Mueller Water Products, Inc. Q3 FY2022 Earnings Call

Good morning, everyone. Thank you for joining us on Mueller Water Products third quarter 2022 conference call. We issued our press release reporting results of operations for the quarter ended March 31, 2022 yesterday afternoon. A copy of the press release is available on our website muellerwaterproducts.com. Scott Hall, our President and CEO, and Martie Zakas, our CFO, will be discussing our third quarter results and our current outlook for 2022. 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 and to address forward-looking statements in our non-GAAP disclosure requirements. As a reminder, we have changed our management structure and segment reporting effective October 1, 2021. We filed an 8-K in January that provided the recast of historical quarterly results for 2020 and 2021. At this time, please refer to Slide 2. This slide identifies non-GAAP financial measures referenced in our press release, on our slides, and on this call. It discloses the reasons why we believe that these measures provide useful information to investors. Reconciliations between non-GAAP and GAAP financial measures are included in the supplemental information within our press release and on our website. Slide 3 addresses forward-looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward-looking statements. Please review Slides 2 and 3 in their entirety. During this call, all references to a specific year or quarter, unless specified otherwise, refer to our fiscal year, which ends on the 30th of September. A replay of this morning's call will be available for 30 days at 1-800-834-5839. The archived webcast and corresponding slides will be available for at least 90 days on the Investor Relations section of our website. I will now turn the call over to Scott.

Thanks, Whit. Good morning, everyone. Thank you for joining us for our third quarter earnings call. This quarter, we delivered record net sales, with both water management solutions and water flow solutions contributing to the growth in the quarter. We generated double-digit net sales growth in iron gate valves, specialty valves, and repair and installation products. Order levels were healthy again this quarter, driven by end-market activity, and we ended the quarter with a record backlog. As expected, the growth in the quarter came primarily from the continued improvement in price realization across most of our product lines. We are benefiting from the multiple price actions taken over the past year and we're pleased with the sequential increase in the third quarter. While the improved price realization led to a sequential improvement in our adjusted EBITDA conversion margin, our third-quarter margin was below the expectations discussed on our last earnings call. We faced many of the same operational headwinds we experienced in our second quarter, including ongoing supply chain disruptions, inflationary pressures, and manufacturing performance. Our teams are focused on improving production levels and operational performance as we manage healthy demand and record backlog. We expect continued benefits from improved price realization in the fourth quarter, and will continue to execute initiatives to manage the operational headwinds, which I will discuss later in the call. I'll now turn the call over to Martie to review our third quarter financial results.

Thanks, Scott. And good morning everyone. I will start with our third quarter 2022 consolidated GAAP and non-GAAP financial results. After that, I will review our segments performance and discuss our cash flow and liquidity. Our third quarter consolidated net sales increased 7.3% to $333.2 million compared to the prior year, with growth in both water flow solutions and water management solutions. For both segments, higher pricing across most of our product lines was partially offset by lower overall volume. Gross profit this quarter decreased 6.7% to $98.3 million compared with the prior year. Gross margin decreased 440 basis points to 29.5% compared with the prior year as the benefits from higher pricing were more than offset by higher costs associated with unfavorable manufacturing performance, installation and warranty obligations. We increased our warranty accrual based on our historical warranty experience and costs, resulting in a $4.5 million charge. Excluding this charge, the gross margin was 30.9%, which sequentially improved by 100 basis points compared with our second quarter gross margin as we improved our price realization. Selling, general, and administrative expenses of $60.8 million in the quarter increased 3.4% compared with the prior year. The increase, which was primarily driven by inflation and investments in personnel, D&A, tradeshow activity, and professional fees, was partially offset by foreign exchange gains. SG&A as a percent of net sales improved to 18.2% in the quarter, as compared to 18.9% in the prior year quarter, due to the leverage from higher sales. Operating income of $36.9 million decreased 13.6% in the quarter compared with $42.7 million in the prior year. Operating income includes the $4.5 million warranty charge, as well as the strategic reorganization and other charges of $600,000, which primarily relate to the previously announced plant closures. Turning now to our consolidated non-GAAP results. Adjusted operating income of $42 million decreased 9.9% compared with $46.6 million in the prior year. The benefits from higher pricing were more than offset by higher costs associated with unfavorable manufacturing performance, inflation, and SG&A expenses. Adjusted EBITDA of $57.8 million decreased 7.7% in the quarter, leading to an adjusted EBITDA margin of 17.3% compared with 20.2% in the prior year. Adjusted EBITDA margin improved sequentially by 100 basis points compared with 16.3% in the second quarter. For the last 12 months, adjusted EBITDA was $201.5 million, or 16.6% of net sales.

