Mueller Water Products, Inc. (MWA) Q4 2026 Earnings Call Transcript

Operator: Good morning and thank you for standing by. Your lines are in a listen only mode until the question and answer session of today's conference. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Is now my pleasure to turn the call over to Whit Kincaid.

Whit Kincaid: Good morning, everyone. Thank you for joining Mueller Water Products fourth quarter and fiscal 2026 Conference Call. Yesterday afternoon, we issued our press release reporting results for the quarter and year ended 09/30/2026. The release is available on our website, muellerwaterproducts.com. Joining me this morning are Paul McAndrew, our President, Chief Executive Officer, and Mike Morgan, our Executive Vice President of Finance and future Chief Financial Officer. After our prepared remarks, we will take questions about the information covered on the call. Please limit yourself to 1 question and 1 follow-up and then return to the queue. Today's call is being recorded and webcast live on the Internet. The accompanying slides are available on our website and include our forward looking statements and non GAAP disclosures. Please turn to Slide 2, which identifies the non GAAP financial measures referenced in our press release, slides and remarks and explains why we believe these measures are useful to investors. Reconciliations of non GAAP measures to GAAP measures are included in the supplemental information in our press release and on our Web site. 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. Unless otherwise noted, all references to years and quarters on this call refer to our fiscal year, which ends September 30. A replay of this morning's call will be available for 30 days and at 819-5.74 thousand. 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 Paul.

Paul McAndrew: Thanks, Whit. Good morning, everyone. Thank you for joining our fourth quarter and fiscal 26 earnings call. 2026 was an excellent year for Mueller. We delivered record results and made meaningful progress strengthening the business. Full year net sales increased 3.2% to approximately $1.5 billion supported by enhanced commercial execution and resilient end market demand. Higher pricing was partially offset by lower volumes. Adjusted EBITDA grew 14.1% year over year to a record $372 million. Adjusted EBITDA margin expanded 240 basis points to 25.2%. Bringing our cumulative expansion over the past 3 years to 940 basis points. Adjusted net income per share reached a record $1.57 an increase of approximately 20%. Year over year. Free cash flow was strong in the fourth quarter, and for the full year, totaling $207 million for the year. This cash generation enabled us to return $74 million to shareholders through dividends and share repurchases. We recently announced a $300 million increase in our share repurchase authorization. And a 14.3% increase our quarterly dividend to $0.08 per share. These actions reflect our confidence in Mueller's strategy and our ability to continue investing in the business. 3 things drove our progress. First, operational improvements through greater productivity and disciplined cost management. Including SG&A productivity. Second, commercial execution through improved service levels, strategic pricing and strong growth in specialty valves. Third, a stronger organization built around leadership accountability. Together, these efforts have made Mueller a more profitable business and positioned us well for fiscal 2027. These results reflect the hard work and dedication of our employees across Mueller. I want to thank our teams for their commitment to our customers, and to making the company stronger. I am proud of what we have accomplished together. I also want to highlight an important announcement about our metering business. We have entered into an agreement to transition the business which operates through our Mueller Systems subsidiary. Zenner USA, who is part of the Minol-ZENNER Group. Following a comprehensive portfolio review, we believe that exiting this business will improve earnings quality simplify operations strengthen returns on invested capital, and allow us to direct resources towards areas with stronger growth potential. This transition is another decisive step in strengthening Mueller. Metering requires scale and technology investments that a more specialized company is better positioned to provide. Zenner is an established global metering company. With extensive industry experience, and compatible technology. We believe these capabilities will support a smooth transition for our customers. This decision reinforces our focus on building a stronger, more profitable Mueller through disciplined execution of our strategy. Supported by the Mueller operating system. As we expand margins, accelerate growth, and create long term shareholder value. We will begin the transition immediately. I work closely with our customers and suppliers to maintain service continuity and ongoing support. We expect most of the transition to occur in 2027. Although some activity and associated costs could extend beyond this year. The timing of customers' migration to the Zenner platform will be the main source of variability in the phased transition. In connection with the agreement, we expect to incur approximately $26 million of onetime expenses in fiscal 27. These primarily relate to the outstanding warranty liability operating and customer service costs, transaction related costs, and severance. The transition impacts will be adjusted as appropriate in our key financial metrics. The onetime and ongoing transition activities will be included in net sales cost of sales, and strategic reorganization and other charges. The majority of the expenses will be incurred during the first quarter with most of the remaining expenses incurred prior to the end of the year. Finally, the financial impacts and benefits will occur in the water management solutions segment. For 2026, we generated approximately $40 million in metering related sales, with a negative adjusted EBITDA margin. We expect the transaction to support adjusted EBITDA margin expansion with a 100 to 140 basis points annualized benefit. Primarily beginning in the second quarter of fiscal 27. At the midpoint of the range, this would be approximately $8 million favorable to EBITDA on an annualized basis. Taking the onetime expenses and annualized benefit into account, we believe the cash return on investment of completing this transition is very attractive relative to other opportunities. I would like to welcome Mike Morgan, who joined Mueller on October 28. Will become our chief financial officer on or about November 19. Following the filing of our annual report. He most recently served as chief financial officer of Integer and previously held senior finance roles at Labcorp and Timken. Mike is a proven industrial finance leader, with an extensive track record working with management teams and boards to improve performance and drive profitable growth. He will recap our fourth quarter and full year performance and I will provide more details on our annual guidance for 2027.

