, which are our short cycle products, Largely, we'll note that we have been backed to normalized delivery patterns with respect or lead time I should say, with respect to our iron gate valves and hydrants. And to dimension that, that really is sort of that turnaround primarily of, I'll say, sort of two two to four weeks between orders and shipments. So we had that in place for a while. Looking at the service brass products that we have, which are a short cycle product, We certainly throughout our 2024, we knew we had elevated backlog also but worked throughout our 2024 to improve the lead times and bring down those backlog levels with respect to our Service Brass products. And pretty much moved back those backlog levels to being more normalized. That said, as we look out at our 2025, given that we were servicing orders from our backlog in 2024, we could see that as being an impact for us in 2025, a little bit similar to the impact that we have discussed with you all with respect to IronGate valves and hydro when we were still working through that piece of it.

In and around sort of overall, I'd say stocking levels from our distributors I'm going to let Paul step in and comment on that.

Yes. Just before I go to that, just to add some color. We took $60,000,000 of service brass backlog out in the prior year and that's predominantly to get back to the normalized lead times that both our customers and our end customers anticipate where we should be at. In terms of channel inventory and stocking levels, we believe they are back to normalized levels. But there may be a short term headwind in terms of lapping from the service brass backlog we Okay, great. Super helpful. I appreciate the context. Maybe a quick follow-up on Marty, your comments around pricing. I think you said you're embedding low single digit to mid single digit pricing in the outlook here and part of the commentary on the improved outlook for the full year was on pricing. So if I recall, I think pricing typically you're more in the low single digit range historically. So has something changed in the mix Or is there something happening on the pricing strategy? Or are you just getting more price realization, I guess heading into this year than you might have been anticipating?

Yes, certainly. So in and around the pricing, I would say that in terms of price realization, I would say no, we are not projecting anything different from what we have experienced in the past. Now I'm certainly going to call out the period where we were in the rapidly rising inflation the very high levels of inflation, certainly all the challenges in and around COVID delivery times, etcetera, and certainly, we'll remind you that we implemented a series of price increases a few years back as we were, in essence, catching up to what we were seeing in and around inflation. But no, with commentary that I have just given, I would say in terms of what we have seen in and around price realization and what we have built in as that sort of low to mid single, I would say that is fairly comparable to what we've seen outside of that unusual period.

Thank you. Our next question comes from Brian Blair with Oppenheimer. Your line is open. May I ask your question?

Thank you. Good morning, everyone. Good morning, Brian. Your team is framed the 80 to 100 basis points gross margin benefit from ramping the new brass foundry and closing the legacy plant At least run rate looking to the back half of this fiscal year. Maybe touch on the commercial benefits of the new foundry. It seems like you're gaining share or perhaps [indiscernible] Is that the case? And if so, what role might the new foundry be playing in those bananas?

Good morning, Brian. You're right. We kind of quantify the 80 basis points to 100 basis points basis points in terms of operational improvement then from closing legacy brass foundry I think from a commercial perspective, the advantages of the EcoBrass and how that translates into a much more efficient foundry and our ability to service the customer in a much more improved manner Those two things going together is going to allow us to be well positioned, particularly for the lead service line replacement as that rolls out in the future.

And then just to level set understand that day by day, hour by hour even, things change in terms of [indiscernible] tariff backdrop and and dynamics, but [indiscernible] Prior to mitigation, be that pricing or otherwise what would the potential impact of announced or threatened tariffs be at this point?

Yes.

So let me address sort of how we are viewing tariffs and what we would see. First of all, I think to level set we'll remind you that in 2024, 92% of our net sales were in The U. S. And we are largely vertically integrated for most of our major product categories and that includes iron gate valves, hydrants and service brass products. As we look at sourcing, we do have a facility in China The facility in China supports our specialty valve business. And we do have a small amount of supply chain exposure to I think importantly, with a lot of the discussion and announcements in and around tariffs. Our teams are working goods, again, specifically addressing Canada, Canada from a sales perspective was about 6% of our twenty twenty four net sales. So I want to emphasize again that with the timing of the tariff announcements, the guidance that we have just provided does not include any potential cost increases or impact associated with those tariffs We'll also reference that the price announcement that we just made, that was communicated prior to the announced [indiscernible] While we believe that any tariffs could increase costs, we think that our exposure is manageable and we certainly think our competitors would certainly have feel some impact as well.