Thanks, Martie. I'll discuss our third quarter performance and markets and updated expectations for this year. After that, we'll open the call up for questions. In our third quarter, we faced a variety of the same operational challenges that impacted our conversion margins in the second quarter. These included inflationary pressures, higher costs associated with the ongoing supply chain disruption, and manufacturing inefficiencies. Inflationary pressures continue to be challenging, especially in relation to materials, freight, energy, and labor. Obtaining raw materials and purchase parts remains a top priority for our teams as they work to meet production schedules while dealing with long lead times and price premiums. Challenges in the scrap steel market have caused us to shift to a more expensive mix of steel and iron in order to secure materials. This scenario is playing out in many of our purchased parts where we continue to see long lead times. While we believe a decrease in commodity prices will eventually lower our raw material costs, we expect the benefits will take longer than usual to impact our conversion margins. Due to the magnitude and breadth of inflation in this economic environment, we anticipate higher costs will continue into 2023. Unfavorable manufacturing performance at our foundries was the primary reason for the lower-than-expected conversion margin in the quarter. Our Chattanooga and Albertville foundries, which purchase energy from the Tennessee Valley Authority, were both impacted by emergency load curtailments. These actions impacted melt capacity, which lowered production levels for our gate valves. Machine downtime at our brass foundry in Decatur severely impacted mill capacity in June. This downtime decreased shipments for service brass products and led to the year-over-year decline in volumes for Water Flow Solutions. We did experience healthy order activity during the quarter and ended the third quarter with a record backlog for service brass products. While we would typically be able to get the machines back in service in less than a week, the supply chain disruptions continue to extend lead times for critical replacement parts. To help address the backlog and improve lead times, we have increased our use of third-party maintenance personnel and outsourced certain operations to achieve higher production levels. Our teams are also very focused on completing our new brass foundry, which will eventually replace the current facility. Replacing the plant with our new state-of-the-art facility, we believe will provide many benefits. The new facility, which will use a new lead-free brass alloy, will increase capacity for melting, machining, and assembly. It will expand product development capabilities. The facility will help achieve many of our sustainability goals because it will lower energy usage per pound, reduce waste, improve the product life cycle, and enhance safety. It will also provide cost savings relative to the current facility with enhanced productivity, sourcing, and product design capabilities. Although we have made significant progress, the supply chain disruptions and labor availability challenges have pushed our construction completion date to the end of fiscal 2023, with the production part approval process extending into 2024. We continue to anticipate that the three large capital projects we have previously announced will account for a combined $30 million annualized incremental gross profit when all are complete and at full rate. With a record backlog and healthy demand, our teams are focused on maximizing production levels at our foundries. These actions include adding shifts, upgrading equipment, and investing in inventory, all to ensure that we have the material, labor, and machines to increase production and improve delivery times. To support our efforts, we have proactively invested in our hourly production team members by working with them prior to contract renewals. To help address the impact of inflation that workers are experiencing, we are implementing wage increases for union and non-union hourly production teams. While these labor investments will add near-term pressure to our margins, we believe our teams can deliver improvements in 2023, which will come from continued price realization, more manageable inflation, and improved operational performance. Additionally, we continue to monitor the overall inflationary environment closely and will take price actions as needed to help offset the ongoing cost pressures from materials, labor, and supply chain disruptions. I will now briefly review our end markets and updated outlook for 2022. As mentioned earlier, order levels remained healthy during the quarter. We believe that repair and replacement end-market activities remain very strong. Overall, the market continues to benefit from healthy budgets, especially at larger municipalities. As a reminder, we estimate that approximately two-thirds of our net sales are related to repair and replacement activities of utilities, providing resiliency for our business. The infrastructure bill, with $55 billion of new funds dedicated to water, wastewater, and stormwater infrastructure, represents the highest level of federal spending since the mid-1970s. While there appears to be a high level of interest in the infrastructure bill from municipalities, there is a process mostly driven by the states to access the money that has not been directly earmarked by the bill. We don't anticipate any benefit this year and believe benefits for next year could be limited due to ongoing supply chain constraints and labor availability challenges that could impact the timing of projects. We expect that beyond that time period, we should benefit from the infrastructure bill spending. For the new residential construction end market, specifically lot and land development activity, we believe that demand remained at healthy levels during the quarter. However, based on the most recent monthly housing data and other data points, the increase in interest rates is contributing to slower new residential construction activity. We continue to anticipate that this will lead to lower levels of land development activity. We expect activity will slow for the rest of the year relative to strong levels during the pandemic. Low inventory, demographics, and population shifts suggest that we could return to normalized activity that is above pre-pandemic levels. Due to strong municipal demand levels, we believe a lower level of new residential construction activity could help municipal repair and replacement activity, given challenges with labor availability for construction. Moving on to our updated outlook for 2022. With one quarter remaining, we are pleased to be on track to deliver our second consecutive year of double-digit consolidated net sales growth. For the full year, we are narrowing our forecasted range for consolidated net sales growth to be between 11% and 12% compared to the prior year. This forecast takes into account the current expectations for orders, price realization, and end market demand. We expect the benefit from improved price realization to continue in the fourth quarter, resulting from the multiple price increases we have already announced. We also anticipate that our conversion margin in the fourth quarter will be lower than previously anticipated, primarily due to the operational challenges previously discussed. As a result, we now expect adjusted EBITDA will be comparable to the prior year. Looking beyond 2022, we anticipate delivering better conversion margins with improved operational performance and higher price realization from pricing actions we have already taken. With the ongoing economic uncertainty, we will benefit from our strong flexible balance sheet and our disciplined and balanced cash allocation strategies. We will continue to reinvest in our business as appropriate and return cash to shareholders through our quarterly dividend and share repurchases. We have repurchased $35 million of common stock over the last 12 months, including the $5 million bought back in the third quarter, and we have $110 million remaining under our share repurchase authorization. In closing, water utilities face many challenges, including accelerating aging infrastructure, climate change, and unfavorable workforce demographics. We have a broad product portfolio, primarily serving the drinking water network that is well-positioned to benefit from a strong municipal demand environment. Our product development, operational, and commercial strategies are focused on capitalizing on key trends in water. These include the accelerating adoption of technology-enabled products and increased demand for products that qualify for the American Iron and Steel and Build America Buy America requirements. The most important priorities for our teams are to execute our operational improvements and deliver the benefits from our ongoing capital investments. In conjunction with a favorable municipal end market and continued price realization, we expect to deliver sales and adjusted EBITDA growth in 2023 and beyond. And with that, operator, please open this call for questions.

