Earnings Call Transcript - MWA Q2 2020

Operator, Conference Operator

Welcome, and thank you for joining us. Today's call is being recorded. If you have any concerns, you may disconnect now. I will now introduce your conference host, Mr. Whit Kincaid. Please proceed, sir.

Whit Kincaid, Host

Good morning. I hope everyone is safe and healthy. Thank you for joining us on Mueller Water Products second-quarter 2020 conference call. We issued our press release reporting results of operations for the quarter ended March 31, 2020, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Scott Hall, our President and CEO; and Martie Zakas, our CFO, will be discussing the COVID-19 pandemic, our second quarter's results, and current market conditions. 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, as well as to address forward-looking statements and our non-GAAP disclosure requirements. 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 and 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 September 30. A replay of this morning's call will be available for 30 days at 1-800-835-8069. The archived webcast and corresponding slides will be available for at least 90 days in the Investor Relations section of our website. In addition, we will furnish a copy of our prepared remarks on Form 8-K later this morning. I'll now turn the call over to Scott.

Scott Hall, President and CEO

Thanks, Whit. Thank you for joining us today. I hope everyone in the audience is doing well and is staying safe and healthy during this challenging time. Before we discuss our second-quarter results for 2020, I will discuss the ongoing COVID-19 pandemic, which is affecting cities and countries around the world. Today's call is a little different given we have participants located in a number of locations. So I apologize in advance for any technical difficulties we may encounter. The COVID-19 pandemic has created significant challenges for our customers, communities, and employees. I am incredibly proud of how our employees have responded to the challenges. Our team members quickly stepped up to the challenge, and our COVID-19 response team meets daily to share information and make quick decisions. Our most important priorities are keeping our employees safe, protecting our communities, and providing support to our customers. We eliminated nonessential travel for all employees and executed remote work procedures for support staff. With a focus on employee safety and engagement, we enhanced procedures for disinfection, including reinforcing hand washing at all facilities, established processes for physical distancing, and increased frequency of communication to employees. We continue to operate as an essential business, providing products and services to customers, which are needed to manage and maintain our nation's critical water infrastructure. We implemented preparedness plans to keep teams safe while they work. These plans include operating our manufacturing plants and distribution centers with new physical distancing measures focused on safe distancing procedures and processes and usage of additional personal protective equipment. All of our facilities are operational and able to fill orders, and our teams have worked effectively to address the few temporary closures we have experienced. We continue to proactively monitor our supply chain and have not experienced any material supply chain issues since the temporary closure of our Jingmen facility, which is located near Wuhan in the Hubei province. Our commercial teams are focused on providing customer service, maintaining contact with our direct customers and working closely with our distributors. We have adjusted our approach to leverage digital channels and processes to fill orders as required for physical distancing. I am inspired by how our teams are looking for ways to support their communities. Our Albertville, Alabama product engineering team is producing 3D-printed face shields for frontline medical professionals caring for patients. The first round of face shields produced are in support of the Marshall Medical Center South in Boaz, Alabama. This contribution is important work that is providing much needed personal protective equipment for medical professionals who continue to risk their own lives to save others and battle the COVID-19 virus. I will now touch on our second-quarter performance. I was really pleased with our strong performance in the quarter as we generated consolidated net sales growth of 10.1%. The increase was driven by increased shipment volumes across most of our product lines and pricing. In addition, it was a significant sequential improvement versus the 3.1% organic net sales growth in the first quarter of this year. The higher volumes were driven by strength in our end markets, especially residential construction. In addition, we believe customers increased orders in anticipation of price increases announced during the quarter. We improved our gross margin in the quarter despite the startup costs associated with our large casting foundry expansion in Chattanooga and expenses associated with addressing the COVID-19 pandemic. Excluding the Krausz acquisition costs in the prior-year quarter, our gross margin increased by 50 basis points. This improvement led to a 15.9% increase in adjusted EBITDA and a 100-basis-point improvement in adjusted EBITDA margins. Our strong second-quarter results are a testament to the growth and performance we are delivering, as well as our team's ability to execute in an increasingly challenging environment. I will discuss current market conditions given the COVID-19 pandemic later in the call. Although we have delivered strong sales growth through the first half of the year, we expect a material slowdown in our end markets for the rest of our fiscal year, especially residential construction. However, our municipal customers are providing critical water, energy, and public works infrastructure services and continue to operate at reduced levels during this crisis. Due to the slowdown in orders we have seen in April, we are reviewing all aspects of our business and taking difficult but necessary steps, including adjusting our production capacity to preserve liquidity and cash flow during this challenging period. Before I turn the call over to Martie, who will provide more detail on our second quarter, I want to discuss why we believe that Mueller Water Products is in a much stronger position versus the last major recession. We have impressive longevity as we have been working with our customers for over a century to ensure that they have the vital products and services they need to deliver clean, safe drinking water. We have a strong balance sheet with ample liquidity and a net debt leverage ratio of 1.6 times at the end of the second quarter versus 3.5 times at the end of fiscal 2008. We are a more focused company after selling U.S. Pipe and Anvil, with a leading position in the water infrastructure market. Today, our end market exposure is more focused on municipal repair and replacement versus residential construction. Residential construction made up about 25% to 30% of our consolidated net sales in fiscal 2019, compared with approximately 50% in fiscal 2007. We estimate 60% to 65% of our core products are critical to utilities to maintain their networks. This gives us a strong base of business, with additional sales coming from residential construction and project-related work. As a result, we have solid cash flow generation, evidenced by consistently paying a quarterly dividend, even during the Great Recession. Finally, we have addressed legacy liabilities, including exiting multi-employer pension plans and settling the Walter tax liability with no future obligations. In summary, despite the near-term headwinds, I am confident in the long-term prospects for Mueller Water Products as a leader in water infrastructure products and services. With that, I'll turn the call over to Martie.

