Mueller Water Products (NYSE:MWA) released second-quarter financial results and hosted an earnings call on Wednesday. Read the complete transcript below.

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Summary

Mueller Water Products reported strong financial performance with a 5.5% growth in net sales, setting new quarterly records for net sales, adjusted EBITDA, and adjusted net income per share.

The company expanded its adjusted EBITDA margin by 210 basis points year-over-year, driven by operational efficiencies and cost management despite higher tariffs and inflationary pressures.

Mueller Water Products raised its fiscal 2026 outlook for adjusted EBITDA, anticipating resilient municipal repair and replacement activity and growth in project work to offset slower residential construction.

A strategic focus on commercial and operational initiatives, including the new Mueller Operating System, aims to enhance customer experience, simplify business operations, and drive innovation and market expansion.

The company continues to maintain a strong balance sheet and is actively pursuing strategic acquisitions to expand its portfolio, with no debt maturities until June 2029.

Full Transcript

OPERATOR

It's McAndrew, our president and Chief Executive Officer, and Melissa Rasmussen, our Chief Financial Officer. Following our prepared remarks, we will address questions related to the information covered on the call. As a reminder, please keep to one question and a follow up and then return to the queue. This morning's call is being recorded and webcast live on the Internet. We have also posted slides on our website to accompany today's discussion. They also address forward looking statements and our non GAAP disclosure requirements. At this time, please Refer to slide 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 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 30th September. A replay of this morning's call will be available for 30 days at 1-800-839-1334. The archived webcast and corresponding slides will be available for at least 90 days on the Investor Relations section of our website. I'll now turn the call over to

Paul

Paul Thanks, Whit Good morning everyone. Thank you for joining our second quarter earnings call. I am pleased with our strong performance this quarter as we set new quarterly records for net sales, adjusted EBITDA and adjusted net income per share. We delivered net sales growth of 5.5% in the quarter, demonstrating the strength of our brands and resilient end market demand. We also expanded our adjusted EBITDA margin 210 basis points in year-over-year. Our operations and supply chain teams performed well driving year-over-year gross margin expansion. With an ongoing commitment to operational excellence and cost management, manufacturing efficiencies more than offset the impact of higher tariffs and inflationary pressures driving year-over-year gross margin expansion. Based on our outstanding performance through the first half of the year and our current expectations for the remainder of the year, we are raising our fiscal 2026 outlook for adjusted EBITDA. We continue to anticipate that healthy municipal repair and replacement activity and strong growth in project related work using specialty valves will help offset slower new residential construction activity. We believe we are positioned for another record year driven by adjusted EBITDA margin expansion and supported by our strategic priorities, including our ongoing commercial and operational initiatives and strategic capital investments. While we are experiencing greater uncertainty in the external operating environment, including changes in demand, tariffs and inflationary pressures, we are focused on driving results and investing in the capabilities and and capacity needed to support long term value creation. I'd like to take a moment to explain the ways we are updating our approach to our strategic priorities. Throughout our long history, Mueller has played a critical and essential role as a leader in the water infrastructure in North America. We have strong brands and a broad portfolio of products and solutions. Our vision is to be the leader in water infrastructure solutions. Our value creation priorities are driving above market sales growth, continuing margin expansion and executing disciplined capital allocation. We are fueled by our dedicated team and strong culture. We expect our ongoing investments in commercial and operational capabilities to enable us to drive above market sales growth and further expand margins. Additionally, we will continue to take a disciplined approach to capital allocation, balancing organic investments such as our strategic capital expenditures, pursuing targeted acquisitions and returning cash to shareholders. We have improved operational execution, strengthened stakeholder relationships and delivered outstanding results, all while navigating a challenging external environment. I believe our performance so far this year and over the last few years is just the beginning. Now I'd like to introduce what we are calling our Mueller Operating System which is a formalized system of tools and processes that will drive discipline, execution and excellence throughout the organization at Mueller. This starts with an engaged employee base which is the upper left of the diagram. Our team members are the heart and soul of Mueller and critical to our future success. We have made significant progress with our safety first mindset resulting in record safety levels. Our next priority centers on enhancing our customer experience which is supported by our commercial and operational investments. These efforts are dedicated to achieving first class quality and delivery, fostering seamless engagement and establishing ourselves as a trusted partner. For example, we are investing in our digital customer facing tools to enhance the customer experience and accelerate quoting and inventory management. Next, we aim to expand margins by simplifying our business to reduce complexity, drive business process excellence and deliver strategic priced cost management. As part of this effort, we recently made the difficult decision to exit the i2O pressure monitoring business outside of North America. This impacts business operations and employees in the United Kingdom, Malaysia and Colombia as well as customers outside the US And Canada. Pressure management remains a strategic priority for us as the demand for pressure monitoring continues to grow in North America where it's increasingly specified alongside hydrants and valves. We plan to use and further develop the pressure technology originally acquired from ITUO to strengthen our competitive position. We expect the cost savings and tax benefits to more than offset the revenue loss and support margin expansion and enhance free cash flow beyond 2026. Lastly, to accelerate our growth, we will drive market leading, innovation focused market expansion and disciplined strategic acquisitions. We have streamlined our new product R and D to focus on the most impactful near term and long term opportunities. We remain excited about expanding our specialty valve, commercial and operational capabilities to deliver highly engineered valves for large projects. While we have benefited from improving our commercial and operational execution, we are confident that we can build on our momentum to accelerate net sales growth and expand margins further through our new operating system. We look forward to sharing examples of successes along the way. With that, I'll turn it over to Melissa to take us through the financials.

