Welcome, and thank you for standing by. Today's call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn today's meeting over to your host, Mr. Whit Kincaid. Thank you. You may begin.

Good morning, everyone. Thank you for joining us on Mueller Water Products' second quarter conference call. Yesterday afternoon, we issued our press release reporting results of operations for the quarter ended March 31, 2024. We also issued a press release providing an update on our leadership team and Board refreshment. Copies of the press releases are available on our website, muellerwaterproducts.com. I'm joined this morning by Marietta Zakas, our Chief Executive Officer; and Steve Heinrichs, our Chief Financial Officer and Chief Legal 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.

Thanks, Whit. Good morning, everyone. Thank you for joining our earnings call. It is an honor to continue in the role as CEO, and I thank the Board for placing its trust in me to lead Mueller at this critical juncture. Mueller plays an essential role in helping our customers deliver clean and safe drinking water to hundreds of millions of people. I get to work with the best team in the industry, and we will continue to build on the power of our industry-leading brands and deep channel and end-customer relationships. I look forward to working with Paul and the rest of the team as we continue to execute on our strategy to drive shareholder returns. I'll now start with a brief overview of our second quarter performance. We had a fantastic second quarter, reflecting the progress our teams have made executing our operational and commercial initiatives to deliver long-term sustainable growth. We achieved record quarterly net sales with a strong sequential increase in volumes, supported by our continued enhancements in customer experience. We improved gross margin by 750 basis points to 36.9%, supported by continued manufacturing and supply chain efficiencies, leading to our highest quarterly gross margin in more than seven years. With a record quarter for net sales and a strong gross margin, along with SG&A leverage, we delivered over 70% adjusted EBITDA growth compared to the prior year. We also achieved record quarterly adjusted net income per diluted share of $0.30, which increased more than 100% compared to the prior year quarter. Turning to sustainability. I am pleased to report that in the second quarter, MSCI upgraded Mueller to its highest ESG rating of AAA. This rating is a great accomplishment and a testament not only to the critical products and solutions we provide for our municipal customers and their communities, but also the hard work and dedication of our team members, suppliers, and customers. We look forward to sharing our continued progress in the next annual ESG report, which will be published later this year. We are increasing our annual guidance for net sales and adjusted EBITDA. These increases reflect our strong first half performance and order activity across most product lines as well as our belief that overall end market demand is healthy. Municipal repair and replacement activity remains very resilient, and the new residential construction end market is improving relative to a challenging 2023. We are targeting a record gross margin for 2024. The significant expected increase primarily reflects benefits from the actions we have taken over the past year to drive efficiencies in our operations. At the midpoint of our updated annual guidance range for net sales and adjusted EBITDA growth, the adjusted EBITDA margin is a 420 basis points expansion, reflecting our expected improved operational performance. Our teams have worked diligently on improving lead times while controlling costs and driving manufacturing material and freight efficiencies. Our execution allowed us to leverage the increased volumes in the second quarter leading to an improvement in gross margin. This strong conversion included outstanding performance at both our iron gate valve and hydrant manufacturing facilities. We also expect to have an additional tailwind in the near future from the completion of our new brass foundry project and closure of our old brass foundry by the end of calendar 2024. Our commercial teams continue to do a great job working with our customers. We were pleased to see the strong sequential increase in order activity this quarter across most product lines, which was primarily driven by favorable end market demand. We believe some of this order strength was due to the timing of our price increases and positive sentiment moving into the construction season. We believe that net sales growth in the quarter versus the prior year would have been close to flat without the pull forward. With normalized lead times, we expect this pull forward to impact our third quarter sales, which is reflected in our updated annual guidance. Our team continues to do an admirable job dealing with the impacts of the Israel Hamas war on our repair products business while also working to satisfy customer demand. As expected, during the second quarter, we experienced higher costs associated with labor, materials, and freight. Our accomplishments this quarter and through the first half of the year are a testament to the progress we've made with our transformation, especially considering the external headwinds our teams have faced. I am confident in our ability to continue our momentum as we look to leverage our leading market positions and investments to deliver more consistent execution and drive future sales and margin growth.