Martie Zakas, CFO

Thanks, Scott, and good morning, everyone. I hope you all are staying safe and healthy. I will begin with our second-quarter consolidated GAAP and non-GAAP financial results, then review our segment performance and finish with a discussion of our cash flow, balance sheet, and liquidity. We had strong second-quarter sales growth with our consolidated net sales increasing 10.1% or $23.7 million to $257.7 million. This increase was primarily driven by increased shipment volumes across most of our product lines at Infrastructure and higher pricing. Our gross profit this quarter increased 15% or $11.2 million to $86 million, with a gross margin of 33.4%. We improved gross margin by 140 basis points over the prior year. The improvement was primarily due to increased shipment volumes and higher pricing, which were partially offset by manufacturing performance and higher costs associated with tariffs. Additionally, the prior-year quarter included $2.2 million of costs associated with the Krausz acquisition. Excluding this impact, we generated a 50-basis-point improvement in gross margin. Cost of sales in our second quarter of 2020 included approximately $1 million of startup costs associated with our large casting foundry expansion in Chattanooga. Selling, general, and administrative expenses were $49.3 million in the quarter, a $3.6 million increase over the prior year. The increase was primarily due to personnel-related costs, IT-related activities, and professional fees, which were partially offset by lower T&E expenses as a result of travel restrictions and shelter-in-place orders. SG&A as a percent of net sales was 19.1% in the second quarter, compared to 19.5% in the prior year. Operating income increased 61.3% or $13.6 million to $35.8 million in the second quarter, compared to $22.2 million in the prior year. Operating income included strategic reorganization and other charges of $900,000 in the quarter, which are primarily related to prior restructuring activities and were $6.9 million in the second quarter of 2019. Turning now to our consolidated non-GAAP results. Adjusted operating income increased 17.3% or $5.4 million to $36.7 million in the quarter. The increase at Infrastructure was partially offset by a decrease in adjusted operating income at Technologies and higher corporate SG&A expenses. In addition, we estimate that expenses associated with addressing the COVID-19 pandemic impacted our consolidated adjusted operating income by approximately $800,000 during the second quarter. Adjusted EBITDA for the quarter increased 15.9% or $7.1 million to $51.8 million. Adjusted EBITDA margin improved 100 basis points to 20.1%. Consolidated adjusted EBITDA conversion margin was 30%. For the last 12 months, adjusted EBITDA was $211.5 million or 20.9% of net sales. Income tax expense was $6.8 million or 22.2% of income before tax, as compared with 26.4% in the prior-year quarter. The lower 2020 second-quarter effective tax rate is primarily due to increases in R&D tax credits and excess tax benefits from stock compensation. We anticipate that the effective tax rate will be between 23% and 25% in 2020. Our adjusted net income per share increased to $0.15 for the quarter, compared to $0.12 in the prior year. Turning now to segment performance, starting with Infrastructure. Infrastructure had a very strong quarter with net sales increasing 12.2% or $26.2 million to $240.3 million. This improvement was due to increased shipment volumes and higher pricing. The increased volumes were driven by many of our core product categories, including iron gate valves, hydrants, specialty valves, and repair products. Adjusted operating income for the quarter increased 17.1% or $7.4 million to $50.8 million. The improvement was primarily due to increased shipment volumes and higher pricing. These benefits were partially offset by higher SG&A expense, increased costs associated with tariffs, and manufacturing performance, which included approximately $1 million of startup costs associated with the large casting foundry expansion in Chattanooga. Adjusted EBITDA for the quarter increased 14.8% or $8.1 million to $62.9 million yielding an adjusted EBITDA margin of 26.2% and a conversion margin of 31% in the quarter. Moving on to Technologies. Technologies net sales decreased $2.5 million to $17.4 million in the quarter, driven by lower shipment volumes at Metrology, which were partially offset by higher volumes at Echologics. Adjusted operating loss was $4.7 million, as compared with a loss of $3.6 million in the prior year, primarily due to lower shipment volumes, partially offset by favorable manufacturing performance and higher pricing. Technologies adjusted EBITDA was a loss of $2.6 million in the quarter, as compared with a loss of $1.7 million in the prior year. Moving on to cash flow. Cash used in operating activities for the six-month period ended March 31, 2020, improved $26.1 million to $3 million, as compared with $29.1 million of cash used in the prior year. Cash flow used in operating activities includes the $22.2 million payment associated with the Walter tax settlement, which occurred in the first quarter of this year. The company invested $22.1 million in capital expenditures during the second quarter, bringing the year-to-date total to $37.3 million. Free cash flow for the year-to-date period improved to $19.3 million to negative $40.3 million. We have a strong balance sheet and liquidity. As a reminder, our debt includes $450 million, a five and a half percent senior unsecured note, and we also have an asset-based lending agreement with up to $175 million revolving facility. We did not have any amounts borrowed under our ABL at the quarter end. At March 31, 2020, we had total debt of $447.3 million and cash and cash equivalents of $111.3 million. At the end of the second quarter, our net debt leverage ratio was 1.6 times. We currently have no debt repayments prior to June 2026. Our five and a half percent notes have no financial maintenance covenants. In addition, our asset-based lending agreement is not subject to any financial maintenance covenants unless we exceed the minimum availability threshold. We had approximately $159 million of excess availability based on March 31, 2020 data, under that lending agreement. As a result, we believe that we are well-positioned to face the impacts of the COVID-19 pandemic. I'll turn the call back to Scott to talk more about market conditions.