Thank you. The first question comes from Bryan Blair with Oppenheimer. Your line is open.

Thank you. Good morning all.

Good morning.

Good morning.

Given your record backlog and order momentum, your fiscal 4Q growth seems pretty locked in barring major disruptions I assume the same goes for early 2023. And maybe offer a little more color on the puts and takes of market activity and demand drivers. As we look forward for municipal repair, replacement, and new construction respectively?

I think net price realization is expected to improve sequentially, which is really the driver of growth in our Q4. We would expect some more improvement as it relates to quarters in the future. The backlog at the record levels at the end of Q3, I think, is a bigger function of throughput at the plants that we had the opportunity to ship more. And so, to answer the question directly, I expect an improving environment from a volume performance. The backlog is there to support it. I believe that the mix of price will contribute to that growth in demand. The biggest driver is that the municipal budgets remain extremely strong. I think that the larger municipalities, as I mentioned in my prepared remarks, Bryan, have in front of them a pretty large menu of projects.

Yes understood. I guess to level set a little more on the margin pressures that your team has faced in the recent past. Can you maybe isolate the impact of price versus material costs and parse the headwind from unfavorable manufacturing performance in Q3? Compare that to the second quarter, and then walk us through how your team's thinking about these variables and the timeline to more normalized conversion margins going forward?

Yes, so overall, we did continue to see strong price realization this quarter, probably slightly improved sequentially from the second quarter, and up close to double-digits that did more than cover inflationary expenses that we experienced this quarter. I think the real pressure there came from the unfavorable manufacturing performance that we saw, as well as the continued supply chain disruptions. Some of the challenges during the quarter at some of our foundries, where we purchase energy from the Tennessee Valley Authority were impacted by some emergency load curtailments. And that impacted our melt capacity. But the main driver that we talked about was machine downtime at our century-old brass foundry, which limited our pounds of production. And what that contributes to is, we ended up with sort of inefficient labor, as well as overhead inefficiencies, when the machines are down, or materials aren't in place, etc. A lot of that impacted the shipments of our service brass products, and that was one of the key drivers of the year-over-year volume decline that we experienced. I'd say looking out we've got a number of initiatives to address the equipment failures. We have increased our use of third-party maintenance personnel, as well as we've engaged in outsourcing for certain products to help with the availability. Certainly longer term, once we get our new brass foundry coming online, we think that will help. Additionally, I would say as we look into our 2023 outlook, I think we have the opportunity, as Scott talked about, with what we've got from a backlog and outlook for the municipal segment.