Michael Morgan: Thanks, Paul. Good morning, everyone. it is an exciting time to join Mueller. Over the coming months, I look forward to meeting many of you and working with Paul and the leadership team to strengthen execution support disciplined investment, and advance Mueller's strategy for profitable growth. Fourth quarter net sales decreased 1.1% versus prior year to $377 million with Water Management Solutions up 1.4% and water flow solutions down 3.0%. The year over year decrease in consolidated net sales was primarily driven by lower volumes, partially offset by higher pricing across most product lines. In the quarter, gross profit of $139 million decreased 0.5% year over year and gross margin expanded 20 basis points to 37.0%. We incurred $600 thousand of Decatur legacy brass foundry cost in the Water Flow Solutions segment Excluding these costs, our gross margin was 37.2% This was down 100 basis points compared with the prior year excluding the $5.6 million warranty charge at Water Management Solutions in the prior year. The decrease was primarily driven by lower volumes product mix, and inflationary pressures including the impact of higher Section 32 tariffs partially offset by higher pricing and manufacturing performance. For the full year, we achieved a record gross margin of 37.9%, an increase of 180 basis points compared with the prior year. Excluding the impact of tariff refunds, portfolio optimization costs and Decatur foundry closure costs, adjusted gross margin was 37.8% Gross margin expanded 100 basis points compared with the prior year excluding 1 time items in both periods. This increase was primarily driven by manufacturing performance and price cost. Total SG&A expenses for the quarter were $57.3 million, decreased $9.4 million year over year primarily due to lower incentive based compensation, favorable personnel related costs resulting from productivity actions and reduced foreign currency headwinds, partially offset by inflationary pressures. We incurred $8.9 million of strategic reorganization and other charges, which has been excluded from adjusted results. These costs primarily relate to closure of our legacy brass foundry in Decatur, Illinois and severance. Strategic reorganization and other charges and the brass foundry closure cost and gross profit have been excluded from adjusted results for the fourth quarter. For the quarter, adjusted EBITDA of $95.5 million increased 4.0% year over year. Adjusted EBITDA margin expanded 130 basis points versus prior year to 25.4%, setting a new fourth quarter record. Our strong margin performance was driven by higher pricing lower SG&A expenses and manufacturing performance partially offset by inflationary pressures lower volumes, product mix, and tariffs. For the full year, adjusted EBITDA increased 14.1% year over year to a record $372 million representing 25.2% of net sales. For the quarter, adjusted net income per share was $0.38 which was flat compared with prior year Our fourth quarter effective income tax rate was 28.0% compared with 23.4% in the prior year quarter. The fourth quarter income tax rate was within our expectations as our annual guidance for the full year effective tax rate was 21% to 23%. For the full year, the effective income tax rate was 22.7% as compared with 24.6% in the prior year. The lower effective tax rate for the full year was primarily due to a 1 time tax benefit resulting from the recognition of a loss on a foreign subsidiary investment. This benefit in the third quarter and equates to a 1-time cash tax benefit of $0.06 per share. Full year adjusted net income per share increased 19.8% year over year to a record $1.57 per share. As a reminder, full year earnings per share included a combined $0.09 benefit from tariff refunds and the 1 time tax item associated with the ITO business exit Turning now to segment performance, starting with Water Flow Solutions. Fourth quarter net sales decreased 3.0% year over year to $211 million primarily due to lower iron gate valve and service brass volumes. These declines were partially offset by higher pricing across most product lines and increased specialty valve volumes. Adjusted EBITDA increased 7.0% year over year to $67.1 million and adjusted EBITDA margin improved 300 basis points versus prior year to 31.8%. This improvement driven by manufacturing performance, higher pricing, and lower SG&A expenses which more than offset lower volumes, product mix inflationary pressures, and tariffs. For the full year, adjusted EBITDA margin expanded 34 basis points year over year to 33.0%, a record for the segment. Moving on to Water Management Solutions. Fourth quarter net sales increased 1.4% year over year to $166 million driven by higher pricing across most product lines and volume growth in repair and natural gas distribution products. These were partially offset by lower volumes of applications and hydrants. Adjusted EBITDA decreased 8.4% year over year to $41.2 million and adjusted EBITDA margin of 24.9% decreased 270 basis points. The decrease was due to lower volumes tariffs and inflationary pressures partially offset by higher pricing and lower SG&A expenses including reduced foreign currency headwinds. For the full year, adjusted EBITDA margin was 24.6% slightly below the prior year. Moving on to cash flow. For the year, cash flow increased $35.3 million to $207 million and was 84% of adjusted net income. Free cash flow exceeded our expectations primarily due to favorable working capital and lower capital expenditures. Net cash provided by operating activities for the year increased by $43.6 million year over year to $263 million primarily driven by higher net income and lower cash taxes partially offset by changes in working capital. We increased our capital expenditures by 17.5% year over year to $55.6 million or 3.8% of net sales, primarily driven by investments in our iron foundries. We ended the year with $566 million in cash and cash equivalents and $454 million in total debt. Our balance sheet remains exceptionally strong, providing significant flexibility organic investment and strategic growth opportunities. We have no debt maturities until June 2029 Our senior notes total $450 million at a favorable fixed interest rate of 4%, we had no borrowings under our ABL facility. Total year end liquidity was $731 million including $165 million available under the ABL facility. This positions us to reinvest in the business, return cash to shareholders and pursue acquisitions in existing and adjacent markets that create value. I will now turn it back to Paul to discuss the outlook for 2027.