Scott Hall, President and CEO

Thanks, Martie. I will provide some additional insights into market conditions and how we are adapting. After that, we'll open the call up for questions. We have withdrawn our annual guidance due to the uncertainty of the duration and magnitude of the COVID-19 pandemic, as well as the timing of the recovery. We do expect that COVID-19 will have material effects on all of our end markets in the near term. Our primary end market is the municipal repair and replacement segment, which accounts for approximately 60% to 65% of consolidated net sales. Although water utilities are essential service providers, the economic and operational effects of shelter-in-place orders and physical distancing practices are being felt by all to varying degrees. They have shifted their priorities leading to delays for some ongoing projects and postponement of new projects. As a result, we expect to see a significant near-term sales volume decline in the project-related areas of our business, which primarily affect our metering, leak detection, and specialty valve products. To be clear, we believe that the majority of our products for the municipal end markets are essential for water utilities to do their planned and unplanned repair and replacement work in this environment. Residential construction is the second largest end market for our core products and made up approximately 25% to 30% of consolidated net sales in 2019. Based on our organic sales growth through the first half of the year, increased housing starts and industry commentary, residential construction had strong momentum going into March of this year. However, given the economic impacts from COVID-19, we anticipate a sharp decrease in activity as new residential construction significantly slows down with builders focusing on their existing lot inventory. Our exposure to the residential construction market is much lower than it was prior to the Great Recession. Additionally, the opportunities for growth are much healthier as average housing starts are below the long-term average, and there are fewer developed lots in inventory. However, we believe this portion of our sales will feel the most near-term pressure driven by the sharp decrease in economic activity and high unemployment. The smallest end market for our brass and repair products is for downstream natural gas distribution, which represents less than 10% of consolidated net sales. Similar to water utilities, we expect this end market to slow down with delays in some ongoing projects and postponement of new projects, but to a lesser degree. We are well-positioned with many of our products being used for the mandated repair and replacement of gas distribution lines. We expect this end market to experience the least near-term pressure. In summary, we are assuming a material slowdown in our end markets for the second half of our fiscal year, especially residential construction. Based on our current outlook, we expect our third quarter to be the most challenging quarter of this year, with our April orders down approximately 25% versus the prior year. We anticipate that our consolidated net sales for the third quarter could be 20% to 30% lower than the prior-year quarter. After discussions with our channel partners, we expect them to meaningfully lower their inventories during the quarter. We believe that the federal government's direct and indirect efforts to support citizens and businesses will help our end markets begin to recover during the second half of the calendar year. However, the timing and magnitude of the recovery remain highly uncertain. Given our fixed cost structure, especially for our core products, the decrease in volumes will lead to a higher decline in adjusted EBITDA for the third quarter, resulting in elevated decremental margins. We are reviewing all aspects of our business and taking action as needed. This includes adjusting our production capacity to preserve liquidity and cash flow during this difficult period. In April, we began implementing temporary furloughs at some of our manufacturing plants as we adjust to market conditions and manage inventory. We have also implemented furloughs for most salaried employees, salary reductions for our senior leadership team, and reduced fees for our board of directors. In addition to eliminating