I will tell you we have experienced this before. Certainly, if we go previously when there were the Chinese tariffs were implemented, during the previous Trump administration. We did see elevated costs associated with those prior tariffs. And as part of the mitigation efforts, We increased prices for certain of our products, particularly specialty valves. We also executed some strategic sourcing sourcing initiatives Our Kimball facility, which I know we have talked about, has been one of our recent capital [indiscernible] That facility has been open for a number of years. It is focused largely on our specialty valve and that does increase our domestic manufacturing capabilities. We're going to continue to monitor what we see from our channel partners and end use customers. To see what impact that there is. But I think overall, our sectors had an industry of passing on cost increases over period of time. And although we do see any potential tariffs as being a headwind, We will certainly work to and are working through to manage them through a comp of pricing actions, as well as strategic sourcing initiatives as we need to as we need them.

Appreciate all the color.

I'll pass on. Thank you. Our next question comes from Deane Dray with RBC Capital Markets.

Your line is open. You may ask your question.

Thank you. Good morning, everyone.

Good morning, Dave. Hey, I would like to talk about the impact of the closure of the old foundry and I don't know if you had a closing ceremony but you probably should have because it's a big deal, it's a big accomplishment to have gotten that done on the timing that you said. And can you just clarify for the [indiscernible] Was there any outsourcing that was still done And as that rolls off, Can you just directionally tell us how much of that expense goes away And then Related to the closure of that facility, I mean, it was operating for so many years. Are there any remediation risks that you have Have you taken any reserves for that? Is there any reason that that might be a concern? [indiscernible] kind of near term price [indiscernible] relief and then longer term, are there any liabilities that we should be aware of? Hey, good morning, Dean. This is Paul. In terms of the outsourcing, if I take that question first, we've been reducing that [indiscernible] twelve to eighteen months as we've been ramping up the new foundry So that essence has all been eradicated over the last two or three quarters, which is part of the margin improvement we've seen there.

So there's no real outsourcing going on now from a service brass The ability of closing the South Foundry and there were some inventory builds during that period in our last quarter then in terms of some products as we transition to the to the new foundry as we spoke about some of the lower running parts as we transition [indiscernible] In terms of legacy costs or outstanding liabilities, we took about $3,300,000 of costs in the quarter around inventory and asset write downs. And we are going to be starting and working on the decommissioning of that old legacy facility And right now, we don't have a specific estimate for any future one time costs at this point. Good. We can take future remediation expenses decommission and possible demolition, but we are not estimating them at this point.

Provided as incurred. So they'll expense we recognize when we incur the expense Got it. All right. That's helpful. And then second question, and Marty, I really appreciate all the details you've given around the tariffs. And in the scheme of things, you guys are really well positioned there and you've already done all the kind of thinking aware there might be some very modest exposure. So appreciate how you calibrated that. And just related with the new administration, the Doge focus on government spending, most of the municipal world is exactly that. It's not federal, but there is some federal, most of it is county and state. But just if there's pressure on government spending, how or how not is water infrastructure impacted.

So very good question, certainly. And I think overall, we do have, as we all know, the infrastructure passed was passed of few years back. And I think importantly, that bill had bipartisan support. [indiscernible] in and around aging infrastructure and in and around specifically water, I think just the growing awareness challenges that a number of cities have faced continues to emphasize the importance of the investment with respect to that. The gap has been there, the gap is widening. And so I think that certainly does lend support for the continued need. On top of that, I know the lead service line replacements Again, I think it continues to be an area where there is at least near term focus and that's largely because consumers and communities really appreciate the health risk associated with that.

I think [indiscernible] and certainly given a number of the policy changes, Certainly a great question to ask. I think our belief is that overall that municipal will continue to be resilient As you know, we have not our guidance doesn't assume a meaningful impact from the infrastructure bill funding, we are continuing to watch it. I know Paul shared earlier on a call today that as we look at the number of projects and the documentation and support they're seeking around this, So I think is there a near term impact Hard to tell if there will be, but as I said, we don't have any specific infrastructure spending. And I think when you assess the bipartisan support as well as the need due to the impact on water and importantly health risk, I think that even if there are a few short term bumps, over the longer term, we think this will still be an area where we will see investment.

That's great. Thanks for all that color.

Thank you. Our next question comes from Mike Hey, good morning, everyone.