Thanks, Marietta, and good morning. For the quarter, our consolidated net sales were $353.4 million, an increase of 6.2% compared with the prior year. Net sales primarily increased due to higher pricing across most product lines with higher volumes at Water Flow Solutions, partially offset by lower volumes at Water Management Solutions. As we've previously mentioned, we believe the lead times and backlogs for iron gate valves and hydrants have normalized. Based on order activity during the quarter, we also believe that valve and hydrant end market demand was healthy in this period. The differences in year-over-year volumes between iron gate valves and hydrants are primarily related to the timing of backlog normalization and channel and customer destocking. In the prior year quarter, hydrant shipments benefited from serving an elevated backlog. In the second quarter, gross profit of $130.4 million increased 33.3% compared with the prior year. Gross margin of 36.9% increased 750 basis points compared with the prior year and reflects our highest quarterly gross margin in over seven years. The increase was driven by improved manufacturing performance and higher pricing. Our continued improvements in manufacturing performance were primarily driven by improved productivity, including labor, material, and freight efficiencies. This improvement also includes benefits from lower brass outsourcing costs. Higher pricing more than offset inflationary pressures, which mainly related to labor inflation. Total materials costs were slightly higher, primarily due to inflation related to purchase parts, which was partially offset by lower raw material costs relative to the prior year. For the quarter, total SG&A expenses of $63.7 million were $500,000 lower than the prior year. Lower personnel-related costs, third-party fees, and engineering expenses were partially offset by higher incentive costs and inflationary pressures. Operating income of $63.5 million increased 93% in the quarter compared with the prior year. Operating income included strategic reorganization and other charges of $3.2 million in the quarter, which have been excluded from adjusted results. These are primarily related to the leadership transition, severance, and certain transaction-related expenses. Turning now to our consolidated non-GAAP results for the quarter. Adjusted operating income of $66.7 million increased 98.5% compared with the prior year, primarily due to favorable manufacturing performance and higher pricing, which more than offset inflationary pressures. Our adjusted operating margin improved 880 basis points to 18.9% compared with the prior year. This is the highest quarterly gross margin since the third quarter of 2019. Adjusted EBITDA of $82.2 million increased 70.9% in the quarter. Our adjusted EBITDA margin improved 890 basis points to 23.3%. Similar to adjusted operating income margin, this is also the highest quarterly margin since the third quarter of 2019. For the last 12 months, adjusted EBITDA was $236.8 million, or 19.1% of net sales, a 470 basis point improvement compared with the prior 12-month period. Adjusted net income per diluted share more than doubled in the second quarter, increasing 114.3% to $0.30 per share, which is a quarterly record. Turning now to quarterly segment performance. I'm pleased to start with Water Flow Solutions, where our operations and business teams led the segment to an outstanding quarter. Net sales of $205.8 million increased 30.9% compared with the prior year, primarily due to higher volumes of iron gate valves and service brass products as well as higher pricing across most product lines. With normalized lead times, strong net sales growth for iron gate valves benefited from a sequential increase in orders, as well as lapping low orders and shipments in the prior year quarter, primarily due to channel and customer inventory destocking. Net sales growth for Service brass products benefited from improved manufacturing efficiencies and serving an elevated backlog, which we continue to lower. Adjusted operating income of $52.6 million increased 246.1% in the quarter. The benefits from increased volumes, favorable manufacturing performance, and higher pricing more than offset increased costs associated with inflation and higher SG&A expenses. Adjusted EBITDA of $62.4 million increased 171.3%, and our adjusted EBITDA margin also improved significantly to 30.3%. This is the highest quarterly adjusted EBITDA margin the Water Flow Solutions segment has ever achieved. Turning to quarterly results for Water Management Solutions. Net sales of $147.6 million decreased 16% compared with the prior year. This was primarily due to lower volumes across most product lines, partially offset by higher pricing across most product lines. Net sales for hydrants were down double digits compared with the prior year quarter. Although our lead times are now normalized and we saw a sequential increase in orders, the prior year quarter's sales benefited from very strong hydrant shipments as we served an elevated backlog. Adjusted operating income of $29 million decreased 9.1% in the quarter. The benefits from higher pricing, improved manufacturing performance and lower SG&A expenses were more than offset by lower volumes. Adjusted EBITDA of $35.7 million decreased 9.8%. However, adjusted EBITDA margin improved 170 basis points to 24.2% despite the decrease in net sales. Moving on to cash flow. Net cash provided by operating activities for the year-to-date period was $62.2 million, an increase of $84.4 million compared with the prior year. The increase was primarily a result of higher net income and improvements in working capital compared with the prior year, which includes a smaller increase in inventories. During the quarter, we invested $10.1 million in capital expenditures and invested $15.8 million through the first six months. While spending through the first half of the year is $4.7 million lower than the prior year period, we do expect spending to be higher in the second half of the year. Our free cash flow for the year-to-date period increased $89.1 million to $46.4 million compared with the prior year, driven by higher cash from operations and lower capital spending. Free cash flow as a percentage of adjusted net income was at 70.1% for the first half of the year. During the second quarter, we repurchased $10 million in common stock, and as of March 31, we had $80 million remaining under our share repurchase authorization. At the end of the second quarter, our total debt outstanding was $448.7 million; we had cash and cash equivalents of $179.2 million. Our balance sheet remains strong, with our net debt leverage ratio at 1.1x at quarter end, no debt maturities until June 2029, and our $450 million senior notes at a 4% fixed interest rate. We did not have any borrowings on our ABL agreement at quarter end, nor did we borrow any amounts under our ABL during the quarter. In March, we amended our ABL, which extended the maturity date to March 2029 and lowered our applicable margins.