all noncritical business expenses, we are evaluating further actions as the change in market demand evolves. We will look to find the right balance between maximizing our cash flow from operations and continuing to invest in the business in anticipation of the markets returning to a more normalized level. With this in mind, we are reducing our capital expenditures for the full year 2020 to between $70 million and $75 million versus our prior guidance range between $80 million and $90 million. Given the strength of our balance sheet and liquidity, we will continue to prioritize completing the remaining large capital projects we reviewed last quarter. These are the specialty valve manufacturing facility in Kimball, Tennessee and brass foundry in Decatur, Illinois. However, given the timing of the completion for the brass foundry, we are pushing out some of the spending associated with this project, which could impact the completion date, as well as the timing of the benefits. When it comes to our other strategic priorities, we will continue to focus on making appropriate investments to further incorporate technology into our infrastructure products while also modernizing our manufacturing facilities and operations. Given the liquidity position on our balance sheet, our capital allocation priorities will continue to focus on capital investments and returning cash to shareholders through our quarterly dividend. We recently approved our quarterly dividend, which is payable in May. We did allocate $5 million toward share repurchases in February prior to the pandemic. However, after further review, we are temporarily suspending our share repurchase program to provide additional flexibility. We are reviewing our M&A priorities and anticipate that discussions will continue, but do not expect to execute anything in the near term. We will continue to review our overall approach to capital allocation as we learn more about the length, severity, and recovery of the crisis. In conclusion, we are continuing to stay abreast of the events surrounding COVID-19, knowing that the situation is very fluid. As events unfold, we will take action as needed. Our most valuable assets are our employees and our customers, and their respective communities depend on us. During this critical time, we will continue to work to protect our workforce and ensure that our customers have the vital infrastructure and emergency repair products and services they require to continue delivering clean, safe drinking water. And with that, operator, please open the call for questions.

Operator, Conference Operator

The first question is coming from Deane Dray at RBC Capital Markets. Your line is open.

Deane Dray, Analyst

Thank you. Good morning, everyone. Can we start with the range that you're giving for the second quarter? And look, I completely understand and appreciate how fluid this is, how there's lots of uncertainty. But the bias here is, at least from the muni side, you've got a pretty good line of sight on the maintenance. So why would there be such a wide range, 20% to 30%? What would take you to the low end? What would take you to the high end, if we could start there?

Scott Hall, President and CEO

Thank you for the question. The primary uncertainty lies in what the inventory reductions among our channel partners will look like. They have indicated plans to protect their liquidity by eliminating hundreds of millions in inventory. This is a crucial factor to consider. Regarding our 10% growth in the first half, I want to clarify that we don't believe the markets have actually grown by that percentage. Following our Q4 last year, significant inventory was removed from the channel, and we've started to see some of it come back in the first two quarters of this fiscal year. Our partners, particularly in the residential sector like Core & Main and Ferguson, have been optimistic and increasing their stock levels. We have also implemented two price increases for brass and iron, which contributed to the growth in our Q2 due to channel inventories. I want to emphasize that we do not anticipate the market will decline by 20% to 30%. Instead, we expect a near-term decrease of about 0% to 10%, alongside the channel adjusting its inventory to leaner levels. Most of our partners will be very cautious in managing their liquidity.