So questions. First, when you look at the front half, back half in your comments you made earlier about margin acceleration in the back half.

Is the equation here just simply seasonality plus timing of the cost benefits from the facility closure? And then then any sense for the magnitude front half versus back half on that margin? Ramp that you expect?

We do expect we do expect the backup margins to be better in the first half. In terms of for seasonal reasons, as you mentioned, and we do expect in water flow to benefit from the closure of the legacy Brass Boundaries as we've already referenced. And Water Management, we expect year over year improvements in our repair products business, which is is the one impacted by the Israel Hamas war. Even though we anticipate some elevated costs there, we'll continue the performance there as incrementally [indiscernible] And then second one then is just could you give some thoughts on how you're looking at the land development side of your business What are your customers saying? I certainly heard the prepared remarks, but any nuance from a customer level and how that [indiscernible] rates kind of stay where they are?

I missed the start of that question Did you pick it up? Yes, I think the question was around the land development residential construction.

Correct. Is that your question?

Yes, yes.

The question was just the outlook in general around land development. And any nuance from customer conversations. Anything along that line?

Yes. We see contingency demand new homes has been resilient. Despite the elevated mortgage rates and other factors including low inventory on existing homes, And we still believe and as we talked to our customers, homebuilders have strong balance sheet and they continue to manage their large investments and inventory levels at a disciplined pace. So for our sales guidance, we assume LOT and Landyval will grow at a level In terms of how that's anticipated into our guidance going forward. Thank you.

Our next question comes from Walt Liptak with Seaport Research. You may ask your question. Your line is open.

Hi, thanks. Good morning and thanks for the good color so far. Let me just ask a follow-up on the tariffs issue and just your I recall from the last time around with supply chain that there was issues with some of the material that goes into the foundries with some of the pig irons and some of the other things that was impacted by international pricing. I wonder if you can just review for us kind of in advance of these tariffs like your supply of raw materials, and how the pricing works from your suppliers?

Good morning, Walt. Our supply of raw materials is predominantly domestic So we don't anticipate any issues from the tariffs from the raw material supply.

Basically, what Mali anticipated and shared earlier around where we may have some other components that may be impacted by these future tariffs.

And I think in and around that, Walt, it's sort of the specific on cost for imports and exports and how that is impacted directly by tariffs And then just are there other more general impacts in the economy as a result of the tariffs?

Okay, got it. So you're saying [indiscernible] hear discussed, could there be overall more inflationary pressure as a result of implementation of the of the tariffs. But Yes, because our total material costs are influenced by purchase parts, suffer from potential labor inflation and other inflationary pressures. It's not just raw materials.

Okay.

So, okay, got it. So is that supply chain just pricing So as the are the projects developing right now for this spring construction season? Or are the projects kind of already coming in with bids and things like that? Like what's your sounds like you've got pricing power, but what's the timing on these tariffs hitting and kind of inflation in some of the raw material markets? [indiscernible] to mention that a couple of different ways.

So just as a reminder with the short cycle products, which is the certainly the largest percentage across our portfolio is includes iron gate valves, hydrants, service brass repair and other. That is where there tends to be a very short shorter lead delivery time under normal [indiscernible] And as we said, we're pretty much back to the normal delivery times for most of those products outside of repair that Paul addressed. Earlier. So With that, we generally see with respect to orders two to four weeks between and delivery. In and around some of the comments that we've made with respect to what we're seeing on projects that could receive funding from the infrastructure bill, I think that's where we are seeing we wanted to comment that we are seeing some of the projects that are going through the requirements needed to qualify for the funding and verify that it meets the requirements designated by the different agencies [indiscernible] funding coming from the infrastructure bill. But as a reminder, we are not assuming a lot of those dollar expenditures in the guidance we provided. Does that address your question? Paul?

Yes, I think it does. Thank you very much.

Walt, I would just add, I think in terms of the investments we made around operational excellence and service levels, and lead times coming back to normalized levels, we are well positioned then as the starts particularly in the northern part of the country as it comes up with the winter period. Thank you. And at this time, I'll turn the call over to Marty Zachus. Very good. Thank you, operator.

We certainly appreciate everyone taking the time to join our call today. Look forward to speaking with you again when we announce our second quarter results and that will be in early May. Hope everyone has a great day and operator with that, if you would please conclude our call. Thank you. This concludes today's conference. May disconnect your lines at this time.