Thanks, Steve. I want to highlight a few key items before opening it up for Q&A. I'm excited about what we've accomplished so far this year, especially given the uncertainties in the external environment. I am thankful for our talented and committed employees who are doing incredible work focusing on serving our customers and driving manufacturing material and freight efficiencies while also executing our large capital projects. There is still work ahead of us, and we are primarily focused on executing initiatives in four key strategic areas. We will continue to drive operational improvements to deliver the benefits from our capital investments. We are making changes to accelerate sales growth and capture the benefits from favorable long-term end market growth trends through product innovation and service. We are also increasing collaboration and teamwork throughout the organization to create a culture of talent development, enabling us to execute on our targets and make Mueller a preferred place to work. We are well positioned to execute on our strategies to improve margins and increase free cash flow to support future investments. I am confident in our strong foundation of talented and committed employees, industry-leading brands and deep distribution channels and direct customer relationships.

At this time, we'll begin our question-and-answer session. Our first question comes from Brian Lee with Goldman Sachs.

Kudos on the impressive execution here. Maybe a big picture question for you, Martie. You've had quite a tenure at Mueller, you've seen a lot of change at the company over the years, and you're not necessarily new to the CEO role as it becomes your full-time responsibility, though. How are you thinking about kind of the strategic priorities? I know you touched upon a few here at the end of the call, but what's kind of changed here as you're taking on the role? Obviously, the company is in a different spot. But as you think about your strategic priorities in that role, can you kind of speak to what you think you can change or enact change going forward? And then one thing I think, in particular, I'd be curious to hear your take on, as you mentioned, sales growth and product innovation. Can you elaborate a bit more on kind of where you see Mueller headed and where the best opportunities might be when it comes to that particular piece of the stool?