Melissa

Thanks Paul and good morning everyone. We are pleased to report another quarter of strong performance. Consolidated net sales increased 5.5% to a new record of 384.4 million million dollars, driven primarily by higher pricing across most product lines along with modest volume growth. Gross profit increased 12.9% to $144.5 million with gross margin expanding 250 basis points to 37.6%. The improvement was driven primarily by favorable pricing, improved manufacturing efficiencies and higher volumes. Manufacturing efficiencies reflected the anticipated benefits associated with the transition to our new brass foundry, including the absence of approximately $800,000 of inventory and other asset write downs associated with the closure of our legacy brass foundry in the prior year. These benefits were partially offset by higher tariffs and ongoing inflationary cost pressures. Total SG&A expenses for the quarter of $59.7 million increased $4 million year-over-year, primarily reflecting unfavorable foreign currency impacts and continued inflationary pressures. During the quarter we incurred $4.4 million of strategic reorganization and other charges primarily related to expenses associated with our leadership transition related expenses and severance. These items have been excluded from adjusted results. Adjusted EBITDA reached a record of $97.2 million, an increase of 15% compared to the prior year quarter. Adjusted EBITDA margin expanded 210 basis points year-over-year to 25.3%, also a new quarterly record. This strong performance was primarily driven by higher pricing, continued manufacturing efficiencies and increased volumes, partially offset by higher tariffs, inflationary pressures and higher SG&A expenses. On a trailing 12 month basis, adjusted EBITDA was $348 million or 23.7% of net sales representing a 140 basis point improvement versus the prior 12 month period. Adjusted net income per diluted share increased 17.6% year-over-year to $0.40, setting another quarterly record. During the quarter. We benefited from lower net interest expense which declined $700,000 driven by higher interest income. Our second quarter effective income tax rate was 25% compared with 24.2% in the prior year quarter. Turning now to segment performance starting with WSS, net sales increased 1% to $218.3 million reflecting higher pricing across most product lines and increased volumes in specialty valves partially offset by lower service brass volumes. Adjusted EBITDA grew 16.4% to $72.4 million driven by manufacturing efficiencies and higher pricing which more than offset increased tariffs, inflationary pressures and lower brass volumes. Adjusted EBITDA margin expanded 440 basis points points to 33.2% compared with 28.8% in the prior year period, representing a new record. Moving to WMS, net sales increased 12.2% to $166.1 million driven by higher pricing across most product lines and volume growth of hydrants and repair products. These benefits were partially offset by lower volumes in applications and natural gas distribution products. Adjusted EBITDA in the quarter increased 11.5% to $40.6 million. The increase reflects benefits from higher pricing and volume growth which more than offset increased tariffs, manufacturing inefficiencies, higher SG&A expenses, including unfavorable foreign currency impacts and inflationary pressures. Adjusted EBITDA margin contracted 20 basis points to 24.4%. Turning to free cash flow for the six month period, free cash flow decreased $30.8 million to $16.5 million and was 15% of adjusted net income. The decrease was driven by lower net cash provided by operating activities and higher capital expenditures. Net cash provided by operating activities for the first six months decreased $20 million compared with the prior year. The decline was primarily driven by changes in working capital and other assets and liabilities, partially offset by higher net income and non cash adjustments. Higher working capital was largely driven by increased inventory levels reflecting higher tariffs, inflationary pressures and strategic investments. We invested $31.9 million in capital expenditures during the first six months of the year compared with $21.1 million in the prior year period, reflecting continued investments in our iron foundries. We ended the quarter with $452 million of total debt and $421 million of cash and cash equivalents. Our balance sheet remains strong and flexible with no debt maturities until June 2029 and $450 million of senior notes at a 4% fixed interest rate. We had no borrowings under our ABL and ended the quarter with $585 million of total liquidity, including $164 million of availability under the ABL. As a result, we continue to maintain ample liquidity, capacity and financial flexibility to support our strategic priorities, including pursuing acquisitions. Turning now to our outlook for fiscal 2026, we are reiterating full year guidance for consolidated net sales growth to be between 2.8 and 4.2% year-over-year, reflecting our current expectations for end market demand volumes and price realization. Based on our performance through the first half of the year, we are raising our annual adjusted ebitda guidance by $5 million at the midpoint to a new range of 360 to $365 million. This range reflects our first half performance and updated expectations for volumes, price realization, inflationary pressures and tariffs, as well as ongoing manufacturing efficiencies. At the midpoint. Our updated guidance range represents an adjusted EBITDA margin of more than 24.5%, an improvement of 170 basis points year-over-year. We are maintaining our expectations for total SG&A expenses within this updated guidance. With increased uncertainty in the external operating environment, including the anticipated slowdown in new residential construction activity, we are working closely with customers and suppliers to adapt as needed to changes in demand, tariffs and inflationary pressures. We are reaffirming our capital expenditure outlook of 60 to 65 million dollars. We now expect our free cash flow to exceed 70% of adjusted net income for the full year, reflecting higher levels of working capital. With that, I'll turn it back to Paul for closing comments.