Paul McAndrew: Thanks, Mike. I will now review our fiscal 27 outlook which excludes all metering related financial results. We expect consolidated net sales between $1.44 and $1.47 billion. Fiscal 26, the metering related sales were approximately $40 million Excluding the portfolio optimization headwind, our net sales would range between flat and approximately 2.5% higher year over year. For price realization, we are assuming a low single to mid single digit benefit for the year. This includes carryover pricing, and new price increases sometime in Q2. Which we have not yet announced. The year over year volume headwinds are mainly driven by the prior year Hydro backlog benefit at Water Management Solutions. Excluding this impact, we anticipate consolidated volumes will be flat at the midpoint. This includes double digit specialty valve growth, and benefits from commercial initiatives. These benefits will be offset by slower new residential construction activity, and cautious purchasing behavior from municipalities in terms of repair and replacement. We expect our adjusted EBITDA to range from $378 million to $388 million At the midpoint of our guidance range, adjusted EBITDA achieves a 26.3% margin for the year. Reflecting a 110-basis point year over year improvement. This would be a 150-basis point year over year expansion excluding the prior year tariff refund benefit. The expansion is driven by the metering and i2O portfolio optimization actions, higher pricing, manufacturing performance, and SG&A productivity. Partially offset by inflationary pressures lower volumes, and product mix. Similar to the prior year, we expect our second half net sales and adjusted EBITDA margin to be higher than the first half of the year. The first quarter lower than the second quarter. This is driven primarily by the seasonality of our business, where construction activity ramps up in the spring and the timing of the benefits from the portfolio optimization and operational improvements. For the Water Flow Solutions segment, we expect net sales growth in the low single to mid single digit range. Supported by higher pricing and volume growth from specialty valves. Partially offset by lower volumes of ion gate valves and service brass products. We anticipate adjusted EBITDA margin will be up slightly versus the prior year, excluding tariff refunds. Benefits from higher pricing and specialty valve volume growth will be partially offset by lower volumes of ion gate valves and service brass and inflationary pressures. For the Water Management Solutions segment, we net sales to decrease in the high single digit range. Reflecting lower sales associated with the metering portfolio optimization, and the prior year hydro backlog benefit. We expect strong adjusted EBITDA margin expansion even with the lower sales. Primarily driven by higher pricing lower SG&A related to the portfolio optimization benefits, manufacturing performance. Partially offset by lower volume of hydrants inflationary pressures and higher tariffs. We expect total SG&A expenses of $220 million to $233 million reflecting portfolio optimization benefits, including the metering business transition. We expect an effective tax rate of 24% to 26%. Reflecting a more normalized rate of the prior year onetime tax benefit. We expect free cash flow to exceed 80% of adjusted net income, including higher capital expenditures of 60 million to $70 million We will continue investing in growth operational efficiencies and domestic capacity with a focus on iron foundries. Before opening it up for Q&A, I want to provide a few closing comments. We delivered strong results in an uncertain operating environment. By focusing on customer service, disciplined execution, and investments in capabilities that support long term value creation. Our fiscal 27 priorities are straightforward. Protect the strength of our core business, improve operational returns, and invest in the best opportunities to create value. Our balance sheet gives us capacity to invest as we pursue above market sales growth and continued margin expansion. While we remain mindful of market uncertainty, we enter the year with a clear agenda and confidence in our ability to take another step forward in margin performance. The Mueller operating system supports these priorities with tools, processes, and management disciplines that strengthen execution accountability, and continuous improvement across the company. This quarter provides further evidence that the system is taking hold. I want to thank our employees worldwide for their extraordinary commitment to our customers and communities. They are the reason for our success and why Mueller has been a trusted partner for more than a century. That concludes our comments. Operator, please open the call up for questions.