Thank you for the question. One of the key points I'd like to make is that we have been actively leading change, both now and over the past eight months. As we look ahead, we remain focused on our mission as a water-centric company. We have a long-standing history in this business, and I believe that now is an optimal time to fully utilize our range of products. The demand for improved water infrastructure is growing, especially in areas facing water shortages, which will require a focus on providing affordable water solutions. Over the years, we've expanded our product offerings. We are a comprehensive service provider, especially with products like valves, hydrants, and brass products. The focus on the infrastructure bill, particularly funds for lead service line replacement, makes our brass products even more relevant, especially with our new brass foundry and the Eco Brass, which offers sustainability benefits. Additionally, we've revitalized our commitment to enhancing the customer experience. We are working to improve our delivery times and strengthen our relationships with customers to enrich their experience with our diverse range of products and services. In terms of technology, we are concentrating on leak detection, pipe condition assessment, and pressure management, providing municipalities with better insights into their systems. This approach will enable us to integrate our infrastructure products more intelligently. Finally, concerning our capital structure, the flexibility we possess positions us well to expand or deepen our product portfolio. We will continue to seek the right opportunities at the right valuations to foster both organic and inorganic growth.

That's all super helpful.

I also want to touch on the operations aspect because with some of the recent internal realignments, we have made further investments in our operational capabilities. Importantly, we have a clear vision for how we can enhance our operational performance, enabling our margins to grow over time.

Yes. Maybe that's a good segue into just the second question I had, a little bit more mundane and less big picture, and then I'll pass it on. When you think about this kind of seven-year high in gross margins, you mentioned specifically price and manufacturing improvements. How sustainable do you kind of see those two pillars? It seems like you still have some outsourcing benefits that are still to come and then price sounds like it's something that's moving into your wheelhouse in terms of something you can leverage. But can you kind of speak to sort of the impacts on gross margin this quarter between the two buckets and then how you think about them going forward as having sustainability?

Absolutely. So around price, I think when you look over certainly a longer-term period, we have generally benefited from price over the longer term. Our objective, as we said, is always for price to cover any of the inflationary costs we are experiencing. Not to delve too much into the history, but I think with the level of inflation that we had, coupled with some challenges with COVID and demand levels, that it was a challenging period. But I think we've gotten back into, you've seen this quarter, we're probably sort of mid-single digits in and around pricing. I think we told you last quarter that we had implemented a price increase across most of our product lines in February. As we called out in our script, we do think our ability to manufacture and ship product with shorter lead times caused a little bit of a pull forward of some of the shipments into our second quarter. So I think pricing, I would say we would expect to continue to benefit in covering inflationary costs and preserving margin as we go forward. With respect to gross margin, we will continue to challenge ourselves to improve our operational efficiencies where we can. We did see some of that benefit during the quarter. I also called out some of the lower outsourcing costs that we had. I think we will be at a point where we are pretty much anniversary that as we're moving into the second half of our year, but I think that was a benefit where we look to improve our overall cost structure. But I would say we do continue to see opportunities to improve our material, labor, and freight efficiencies, and certainly volume leverage can also help us as we move forward as well.

Our next question comes from Joe Giordano with TD Cowen.

So I wanted to just ask on like if you look back over the last year, there's just been huge volatility in the guides, both directions. I mean, we're happy to see it in the positive direction this time, but both directions have been huge up and down moves. And then also like the actual performance relative to the guide, there's been huge volatility. So you've had quite extenuating circumstances over the last year with what's going on internally and the inventory situation at channel partners. But like can you kind of talk through the internal modeling process and how you feel the comfort level you have about the ability to forecast the businesses from here?