Paul

Thanks Melissa. I want to provide a few closing comments before opening it up for Q and A. Overall, I'm excited about our team's outstanding performance this quarter. Also, I am pleased to be raising our annual guidance at this point in the year. We remain vigilant as our end markets evolve. In this increasingly uncertain external operating environment, we expect the municipal repair and replacement market to remain resilient. We are closely watching the anticipated slowdown in new residential construction activity. We continue to be focused on what we can control, executing our ongoing investments in our commercial and operational capabilities. Our teams are prepared to take action to help offset changes in end market demand if needed. With our focused strategic priorities and investments in our capabilities, we believe we can continue to drive results and deliver long term value creation. I want to thank all our employees worldwide for their extraordinary commitment and passion in supporting our customers and communities. They are the reason for our success and why Mueller has been a trusted partner for over a century. That concludes our comments. Operator, please open the lineup for questions.

OPERATOR

Thank you. We will now begin the question and answer session. If you would like to ask a question, please unmute your phone, press Star one and record your name clearly. To withdraw your question, you may press Star two. Again, just press Star one to ask a question and One moment please for our first question. Looks like our first question comes from Jeff Reif with RBC Capital Markets. Your line is open. You may ask your question.

Jeff Reif (Equity Analyst)

Good morning. Appreciate all the details thus far. Can you start by talking about sell in versus sell out trends, in the quarter across your segments and how would you characterize inventory levels in the channel today?

Paul

Good morning Jeff, this is Paul. In terms of how we look at channel inventory, you know, the foresight we have in the channel inventory, we believe it's at normalized levels. Of course, I think our channel partners are managing the uncertainty in the external environment the same as everybody else at this point. In terms of your other question, in terms of sell through, you know we had if it's about a backlog reduction then in the quarter we had a kind of normalized backlog change from a seasonality perspective in our Q2 where we see a rise in backlog around our price increase which goes out in February, a little bit of pull ahead from an order perspective and our specialty valve business still continues to be the large portion of our backlog.

Jeff Reif (Equity Analyst)

Got it. And maybe just as a follow up on just WMS sales that came a bit better than expected this quarter. Yet you're reiterating the full year outlook. Does that imply a more moderated growth cadence of the year? Was there any P forward there? Just anything there?

Melissa

Hi Jess, with WMS, yes we did have double digit growth in the quarter and that was primarily driven by higher pricing and volume gains which were primarily in the hydrant and repair product lines. Hydrant shipments are benefiting from an elevated backlog that we started the year with this year. Despite the lower volumes associated with a slowdown in residential construction activity, we do expect to see growth in the remainder of the year. However,, the first half of the year has been a stronger growth and we expect WMS to normalize as the year progresses.

Paul

Jeff, just to add on to that, obviously the prior year we had a service brass backlog reduction and that's been flipped now with the hydrant. It's why the normalized backlog changes. It's just a flip between segments.

Jeff Reif (Equity Analyst)

Got it makes sense. Appreciate it. Thanks.

OPERATOR

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

Brian Lee (Equity Analyst)

Hey, good morning everyone. Thanks for taking the questions. Maybe first on the the updated outlook for the year. It sounds like you've seen good pricing realization, so kudos on the nice results here. But the revenue guidance is intact. Can you kind of speak to how much you're expecting from price versus volume? And is some of the price actions you saw come to fruition in the first part of the year? Is that expected to persist through the rest of the year? Is volume maybe a little bit lighter? Wondering why there might not be a little bit more upside to the revenue outlook given the strong pricing capture you saw earlier in the year?

Paul

Yeah. Good morning, Brian. You know, we went up with our annual price increase in February low single digit. You know, as a reminder, we had a tariff related price increase really taken effect in Q3 and Q4 of last year. So we'll start to lap that tariff related price as we move into the second half of the year.