Deane Dray, Analyst

Scott, I'm really glad you mentioned that last point about the market size and the market dynamic being 0% to 10% because that makes a lot of sense. Do you have any insight into how much the pull forward affected the results in the fiscal second quarter?

Scott Hall, President and CEO

It's difficult for me to provide a specific number, but I would estimate that if you consider everyone else's reports, it seems to be roughly a 50-50 situation. About half of it appears to be driven by growth and market strength, with a slight weakness in March after January and February. The other half seems to involve inventory buildup due to the announced price increases, as the channel capitalizes on the lower costs from the earlier months. However, this is not based on any scientific analysis. I would place my estimate in that approximate 50-50 range.

Deane Dray, Analyst

Great. That's helpful. Can you provide an estimate of the potential decrementals by considering the extremes, like 20% and 30%, and what those decrementals might look like in the second quarter? Also, how do you anticipate managing decrementals for the rest of the year?

Scott Hall, President and CEO

That's a great question, and it’s something we've given considerable thought. I think our decremental margins will be at their worst in the third quarter. The reason is that the leadership team and I spent several days in virtual meetings discussing the recovery outlook. I want to make sure our investors understand that we've analyzed two scenarios. The first is a traditional recession recovery with gradual quarter-on-quarter growth, and the second resembles a V-shaped recovery. At this point, we see both scenarios as equally likely for the near term, which we can define as our fourth quarter. We aren't sure how significant the jump in the economy will be when it rebounds, but it certainly won't be as severe as it was in April. To put it simply, we've decided to remain cautious. We have not laid off any of our hourly employees and have reached agreements with all the unions, giving us maximum flexibility in the third quarter. This ensures that if there is a surge, we have our operators ready without any learning curve, appropriate inventory levels, and the right mix of skills on the floor. We have made some reductions in fixed costs through furloughs and pay cuts for leadership and the board, but overall, we've maintained flexibility to emerge from this situation as strong as we were going in. In terms of decremental margins, they will likely be high. Given that our fixed costs account for about 20% to 25% of our cost of goods sold, and with a reduction of 20% to 30% in volume along with some inventory decrease, we could see decrementals reaching the 40s or 50s percent range. It’s our responsibility as managers to mitigate this through SG&A and plant actions, and we plan to do that. We didn’t provide guidance because we want to take into account all possible outcomes. However, we do anticipate that this will be our most challenging quarter in terms of decremental margins. I want to reassure everyone that this isn't due to delays in layoffs or cost-cutting measures; we’re operating in a low-interest environment. The country might quickly overcome this downturn, possibly facing 6% to 8% unemployment again, which wouldn’t be bad considering we’ve seen numbers closer to 20%. If we return to 6% quickly, I believe we’ll be well-positioned to grow again.

Deane Dray, Analyst

Appreciate all the color. Best of luck to everyone. Thank you.

Operator, Conference Operator

The next question is coming from Brian Lee of Goldman Sachs. Your line is open.

Brian Lee, Analyst

Hey, Scott. Good morning, everyone. I hope everyone is doing well. Thanks for taking the questions. Maybe just a follow-up on Deane's. I know you're not giving specific guidance, Scott, and you're reserving a little bit of dry powder here. But to the extent that this isn't a six-week V-shape type of recovery, and you do have to manage a little bit through the cost structure. If Q3 is the worst quarter from a decremental perspective, you're saying kind of 40s, 50s range. Where do you think you can manage that down to if you had to sort of start to drive some more structural changes in the cost structure, let's say, moving through the year, if that happened to be the case?

Scott Hall, President and CEO

That's a challenging question. You have both fixed costs and step fixed costs involved. I'm hesitant to delve too deep into specifics, but you can expect that the decrements will likely be around the 40% range, even under the most favorable circumstances. This is due to the nature of our 20% to 25% fixed costs. We have significant depreciation as we are a vertically integrated manufacturer, which sets us apart from many of our peers in the water sector. Consequently, our depreciation and fixed utility expenses are more challenging to reduce. However, I want to reassure everyone that we are experienced in handling downturns; we've navigated similar situations in the past, such as during the '80s, '90s, the dot-com bubble, and the 2008 crisis. Our approach includes minimizing indirect labor in material handling, encouraging operators to manage their own materials, and evaluating efficiency and staffing levels. While we are a high gross margin, high EBITDA business, it's important to note that managing decrements becomes more complex when operating at a 21% EBITDA margin.