Certainly. So I'd say, look, overall, one of the areas that we're certainly going to try to do is to give you the explanations for why we have the guide that we have as well as to provide you insights into what our performance was and why it was what it was. Look, as we take a look at our outlook for 2024, I think importantly, as we move from our first quarter, and I'll remind you, we did see our net sales down about 18% in the first quarter. The explanation we provided then is we were still experiencing in our 2023 servicing a very elevated level of short-cycle backlog, which was a situation I will say we had not experienced at the company. I think as we look at where we are today, most of the destocking that we felt had been done largely with distributors was behind us. Our short-cycle backlog is back to a normalized level. On a year-over-year basis, hydrants were still elevated in our prior year, and that's why you're seeing some of the differential in the net sales performance between our Water Flow Solutions segment and our Water Management Solutions segment. But I think as we move through the year, it was pretty much towards the end of the third quarter into the fourth quarter of '23 by the time we got that hydrant backlog down. But I think as we look at where we are today, a lot of those disruptions from supply chain, COVID, and fast inflation have caused some challenges that we had. But I'd say destocking is largely behind us. The service brass backlog is still higher than what we would call normalized but we are continuing to reduce that short-cycle backlog. I would say, our delivery times are back to normal with the respect to our iron gate valves and hydrants. We have continued to reduce the delivery times across most of our service brass products. Therefore, I think the guidance we just provided for 2024 reflects what we have seen in the order patterns as they have progressed through the first six months of our year. I hope that answers your question, Joe.

To follow up on the earlier question about the portfolio, we are bringing in new Board members and undergoing a refresh. I'm curious as you consider the future of the company, should we expect any departures or changes in direction? You mentioned connecting infrastructure with your technology products, which we've discussed before. It seems that progress on this has been slower than anticipated. Now that you are in a permanent role, do you foresee any significant shifts or how should we view this situation?

So look, I think with respect to the leadership changes that were just announced, we've got nothing else planned at this time. I think importantly, as I referenced, the team, we have made some changes over the last eight months. We had an internal realignment. And with that alignment, our focus was looking to invest further in our customer experience and our customer relationships. Additionally, we have enhanced our overall operational expertise and investment there. I think we have emphasized more collaboration across the company with a real emphasis on performance and accountability. I think a lot of that is what we have been working on internally across the company, realizing some of those benefits as we look at the performance that we had this quarter.

Our next question comes from Bryan Blair with Oppenheimer.

Thank you. Good morning, everyone. Excellent quarter. I guess, somewhat of a follow-up to Joe's question in terms of guidance visibility, maybe we can level set a little bit more on back half expectations. I appreciate the color on Q2 pull forward. Can you give some finer points on how that influences your team's Q3 and Q4 expectations, both top line and EBITDA margin progression?

Yes. So as we look at the guidance that we just gave for the second half of the year, overall, first half of our year, we saw net sales down, and we are looking for net sales growth with the guidance that we just gave in the second half of the year. Importantly, we expect to experience higher costs in our Krausz repair products. We've got higher costs largely with labor, materials, and freight. These were noted in our second quarter and we anticipate that we will continue to have those higher costs in the second six months of the year. With respect to inflation, it impacted, in the first half of the year, probably more from labor inflation. But as we look out into the second half of the year, we think we could see more inflationary pressures in and around some of the material costs, which could also be reflected in purchase parts. Additionally, from an SG&A perspective, we've increased our SG&A guidance a bit for the second half of the year. Some of this guidance results from differences in our incentive accruals, inflation, personnel investments, as well as additional cybersecurity protection investments.

Okay. Understood. Your updated full year guide implies around 20% margin. So that achieves, assuming execution continues, the fiscal '25 outlook that your team had in place for a while, and you walked through a lot of good guides in terms of margin outlook and an opportunity that still lies ahead for your team? Is there a new margin target that you're willing to speak to if we think about fiscal '25, '26 or any medium-term timeframe?

Yes. Looking beyond 2024, we haven't put anything out there at this point. I think certainly right to call out what we had been saying, which was that we did have an expectation that we could get back to the pre-pandemic margins as we look to 2025. I think certainly, we're moving in that direction, but specifically, other than looking to hit and move above those pre-pandemic margins, that is where we are today.

Our next question comes from Deane Dray with RBC Capital Markets.

I'll add my congrats to Martie and Paul. Maybe we can start off with any more specifics on the new foundry. I know there are limitations in terms of comparisons, you can't say necessarily what inning or how many SKUs or product certification. But just any color regarding where you stand on the process of being closer to a full ramp?