Okay, helpful color. Thanks again.

Thank you.

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

Thank you, good morning everyone.

Good morning, Deane.

Hey, like to continue that line of questioning. Just trying to reconcile that yes, what came up in the third quarter? What was the tipping point in terms of saying you've got a lower EBITDA guidance as supply chain kind of didn't change? It's still, it's a big headwind we get that same thing on inflation. So—and Martie, just to clarify, it sounded like it was the manufacturing inefficiencies at the foundry that was more of the tipping point that you were not going to make up that EBITDA shortfall to hit your guidance. Is that fair?

Yes. I think that's fair, Deane, and I'll turn it to Martie, but I want everybody on the call to understand there's basically brass product in every product we make. So if you think about a gate valve, there are brass components in it. If you think about a water product, there are brass components in it. The brass foundry downtime, I think, was the tipping point for looking at the rest of the year. And certainly, we're experiencing downside issues with our workforce and things like that as we speak. And so what does that force you to do? Once you have that supply problem, yes, service brass sales are part of it, but it forces outsourcing the components for gate valves and hybrid as well. And those were the—that was the biggest driver as we thought about providing insight for investors into what we think will happen in the fourth quarter, and that really made us reevaluate. We're assuming in our fourth quarter that we will have some outsourced supply chain issues through the fourth quarter as we work through these equipment issues in the Decatur foundry.

So when you have the new foundry in place, how much of these operational manufacturing inefficiencies go away?

I would say all of them. Because the reality is that things like machines and equipment that we use are all made of older technology. So I think that opportunity—yes, there's opportunity for improvement. We got to go tour the progress on the new foundry. Last month, I think it's going to be a step change improvement both from a worker environment, throughput capability, an early warning detection systems, the availability of machine data or running machine learning and things like that, I think they are all really, really positive. And I'm excited to get it open. I'm looking for ways to try to accelerate the production part approval process so that we can get there sooner, but we are facing the headwinds associated with contractor labor and supply chain issues with getting all the parts for the new foundry.

All right, that part is really helpful and thanks for that additional color. Just to clarify on the cut in CapEx, what projects or initiatives are getting pushed?

I'd say, overall, in terms of looking at the lower guidance on CapEx, I think some of what we have seen is just project delays. Some of that is coming from supply chain disruption, and a portion of the spending for the new Decatur brass foundry has been pushed into our 2023 budget. I think additionally, some of the delayed projects are a result of the teams focusing on some of the operational challenges. So I think that's certainly one of the reasons. Additionally, as we continue to look at the various capital project opportunities, we have elected to deprioritize some of them going forward.

Okay. And then last one on the warranty charge. So what triggered it? Are there particular products? I just want to get a sense of how broadly this covers the warranty experience that you've had?

Yes, so with respect to the warranty charge, it relates to the sales of our metering products. And just as a reminder, that is part of our Water Management Solutions segment. What we do on an ongoing basis is monitor and analyze our warranty obligations periodically and revise any accruals as necessary. We did our warranty accruals, and that was primarily due to the historical warranty experience on certain products as well as some higher product replacement costs.

Has there been any noticeable claims experience? Is this the first of many or is this more routine just based upon whatever time period your accountants say that you're supposed to change that reserve?

Yes, so what I would say is, look, the warranty periods tend to be very long within the industry. We do review them regularly. And it's an estimate that we have based on the best information we have available at the time. So as we get more information and experience, we'll evaluate and update the estimates and adjust as appropriate, and that was what we did this quarter.

Thank you. And our next question comes from Joe Giordano with Cowen. Your line is open.

Hey guys, good morning.

Good morning.

So just want to think ahead to next year, the foundry gets pushed to the end of 2023, approval into 2024. Now like what gets better from a margin and manufacturing productivity setup? Like what gets better and what is under your control to improve into 2023? And what offsets that by delays in the push out of the project?