Brian Lee, Analyst

I appreciate the information. Regarding fiscal Q3, you indicated that this will be the most challenging quarter as we navigate through the crisis, and I value your insights on inventory trends, which seem to align more closely with your perspective than the broader market outlook. However, since you are not providing a full-year forecast, you're suggesting that Q3 will be the low point for you. Is there anything apart from the inventory data that you are considering to support this assessment? Could you elaborate a bit?

Scott Hall, President and CEO

Sure. I believe the most significant action we've taken in the past 45 days is monitoring the order intake at the channel level rather than just focusing on what is coming through. The sell-through we assess at the channel offers a clearer picture of market conditions. Some companies are showing flat performance year over year during the first 35 to 40 days of the quarter, while others are experiencing declines between 0% and 10%, varying by region based on activity levels. There is considerable uncertainty regarding how the remainder of the quarter will unfold. However, we are confident that April will represent the lowest point, impacted by inventory adjustments and diminished economic activity due to widespread state closures throughout that month. The northeastern governors have essentially confined that entire region for 45 days. It's important to note that we are currently at the low point in April. As states begin to reopen, even partially, we anticipate improvements in channel sell-through, and from there, we expect growth. While I can’t specify precise percentages like 25%, 22%, or 27% regarding inventory, I am certain that underlying demand for municipal products will remain stable, and we will not see housing starts drop to zero. Therefore, it's unlikely that we'll lose 35% of our business. To directly address your question, the demand outlook remains unclear, but based on our observations, we believe we've provided a fairly reasonable range.

Operator, Conference Operator

The next question is coming from Ryan Connors, Boenning and Scattergood. Your line is open.

Ryan Connors, Analyst

Great. Thanks for taking my question. Hope everybody is well. So I don't want to beat the dead horse, but I appreciate the distinctions you draw, Scott, between the business and the portfolio now versus the last cycle. Certainly valid. But just to play sort of devil's advocate. I mean, one of the lessons of the last recession was that there was this correlation between housing and the municipal infrastructure spending, which is, of course, because tax receipts are a big part of those local government revenues. So we actually saw pretty big decline in municipal, albeit on a two- or three-year delay. And so those two markets actually ended up behaving similarly, but housing was kind of a leading indicator on where muni was headed. And then you see things like AWWA surveying their membership a couple of weeks ago and saying 68% of U.S. water utilities as of a couple of weeks ago were planning budget reductions heading into budget discussions. Most of them are on a June fiscal year. I mean, we just don't want to see people making the same mistake twice and making the same call that was made in '08, which is muni will be resilient when, in fact, we've seen that wasn't the case in the past. So what is it that gives you the confidence to call the bottom with all those things in mind?

Scott Hall, President and CEO

I believe that's a valid observation. During a recent virtual meeting with our senior leadership, we discussed this extensively. In summary, the two main distinctions between 2008 and now for municipal finance are that the previous crisis was fundamentally about liquidity. The ability to borrow diminished, impacting not just homeowners but the entire banking system, making it challenging for municipalities to raise funds. Consequently, the focus on taking on debt for projects in question has led to municipalities currently receiving favorable financing for upgrades. Additionally, we are now eleven years into the deterioration of our infrastructure. While I can’t share specific details, it's worth noting that even in March and April, the need for repair products significantly increased due to reaching a critical point where the financing required for emergency repairs will continue to rise. Lastly, I believe that this time, as discussions about stimulus begin, lessons learned from the past—specifically from the 2010 ARRA period—will ensure that any new stimulus will allow for water upgrades, unlike the previous situation where municipalities hesitated to initiate projects while waiting for clarity on funding.

Martie Zakas, CFO

In essence, they had to understand some of the provisions of the ARRA, which put many water projects on hold as they needed to clarify what Buy America meant. This led to delays in spending because they had to determine if any small component of the project wouldn't qualify. Therefore, the timing of the spending was affected more by the details of the ARRA rather than the availability of funds.

Scott Hall, President and CEO

Right. And the way they made the money available, too, I think, if you recall, Ryan, it will likely change this time as well.