Melissa

And Brian, we saw price realization through the second quarter in the mid single digit range, which was slightly higher than the first quarter. And that was because we did see a slight benefit from our February price actions due to the execution of our commercial team.

Brian Lee (Equity Analyst)

And then just, you know, the slowdown in resi activity. I know you guys have kind of been calling this out for a little bit of time, so the tone is consistent. But can you quantify, you know, kind of the impact is it may be becoming more of a headwind than you were assuming and presumably the impact is already embedded in the balance of your fiscal 20. But you know, thinking ahead to 27, you know, how much of a continued headwind or just any thoughts on how this evolves over the next year or so for your business?

Paul

Yeah, we believe the external environments continue to evolve. You know, we use public home builders data points, land development. We still believe resi is down high single to low double digit range. But on the external market and the outlook beyond that, we know there's still pent up demand for resi construction. It's really trying to manage the uncertainty right now. And that's why I talked about in my prepared remarks that we will pivot as an organization and manage this closely.

Brian Lee (Equity Analyst)

Last one for me and I'll pass it on. Obviously the balance sheet's in a pretty good spot here. Ma, in the capital allocation strategy. Can you kind of give us a sense of how up the priority chain that is, how active you Are there maybe what kind of pipeline you're looking at or opportunities are most interesting right now. Thank you, guys.

Paul

Yeah, great point. Our balance sheet is really strong and we've definitely increased our activity about how we look for acquisitions to expand our portfolio. We want to find key criteria then where we can expect sales and profitability, cost synergies. The challenge here is unlocking some of those acquisitions. But we are far more active in trying to tap into what would be a good acquisition for us as an organization.

OPERATOR

Thank you again. If you have a question, just press Star one at this time. And one moment please. Our next question comes from Walt Libtak with Seaport Research. Your line is open. You may ask your question.

Walt Libtak

Hi. Thanks. Good morning, guys.

Paul

Morning, Walt.

Walt Libtak

I wanted to ask a free cash flow question you called out. Some of the working capital accounts and accounts receivable were up a little bit. I wonder if you could just provide us with a little bit more detail on the free cash flow. Did you, I can't remember, but did you guys take the free cash flow guidance down or were you always at that 70% of net income for the year?

Melissa

Good morning, Walt. Yes. So a couple of things related to free cash flow. The second quarter is typically our lower quarter for cash generation and that's primarily due to receivables. The first quarter is our lowest revenue generating quarter typically. So we have a lower collections in the second quarter related to those receivables from the first quarter. Now that said, we also during the second quarter are ramping our inventory levels in anticipation for our seasonal ramp for the construction season. With this specific second quarter, we did have lower than expectations in free cash flow, and that was primarily due to higher levels of working capital as a result of increased inventory. The increased inventory balance does reflect higher tariffs. It also reflects inflationary pressures and some strategic inventory builds. We talked about growth in sales related to our specialty valve product lines. We expect to see some double digit growth in that product line this year. That product line particularly has a long backlog and lead time. So that will stay in inventory for a bit longer. And so we did decrease our expectation of free cash flow as a percentage of net income this period to 70% as a result of the inventory balances as well as increased capital expenditures for the year.

Walt Libtak

Okay, and what was it before? Was it 85% now down to 70?

Melissa

Yes, it was 85% previously.

Walt Libtak

Okay, got it. Thank you. And then, you know, just a follow up on the residential questions. Can you help us remember, like when, you know, if the residential sector you know, does still look pretty slow and kind of uncertain. Are there any things that you guys can do around those businesses, either with some of your overhead costs or strategically to try and pick up some market share?

Paul

You know, Walt, there's a lot of crossover in our products between the Resi plus, the Mooney market and how we distinguish those. You know, from a strategic perspective, our specialty valve business is definitely less residential construction exposed. And that's where we continue our investments. And we've continued our investments in terms of operationally consolidating those plants from an engineering skill set perspective in terms of developing those products. And we believe there's a lot more growth opportunity that we start into, tap into from an industrial water perspective.

Walt Libtak

Okay. All right, thank you.

OPERATOR

Thank you. And at this time, I'll turn the call over to Paul for closing remarks.

Paul

Thank you, operator. Thanks to everyone who joined us on the call today. Overall, we're excited about the record quarter and our team's ability to execute our increased annual guidance for adjusted EBITDA reflects the confidence we have in our commercial and operational capabilities. We remain vigilant in an increasingly uncertain external operating environment as it relates to demand, tariffs and inflationary pressures. While we expect the muni repair and replacement market to remain resilient, we remain closely watching the anticipated slow in residential construction activity. We'll stay focused on what we can control and take action if needed. I want to once again thank our dedicated team members who have been and always will be the driving force behind our success. Thank you all and we look forward to speaking with you again with our third quarter results when they're announced in early August, and with that. Operator, please conclude the call.

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