Operator: Thank you, sir. Please unmute your phones and state your name when prompted. To withdraw your question, please press 2. Brian Lee with Goldman Sachs, your line is open.

Keshav Choudhary: Hey, guys. This is Keshav Choudhary on for Brian Lee. Thanks for taking my question. Firstly, your 2027 sales guidance implies some growth even excluding the meeting business. Can you maybe walk us through you are assuming for residential construction was it municipal repair and replacement? And specialty was within that outlook? Thank you.

Operator: 1 moment, please. Please continue to stand by while am experiencing technical difficulties. Please continue to standby. Please continue to standby we are experiencing technical difficulty. Please continue to standby. Brian Lee, you may go ahead and ask your question again from Goldman Sachs.

Keshav Choudhary: Yes. Hey, guys. it is Keshav Choudhary on for Brian Lee. Thanks for my question. So firstly, your 2027 sales guidance implies growth excluding the meeting business. Can you maybe walk us through what you are assuming for residential construction versus municipal repair and replacement and specialty valves within that outlook? Thank you.

Paul McAndrew: 1 moment, please. Sorry, so just following through, sorry about technical difficulties there. So our sales guidance excluding the metering portfolio optimization is 1.5%. We are expecting residential construction to continue to decline at low single digits on top of double digit decline in fiscal 2026. We anticipate municipality spending to be cautious as they have the inflationary pressures around their budgets. Where we are expecting to see double digit growth and where we have seen growth at that level over the last few years is around our specialty valve business. As we continue to move this company to a broader flow control platform.

Keshav Choudhary: And then just maybe on the price cost side of things, are you previously expected to remain price cost positive despite lower price realization? How are you thinking about pricing relative to inflation and maybe Section 32 tariff costs as you enter 2020 Yeah.

Michael Morgan: The company this is Mike Morgan, by the way. The company has strong brands and we continue to expect to be able to deliver price increases year over year. So from a price cost perspective, we would expect to be dollar positive. And in terms of margin, it is in the neutral range in terms of price cost.

Paul McAndrew: Thank you, guys. On our tariffs, Section 32 impacted our steel products from Israel. The IPR tariffs came to an end. But right now, we are we have all that priced in our assumptions.

Keshav Choudhary: Cool. Thank you, guys. that is helpful. I will pass it on.

Operator: Thank you. And once again, if you would like to ask a question. Our next caller is Jeffrey with RBC Capital Markets. Your line is open.

Jeffrey Reive: Thanks. Good morning, everyone. Just want to say congrats to Mike and it is nice to have you on the call.

Michael Morgan: Thank you very much. Appreciate it.

Jeffrey Reive: Yes. And just I want to follow-up on that pricing question. So slides indicate, I think, low single digit to mid single digit realization for next year, but this is including I guess, a new price increase that has not been announced. This is a change from the historical practice that you just not embed the price increase until you announced it. Just can you help us understand what gives you confidence to include that now on the ability to capture it?