Ryan Connors, Analyst

Got it. My other one has to do with technology, which, I guess, we've discussed a little bit less here on the call. But just it seems like there's a bit of a Catch-22 there where you've got to keep up on innovation and R&D if you want to stay relevant in terms of your product line. But then again, obviously, the business was already unprofitable even before COVID. So without some pretty sharp cost reductions, it could become a pretty big drag on earnings. So how do you manage the balance between having to do some things, but yet making sure that you're keeping up with the Joneses? Because obviously, some of the larger players will just keep plowing money into R&D.

Scott Hall, President and CEO

I believe this is crucial. During economic downturns, it’s important to envision our purpose and understand why customers choose us, what we offer, and what we are recognized for. Our tagline reflects where intelligence intersects with infrastructure, highlighting our products like smart hydrants, smart valves, informatics, diagnostics, and the Sentryx platform. These elements are essential for our long-term success as we navigate digital changes in the water sector, similar to the transformations seen in electricity and gas industries in the past. It becomes evident that we must prioritize communication and the software, particularly in software-as-a-service, at our core. We also need to advance sensing and transducer technologies related to pressure, temperature, and turbidity. It’s important for our team to acknowledge that, regardless of technology, a meter must be cost-effective whether it has smart features or communication capabilities. We are experiencing fluctuations in our business. Although sales in the Metrology sector were low, our bookings were strong due to wins like Newport News. However, without achieving scale in meters, this variability will persist. Meters provide insights into communication technologies and serve as critical data points for our analytics. Therefore, we need to remain engaged in this area. I accept the feedback regarding our need for improved profitability and management, but I recognize that to reach our goals in five years, I need to maintain visibility into the market.

Ryan Connors, Analyst

Got it. Well, listen, I really appreciate the thorough response. Thanks for your time.

Operator, Conference Operator

The next question is coming from Andrew Buscaglia of Berenberg. Your line is open.

Andrew Buscaglia, Analyst

Hey, guys. If you take that technology comment one step further and just talk about kind of in this environment. I know a lot of people were piloting your Echologics products. But can you talk about what the conversations are like there? And then is Echologics positioned beneficially to be kind of a bigger cost savings, more differentiated leak detection product out of this downturn? Would that be attractive to these people piloting?

Scott Hall, President and CEO

Thank you for the question. Yes, to answer directly, it's not just us. There's a general sense that during this downturn, those companies that are technology-enabled and tech-savvy had better control over their networks during the stay-at-home and social distancing measures. Recently, Bluefield suggested that the pandemic will actually support the adoption of technologies like acoustic leak detection, electronics, remote monitoring, and the digitization of water infrastructure. I believe that is true as well. So, to answer your question succinctly, yes, we do see and believe in this trend, and the conversations have been generally positive. If you can envision using your backhoe to fix a leak accurately the first time rather than digging multiple holes, the value for our users is quite clear.

Andrew Buscaglia, Analyst

And you had all these kind of long-term plans to retrofit and build new facilities. Where do you stand with that based on what's going on in this downturn now? I know you cut your capex a bit, but if you could provide some color, how you're thinking about that?

Scott Hall, President and CEO

Sure, thank you for the question. I wanted to address our discussions with employees in Hammond, Indiana, where we have announced the closure of the plant. We are moving forward with our plans in Kimball, Tennessee, continuing our capital program and consolidating capabilities there. This will allow us to manufacture large hydro gates alongside the big valves currently produced in Hammond. Our project timeline and budget are on track. We have decided to delay spending in Decatur. Approximately half of the funding for Decatur was allocated to improvements in mixing and other capabilities, which would increase our overall capacity and enable us to access more markets. While we have maintained our plans, we have postponed them and extended the timeline for Decatur's go-live by delaying some equipment purchases. This is a calculated risk; although we have to wait a bit longer, we also know that if the market pulls back, lead times can change. We need to monitor the situation closely, as we may still have options to adjust the timeline if necessary. Overall, we are looking at delaying the Decatur Brass foundry plans by about a year, shifting some expenditures from this year to next year and beyond.

Operator, Conference Operator

The next question is coming from Joe Giordano of Cowen. Your line is open.