Yes, Deane, our foundry teams are continuing to improve the operations in the new foundry. As you can see, this translated into higher year-over-year production volumes and better sales through the foundry. The new foundry is using new equipment, which pieces of it continue to be installed, and we're focused on ramping up the production volumes there to satisfy the backlog while continuing to work through our tooling process. We do expect to close the old foundry at the end of calendar 2024, which does continue to run today. We think that the impact of the duplicative costs of running two foundries is around 80 to 100 basis points as a headwind to gross margin. With the closure of that facility, we expect to see that benefit coming in 2025 and extending into 2026.

Those duplicative costs, those ramp down, we can just assume linearly or can there be any kind of step function as you eliminate outsourcing?

Yes, that's a great question. Think of it more as a step function because there are certain fixed costs associated with running the foundry that will remain as long as the old foundry is operational. Therefore, we do not expect the costs to decrease in a linear fashion due to factors such as basic maintenance and the workforce in place.

That's great. And then, Martie, just the idea on the pull forward, you've put through price increases before in the past. Was the magnitude of the pull forward surprising at all? I know that that's a high-quality problem to ask about more business coming through in the quarter. But just the idea, did the pull forward surprise you in any way?

Deane, I think about it this way. The timing of the price increase was influenced by our ability to deliver and ship the product, which was a crucial factor. Another aspect reflects the market outlook. We discussed the destocking that had occurred, which we believed was largely resolved by the end of the quarter. Regarding the end market, we've noted that the municipal market remains fairly resilient, and the residential construction market is in a significantly better position compared to last year. However, we acknowledge that the high-interest rate environment does affect demand to some extent. I believe these factors contributed to our performance. Therefore, I would highlight this as an important element in explaining part of the strength seen in our second quarter net sales growth.

The next question comes from Mike Halloran with Baird.

Martie, congrats on the formal announcement. A quick one here on margins. As we think about the cadence, particularly in WFS margins, how much should we be thinking about the margin levels tracking with revenue as we move into Q3 and Q4? Should we be more focused on the kind of sequential trend and the impact of the internal initiatives and the pricing? Just trying to think about which line item we should be keying more off of?

So good question. With respect to Water Flow Solutions, I think we would say that the strong net sales growth that we saw through the first half of the year, we can continue to expect due to the year-over-year comparisons and certainly continued growth from iron gate valves and service brass products. As I said, we're continuing to work down that elevated backlog. We are also continuing to get improved labor material and supply chain efficiencies out of WFS as well. Those and the volume growth from our iron gate valves will certainly be drivers as we look at Water Flow Solutions for the year. Regarding Water Management Solutions, we have seen lower net sales. Certainly, net sales for our hydrants were down double digits compared with the prior year quarter. However, we did see, on a sequential basis, an increase both from orders and shipments. In the year-over-year perspective, we had very strong hydrant shipments in '23 due to that elevated backlog, creating a difference. Within the Water Management Solutions segment, that is where we have our repair products, and we have noted that we expect to experience higher labor, freight, and material costs moving into the second half of the year. That said, we're looking for continued favorable price costs across both segments as well as improved manufacturing performance.

That's super helpful color. Maybe shifting gears a bit to the capital deployment side. It's starting to feel like the team is getting their feet under them a little bit. Can you talk about how you're thinking about the cultivation and the funnel on the M&A side and broadening and deepening the product portfolio?

Yes. So I'd say, in and around the M&A front, I think it's easier for us to identify what we think would be the right additions to our portfolio, not only to broaden but deepen our portfolio. I think a lot of the challenges are really around the availability of where we think could be some nice add-ons. That said, I think from a capital structure perspective, we are in the right position with respect to our capital structure availability under the ABL and certainly, the flexibility that the capital structure affords us. I would say, with the improvements in operational performance, we are excited about where acquisition opportunities could be. As I said, we've got the team focused around that. It's just finding the right opportunities and importantly, at the valuation that we think will be additive for our investors over the long term.

Appreciate the time this morning. I'll pass it on.

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