Yes. I think that certainly, notwithstanding the highly uncertain economic environment given the interest rate rises and the supply chain disruptions, we acknowledge and believe that the growing inflationary pressure is offset by the monetary policy the Fed has taken, which could lead to a recession. But I think the biggest thing that we think about is that we are going to benefit from significant carryover prices that are already locked in the backlog for actions we've already taken. We expect to end 2022 with very high backlog levels, especially for our short-cycle products, which will help offset expected decreases in demand related to the slowdown in the construction market. So we anticipate the municipal repair replacement market continue to benefit from the healthy budgets at the municipal level. We expect to improve our adjusted EBITDA conversion margin as commodity prices remain below peak levels. Since we didn't implement any of the surcharges as part of our pricing actions, we would not expect to have any raw material adjustments for the items that have already been ordered. I also believe that we'll have improved manufacturing performance, which will contribute significantly to the year-over-year improvement. Certainly, we're in an uncertain economic landscape, but I do believe that these will improve due to initiatives, which Martie and I, along with the executive leadership team, review pretty much on a weekly basis to ensure that our throughput gets back to levels that they were prior to the summer. We're mindful of the ongoing inflationary pressures relating to higher wage rates, utilities, and freight. But as I said in my prepared comments, I expect that we will take the rational market actions needed to offset those. And so that's the basis for our optimism for 2023 in terms of margin improvement and conversion margin performance.

And then just thinking about the housing data that's come out on single-family homes — it's not looking great. You referenced that. What kind of actions or plans are you drawing up internally to adjust your business to a world where housing is potentially decently worse than it is now?

Yes, I think in Q3, new residential construction market, specifically lot and land development activity continued to be at healthy levels, which is also reflected in our Q3 order book. So I understand that the permits pulled data would indicate that. But I think as I remind everybody, you really have to look at a lot of inventories because we use housing starts as a surrogate. But certainly, it will follow in the future that we could have lower levels. As expected, I think the increase in interest rates is leading to slower new residential construction activity. And in total, housing starts are slightly decreased, but interestingly, multi-families started increasing. And so, I think that there's still some underlying housing demand. Single-family starts are now running at a lower pace but are still higher than the pace in the decade before the pandemic. So if you were to compare the average annual figures, we are still significantly above it. The sharp rise in borrowing costs is clearly leading homebuilders to scale back production plans, and I anticipate that we'll see a lag for us just as we were slow to respond when housing started. There will still be a lot of curb and sewer work in land lot development. I believe that a lower level of new residential construction could help municipal repair and replacement activity. The homebuilders tend not to be the people who put in the curb and sewer. They tend to be contractors, and they are the same contractors that municipalities contract to do repair and replacement work. So a lot of the trenching and repair work involves the same people. Given the squeeze on labor, we expect that healthy municipal budgets will pick up some of that slack, and we remain optimistic about it. I think the biggest indicator is the healthy order activity we saw in the third quarter. In July, orders were in line with our expectations. So I feel confident that while there will be some slowdown, the tailwinds from the Infrastructure Investment and Jobs Act (IIJA) and healthy municipal budgets will more than offset any negatives.

Thanks for all the color.

Thank you.

Thank you. Our next question comes from Walt Liptak with Seaport. Your line is open.

Hi, thanks. Good morning, guys. I wanted to ask about the outsourcing and some of the temporary workers. Can you give us an idea of the incremental cost from that and maybe the expectation for how long those costs will be in place?

Yes, that's harder to parse out. When we were looking at performance, we look at what it would have cost us versus what the actual cost will kind of show up in a couple of different places. But long story short, manufacturing performance was the biggest reason for our cost increases experienced in Q3. Part of that is machine-related, part of that is outsourcing, and part of that, frankly, involves freight. It's hard to parse it. I'm not sure that it's something I would want to get into in detail.

Okay, all right. That's fine. Let me ask it this way because it all comes down to gross margin. In the fourth quarter, what—and I'm sorry if you mentioned this already, but what gross margin should we be thinking about for the fourth quarter? And then how do you think the gross margin ramps as you maybe get on a stronger footing with some of these manufacturing issues?