Joe Giordano, Analyst

Good morning. I want to discuss the Technologies a bit more. I appreciate your comments regarding the importance of communications and software. However, looking back at the business over the past six years, it has been unprofitable with a top-line run rate between $80 million and $100 million. Given the current environment, I expect that run rate to trend toward the lower end, especially as projects become more challenging. While I understand your focus on achieving profitability, I am curious about how that will be accomplished. Much of what has transpired in recent years occurred during relatively strong municipal markets, so with an upcoming more challenging market, what gives you the confidence that achieving sustained profitability at a lower run rate is feasible for this business? How viable is it moving forward?

Scott Hall, President and CEO

I believe the focus on an $80 million segment within a $1 billion business is getting more attention than it deserves. Consider that the $4 million loss we incurred last year was mainly due to development costs. Are we going to stop advancing software and equipment for Echologics or halt the development of Hydro-Guard, sampling stations, transducers, and Sentryx? If you think we should, then you could argue that the $3 million or the $4 million loss isn't worth it, and you might want out while seeking profitability. However, if you examine the business from a broader perspective and acknowledge the digital disruption occurring in the water sector, it's essential to view the entire operation holistically. When doing so, you'll notice we possess a 20% EBITDA business. The question is, how do we safeguard our share of that profit pool five years from now? The answer lies in preventing that profit pool from being diminished by new entrants providing data and analysis. Historically, in industries affected by digital disruption, profits have shifted from equipment manufacturers to information and insights providers. Our business is highly profitable, with a strong brand, and our investment in technologies is aimed at ensuring that our 20% EBITDA remains sustainable into the future. I don't see this investment as isolated; it’s akin to services like OnStar or Audi connect, which enhance a vehicle's value beyond mere transportation. I acknowledge the criticism regarding the need for meters to generate profits on their own, and I agree we must achieve scale and better operational performance, as indicated by our recent improved results in the meter business. However, we cannot abandon the digitization of valves, hydrants, and brass products. While you and I may differ on our views, I'm not worried about the $4 million negative EBITDA for the quarter because I truly believe our team is making significant strides with Sentryx, Echologics, and our various developments. I am confident that this area will be the source of our new product innovations.

Joe Giordano, Analyst

Has there been a discussion internally about, like, I don't know, if this is all one segment and then that's just considered like R&D for the core business rather than a stand-alone segment that loses money, might be easier to digest for people?

Martie Zakas, CFO

Look, appreciate your question. It was a few years back that we made the determination to break Technologies out into a separate segment. As much as anything, it was a desire to provide more transparency through for investors. There are certainly a lot of considerations when you go through and you determine what the segments are. But that was really a lot of the thinking behind it, in terms of why we broke it out. But certainly, it's something that I would say in terms of segments, that's something that we do continue to look at going forward, but appreciate that any changes require a lot to get there. But that was the reason that we did it several years back.

Scott Hall, President and CEO

One of the commitments made by our board of directors is to engage in open and transparent discussions about issues. When I joined the company, I made it clear that regardless of people's views on the business, whether focused on technology or infrastructure, we would address everything candidly. One downside of this approach is the significant investment flowing into technology without a corresponding rise in infrastructure sales. If you disagree with my perspective, that's understandable. However, if you believe that the water infrastructure sector is heading towards digital transformation, you would see our investments as wise. Before we conclude, there are a few more points I'd like to address that haven't been mentioned. I'm confident that our long-term positioning remains strong. The large casting foundry in Chattanooga aligns well with the renewed focus on buying American products. Our vertical integration and the plans for nearby facilities, such as the one in Kimball, are on track. Our capability to quickly adopt and integrate digital technology into our essential products for delivering clean and safe drinking water keeps us at the forefront of discussions with major utilities. We recognize that changes in remote work and shelter-in-place orders will affect their business models and that there will be increased emphasis on water quality. This flexibility positions us strongly for the future, and we have a solid technology roadmap. I believe we will see an uptick once the country begins to reopen, especially as unemployment rates stabilizes. As states lift restrictions and restaurants open, we anticipate some recovery, although its effects on residential construction and municipal aspects remain to be seen. We prioritize maximum flexibility in the near term and understand the implications for our Q3 results, but our focus is on long-term growth. I feel good about our current position and the adaptability we possess. I'm optimistic that this period will be a temporary setback and that it may not be as severe as initially perceived. As we navigate through these healthcare challenges and return to a more normal state, Mueller will be well-prepared for the future. Operator, please end the call.

Operator, Conference Operator

This will conclude today’s conference. All parties may disconnect this time.