Paul McAndrew: Yeah. Thanks, Jeffrey. I think twofold. Look, our price confidence is high based on the brands of our business and our commercial execution and operational execution with our customers. So we are. that is why you have given a range. I think previously, it was confusing to everyone. So we wanted to make it clear this is what is baked into our guidance right now. And in terms of that price increase, it would be in our. Later in our Q2 as per we do on a yearly basis. Got it. Okay. I appreciate that. I think it makes sense. And maybe just moving to the metering exit, can you just help us understand the economics of the agreement? Is it that Mueller's not receiving any consideration and you just have to basically take a $26 million charge and you hand over the customers, then is there any I guess, I do not know, incremental liability that can persist Yeah. First of all, Jeffrey, I want to kind of remind everyone on the metering business, you know, the sales have been declining at a 10% CAGR over the last 4-5 years with negative EBITDA margin. And it is really about how the team and I have looked at the portfolio and, you know, removing what is a subscale and competitively disadvantaged business from our portfolio. Allows us to really focus on where we believe we are transitioning this company to from a growth opportunities perspective. To answer your question directly, you know, the annualized benefit when you back in at the midpoint is $8 million of EBITDA improvement. And the 1 time charges are predominantly around a warranty, both software and hardware services to fulfill the customer requirements on an ongoing basis along with the transactional costs. As a reminder, we do have a manufacturing facility related to this business. So what we will be doing ongoing is transitioning customers to Zenner. We will continue to support them from a customer, warranty perspective ongoing, and the goal here is to work closely with a much larger water metering company who wants to make progress in North America and is backed by a global metering manufacturer and transition our customers across smoothly to a much better position for them. Okay, that all makes sense. And I can just sneak in 1 more. When you look across your portfolio today, are there other low margin products or technologies that you are evaluating for divestiture? Look, part of the Mueller operating system in that simplification is looking constantly at the portfolio and I take that down to a SKU level, not just a product portfolio. We believe we are positioned well now. We still believe the leak detection business is a key part of our technology going forward, how that integrates into our industrial products is critical. We know municipalities have a need to address nonrevenue water, and we believe that technology is a key part of how that fits in. Great. Thank you.

Operator: Thank you. Our next caller is Bryan Blair with Oppenheimer. Your line is open.

Brian Blair: Thank you. Good morning, everyone. Mike, welcome to the call.

Michael Morgan: Thank you.

Brian Blair: I am hoping we could level set on hydrant backlog normalization. Sorry if I missed this detail. But what was the impact in Q4 I assume that would start to phase in. And then what we have enough information to back into the segment and consolidated impact for fiscal 27 overall, but how should we think about the cadence throughout the year?

Paul McAndrew: Yes, Bryan, as we kind of think about the hydrant backlog, it was minimal in Q4, as an impact as we kind of caught up on our backlog and have seen that normalization with the channel. The overall impact for the year is around 2% from a sales perspective. As a headwind that will move into fiscal 2027 for comp comparison.

Brian Blair: Okay. Understood. Then bigger picture, guess, medium term follow-up. It looks like EBITDA margin looks to be 26.3% this year, so over 1 thousand basis points expansion since fiscal 2023. Now how should we think about runway from here? Are you willing to offer a medium term margin target then I guess at risk of leading the witness here, would that start with a 3?

Paul McAndrew: Yes, great question. And part of Mike coming on board now is to help us kind of put that narrative together from a longer term perspective. But really pleased with the organization, you know, Bryan, 940 basis points in 3 years and midpoint of our guidance will be 1.15 thousand in 4 years. So really transformed the company. You know, the next step now, I said, is to really take the specialty valve business, which plays in the plant work, both potable and wastewater, larger pipe distribution, water and flood control, along with importantly, the growing industrial segment where we are seeing a lot of traction in our investments. You know, relatively small number to start from, but definitely seeing a lot of high growth opportunities in our industrial applications.

Michael Morgan: And we believe, you know, we are a company that has deep expertise and engineering skills in flow control, and so we leverage that and change the company from that perspective. The only thing I would add to that is that the Mueller operating system is, you know, just taking hold. So there is room to run.

Brian Blair: Alright. Very encouraging. Thank you.

Operator: Thank you. We are showing no further questions. I will turn the call back over to you for closing comments.

Paul McAndrew: Thank you, operator. Thanks to everyone who joined our call today. We are excited about the progress we made in 2026, leading to continued margin improvement and strong cash generation. We enter fiscal 27 focused on strengthening our core business using the Mueller Operating System and portfolio optimization to simplify operations enhance execution and improve returns. We remain mindful of market uncertainty and we will stay focused on what we can control. Once again, I want to thank our dedicated team members for their commitment to our customers and communities. Look forward to speaking with you again with our first quarter results when they are announced in early February. And with that operator, please conclude the call.

Operator: Thank you, sir. This concludes today's conference. You may disconnect at this time and have a great rest of your day.