Yes. I think gross margin is going to be under pressure in Q4. Well, I think that the reason we took it down, if you do the implied adjustment to our fourth quarter EBITDA, going from 7% to 10% down to flat, you can see that Q4 will be at or near the significant pressure that we've seen in Q3. And so we might even have a couple of basis points of pressure. Additionally, in our Q4, we will expect to have higher SG&A just based on the seasonal nature of our national sales meeting and some other significant expenses in our fourth quarter that we typically incur. Therefore, if you were to take a little higher SG&A and infer what would have to happen in the fourth quarter to be flat from an EBITDA perspective, you will determine that there's little or no improvement in gross margin in our Q4. The turning point comes in the first half of next year as we get more of these things behind us in terms of throughput and reliance on outsourcing, plus some of these freight premiums we're paying today to expedite getting materials. I would like to remind everybody that, at the end of the day, we are in the business of satisfying customers and adhering to build schedules for municipalities. This commitment is our number one priority to ensure that we maintain our market share and that our customers choose us for newer water products. Although we’ve faced challenges in the third quarter, we expect these conditions will continue into the fourth quarter before beginning to improve.

Okay, great. Thank you, that helps.

Thank you. Our next question comes from John Ramirez with D.A. Davidson. Your line is open.

Good morning. This is John speaking for Brent Tillman. How are you?

Good, how are you?

So historically, MWA has had very different decisions and market share in your core products. How have some of the product challenges impacted that at all? Presumably, your competitors are facing the same issues, but I'm wondering if some share shift is still occurring as a result?

Yes. I don't think there's a lot of share shift going on, either us losing share or us gaining share. I think that there's a sprint, if you will, going on to ensure that the projects scheduled for work get executed. I would say on hybrids, our lead times are more favorable compared to our competitors. As for gate valves, we are ahead of our competitors in terms of lead times. The reality is that material costs are a small piece of the equation. I don't believe there's a major share shift happening. I think when you consider our relationships with municipalities and in our supply agreements, it's the same group of players. What we've observed is a market operating around 1,200 to 1,300 units a day of gate valves, which is significantly higher now, over 2,000 units a day today. I don’t think that competitors have adjusted their production capacities more than we have, so I feel positive about where we are from a share perspective.

Got it. And just a follow-up, if I could. Could you provide more color on how much the availability issue has worsened since the last quarter? And I'm sorry if you already mentioned, but what strategies are you employing to secure those raw materials going forward into next year?

That's a great question. Look, I think that we have seen some softening in raw material prices. But peculiarly, we've also encountered some availability challenges. So normally, if you can't get scrap or face upward pressure on the price, we've actually seen it come down. As I’ve explained in previous quarters, when availability or quality fluctuates, we lose efficiencies in yield. We have had to substitute higher-cost ingredients into our production process to maintain yields. These costs are definitely part of our near-term view for Q4 as we continue to ensure we can meet market demand from a finished goods perspective. Therefore, to answer your question on our future purchasing, we are ordering materials as much as allowed under existing agreements. Suppliers like Progress Rail and others are offering limited forward buying capability, about 21 to 30 days.

And just a quick follow-up. So you said 21 to 30 days in a normal environment where you don't have the availability issues, how much higher than that is what you're typically allowed to buy?

No. I think that I understand what you're asking. I believe you might be thinking about it incorrectly. What we have is one to two days of inventory on what we call our high-turn materials. There’s been a just-in-time mentality around the supply chain. Orders are placed based on the pounds required and we typically order those materials daily for shipment within that same day. Since we’ve now bumped up against backlog issues, our need to buy forward has increased. We are in an unusual situation, and that’s why we’re trying to align our forward buys with pounds in backlog to lock in margin. When we get back to a more normal situation, we would expect our supply chain to return to ordering today for what we sold yesterday. I want to clarify this specifically pertains to steel, not brass. Brass is a different animal where you typically buy 30 to 90 days in advance.

Thank you so much. I appreciate the additional information you provided. I'll hop back in the queue. Thank you.

Okay, there's no more questions. I'd like to thank you, operator. Thanks to everyone for joining today's call. While we're pleased with our net sales growth and price realization at this point in the year, we are disappointed with the lack of progress this quarter in addressing internal and external challenges, most importantly, the machine downtime issue we've discussed. I really want to say that we continue to be inspired by our team's dedication as they deal with an unprecedented external environment while also executing initiatives to transform our manufacturing capabilities and service our customers. We are well-positioned to improve margins in 2023 as we continue to drive pricing in the market, address operational challenges, execute our capital projects, and increase production volumes. We're seeing healthy orders along with a record backlog for our shorter-cycle products. Finally, we are excited about the tailwinds for the water infrastructure end markets and our ability to help municipalities address their accelerating challenges. So I'd like to thank you all for your continued interest. And with that, operator, please conclude the call.

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