Unidentified Analyst: Yes, that’s correct.
Martie Zakas: So I think, first of all, overall looking at capital expenditures, our guidance for the full year is $45 million to $50 million. We were certainly light in the first quarter. And I think as we shared in some of our opening comments, lighter in the first quarter, some of it is comparative relative to the brass boundary expenditures that we had last year. We also did experience probably some short return delays that related to the cyber security incident. That said, we are still looking for our guidance in the 45 to 50 range. We have talked about overall level of capital expenditures. It has been in a higher level in recent years and that is because of the three large capital projects that have been underway. As we said, we are closing to the finish line in terms of those expenditures with the last being our brass foundry.
Our expectations going forward are that capital expenditures will be less than 4% of net sales. So we do expect that we will continue to see the expenditure levels as a percent of our net sales to decline. That said, I will certainly remind you that we are by enlarge a vertically integrated manufacturing business. We do have three large foundries, because we are melting the iron for our hydrants, for our valves, our iron valve as well as for our service brass products. And so certainly we will always have a certain level of maintenance expenditures that we need to make as a result of the manufacturing processes and being vertically integrated.
Steve Heinrichs: And as it relates to the cash, we are obviously pleased with our strong first quarter operating cash flow, and it’s obviously significantly higher than the prior period. This improvement was really due mostly to improvements in working capital management, a smaller increase in inventories, higher receivables collections and an increase in payables. As you heard in our prepared remarks, just a reminder here that there was a benefit in the first quarter from payables as a result of delays caused by the cybersecurity incident, which affected some of our systems. And we expect those benefits to reverse in our second quarter as our payable systems processes have now normalized. So we are pleased with that, the strong cash performance and I look forward to continuing that going forward.
Operator: [Operator Instructions] Our next question comes from Walt Liptak with Seaport Research.
Walt Liptak: I wanted to ask a follow-up to Deane’s question about the outsourcing. And I want to make sure I heard this right. So the outsourcing, you’ve reduced sort of that parallel cost by, I think, you said 60% to 80%, is that right?
Martie Zakas: I said say probably, let’s say, around 50%, maybe 50% to 60%. But I think with we have — as we look to the margin improvement that we’ve seen, I think certainly one of the reasons for that and we talked about it I think last quarter talking about again this quarter, is as we have been able to reduce our outsourcing expenditures, which are contributing to the margin improvements.
Walt Liptak: And it sounds like some of the backlogs are down like 80%, so you’ve gotten through most of that pass through backlog. Do we see more of these outsourcing costs come out next quarter or do we wait until year end for that to wind down?
Martie Zakas: So first of all, I think of important question that you’ve — or comment that you’ve made in and around backlog. So with respect to our short cycle backlog or the products that have a short cycle backlog, it’s typically our iron gate valves, our fire hydrants and our service brass products. And when we look at our iron gate valves and we look at our fire hydrants, those two products, we would say when we look at lead times, we are really pretty much back to normal. And the elevated levels of backlog essentially are eliminated at this point. We still do have a higher than normal backlog level for our service brass products. We reduced that somewhat in the first quarter and we are working to continue to reduce those backlog levels to get to sort of the normalized short cycle backlogs as we work through the balance of our 2024.
And we did make a meaningful improvement in that in our first quarter as well. The corollary question that you’re asking in and around the outsourcing costs. I know in past calls we have commented that that has been one of the contributing factors to the higher cost levels that we have. And I think as we are improving the production levels at our new brass foundry, as well as with the less disruptions on the supply chain and importantly, the work of our supply chain team, we are continuing to see improvements with the outsourcing costs that we have had. We’ve seen some meaningful improvements there and I think we can continue to see more generally moving forward.
Walt Liptak: I just wanted to back up to the SG&A cost reduction that’s been going on for the last couple of quarters. Are we done with the actions taken and are we seeing full benefits now from the SG&A cost cuts?
Steve Heinrichs: During the third quarter of last year, as you know, we restructured our sales and marketing organization and streamlined other areas of our organization to bring our business teams close to our customers. We took additional actions to streamline our other G&A expenses, including corporate, which includes some of the support function roles. And we are tracking to achieve the $25 million in SG&A savings that we highlighted previously and achieved a big chunk of those in 2023. As a reminder, we do see inflation in SG&A going forward and it’s probably going to be in the range of around 5%. So when you start to compare prior periods, please realize that there is inflation in SG&A.
Walt Liptak: And then last one is just on the leadership transition. Is there anything that you can tell us, any timing as the search still going on or have things wrapped up?
Martie Zakas: So that we do not have any updates to share at this time. Our Board is focused both on the Board refreshment piece as well as the CEO search process. As they said, they have retained an executive search firm, they’re considering both internal and external candidates, but they have not announced a timeline for this process.
Operator: Our last question comes from Bryan Blair with Oppenheimer.
Bryan Blair: To drill down a little more on price cost trends, it’s been favorable for a bit, you’d momentum there. However you want to parse out the price cost impact from fiscal 1Q and what is directly contemplated in guidance as of now?
Martie Zakas: Yes, let me try to hit on your question. So let me talk on price first. And some of this, I think, goes back over the cycle that we had just lived through and I think have gotten on the other side. With the extraordinary levels of inflation that we experienced largely starting in ’22 and ’23, the supply chain disruptions all of that. I know that, we talked for a while and I’m going back a few years now, I think, to give you the context. But we were, for a while, upside down with respect to the price inflationary costs and we implemented certainly a series of price increases. And as we stated throughout that time period, the objective was to recover, if you will, sort of the inflationary cost, get on the other side of that and then ultimately, continue to have the pricing more than covering the inflationary cost that we are experiencing.
I think now we are in a more normalized inflationary and pricing environment. So we’re sort of — at this point we’re beyond what we experienced. We did announce that we just put in a price increase for our iron, specialty and gas products. From an inflation perspective, we are probably seeing the most inflation with respect to labor costs as we look at that as a factor going on. But with more stability in the inflationary environment, we think that we can have — as we look ahead at this point, we feel that the pricing that we are forecasting will more than cover what we could see with respect to inflation and importantly preserve margin.
Steve Heinrichs: And that is in our sales and EBITDA guidance and we do expect the improved manufacturing performance that’s been demonstrated and the pricing. These are the inflation that Martie just referred to offset lower lines that we’re also guiding to. So hopefully, that’s helpful.
Bryan Blair: As a follow-up, you’ve called out that over time [IJA] spending should be the catalyst for your business. And there are a few areas in which that’s identifiable, but likely fiscal ’25 and beyond, and that’s understood. There are some areas of spending front end kind of work where I suspect you are participating to some extent. What sticks out to me is Echologics with the pipe condition assessment work that you can do to help with LSL mapping and planning. Has that been a catalyst for Echologics to date or is that expected to ramp as that front end work intensifies?
Martie Zakas: I would say specifically with respect to Echologics, I can’t tell you that the — we haven’t seen the infrastructure build be a catalyst for Echologics. And as we said, we really don’t feel that from what we’re seeing, we don’t expect to see much impact from the infrastructure bill in 2024. And look, I think part of this is just appreciating that sometimes the devil is in the details on these items. And certainly, we are very positive on the bill long term. We love certainly the focus you see with the dollars that will be allocated to water infrastructure. But currently what is going through is just sort of the governmental process as you have to work through various government agencies, which not only include the EPA, they can include let’s say DOT, HUD and others, just to put specification around the provisions that have to be met for projects that then receive the funding.
