Mueller Water Products, Inc. Q4 FY2024 earnings call

• Pleased with strong finish to a record year with fourth quarter net sales and adjusted EBITDA exceeding expectations. Consolidated net sales for the year exceeded $1.3 billion with record levels for gross margin, adjusted EBITDA, adjusted net income per diluted share, and free cash flow.
• New brass foundry wrapped up, plan to close legacy brass foundry by end of calendar 2024, expected to result in 80 to 100 basis point annualized improvement in consolidated gross margin starting in second half of fiscal 2025.
• Team in Israel deals with impacts of Israel-Hamas war while working to satisfy customer demand; made operational investments in supply chain and production capabilities for Krausz repair products, expecting headwinds in 2025 but forecasting further margin gains in 2025.
• Focused on improving operational excellence, increasing supply chain efficiencies, developing advanced manufacturing capabilities, and increasing customer experience investments to deepen relationships and enhance customer engagement.

Water Flow Solutions

• Fourth quarter net sales increased 24% to $200.3 million compared to the prior year quarter, primarily due to higher volumes of iron gate valves and service brass products, as well as higher pricing across most product lines. Adjusted operating income increased 51.3% to $41.6 million in the quarter. Adjusted EBITDA increased 41.3% to $51.7 million, and adjusted EBITDA margin improved 310 basis points to 25.8% compared with the prior year quarter. For the full year, adjusted EBITDA margin improved by more than 1,000 basis points to 28.8%, which is a record for the segment.

Water Management Solutions

• Fourth quarter net sales increased 5.7% to $147.9 million compared with the prior year quarter, primarily due to higher volumes of hydrants, as well as higher pricing across most product lines. Adjusted operating income increased 36.1% to $29.8 million in the quarter due to benefits from higher volumes, favorable price cost, and lower SG&A expenses, which more than offset impacts of the Israel-Hamas war. Adjusted EBITDA for the quarter increased 26.1% to $36.7 million, and adjusted EBITDA margin improved 400 basis points to 24.8%. For the full year, adjusted EBITDA margin improved 70 basis points to 23%, which is a record for the segment.

• Expect consolidated net sales to be between $1.34 billion and $1.36 billion for fiscal 2025, representing a year-over-year increase between 1.9% and 3.4%.
• Adjusted EBITDA is expected to range from $300 to $305 million, reflecting year-over-year growth of 5.4% to 7.1%.
• Total SG&A expenses are expected to be between $230 and $240 million, with the forecast below prior year due to lower amortization expense and incentive compensation, partially offset by commercial and IT investments and inflationary pressures.
• Anticipate second half 2025 adjusted EBITDA margin to be higher than first half, driven by net sales seasonality and continuing manufacturing performance improvements, including benefits from closure of legacy brass foundry.
• Expect free cash flow as a percentage of adjusted net income to be more than 80% in fiscal 2025. Capital expenditures are forecasted to be between $45 and $50 million.

• Impact of Israel-Hamas war on Water Management Solutions team and business.
• Krausz repair products business expected to continue to experience headwinds in 2025, especially relative to first half of fiscal 2024.
• Elevated service brass backlog in prior year impacted volume in current year, potentially causing modest headwinds in 2025.
• Non-cash goodwill impairment related to lower forecasted revenues and associated profits in applications product lines, and warranty expense related to metering products within Water Management Solutions segment.

Q: Can you give a sense of how much stimulus spending has still to come through and any risk that any of it gets pulled back? Also, about risk management at Krausz.

A: Martie Zakas mentioned general expectation of continued support for infrastructure bill due to aging water infrastructure, but limited bid activity due to BABA documentation requirements; Paul McAndrew said Krausz repair products team has increased flexibility in production and is in strong position going forward.

Q: Should we think about capital allocation as we move forward, revisit M&A pipeline, and other organic investments?

A: Martie Zakas said will continue return to shareholders through dividend and share repurchase (with $80 million remaining in authorization), capital expenditures will be less than 4% on go-forward basis but continue to invest in facilities, and acquisitions remain important area of focus for targeted bolt-ons, synergies, and product line expansion.

Q: Talk about the high-level discussions with customers today versus twelve months ago regarding residential outlook.

A: Paul McAndrew said still believe residential construction is normalized and healthy, demand for new homes resilient despite high interest rates, homebuilders have strong balance sheets and manage inventory levels disciplined.

Q: Talk about the impairment taken and the warranty charges, related businesses and go forward plan.

A: Steve Heinrichs said $16.3 million non-cash goodwill impairment related to lower forecasted revenues in applications product lines with strategic focus on streamlined approach; warranty charge in fourth quarter related to metering products in Water Management Solutions segment due to historical experience and product replacement cost forecast.

Q: Break down 2025 growth view, price vs volume, and infrastructure spending tailwinds timing.

A: Martie Zakas said guidance includes carryover pricing and some volume growth, expects modest headwinds from service brass backlog, and infrastructure spending tailwinds likely seen in specialty valve business as customers validate requirements for funding.

Q: Talk about Mueller One and profit improvement targets.

A: Martie Zakas said Mueller One is internal call to action for team to work as one company for better customer and employee experience; Paul McAndrew said it's part of realigned organization leading to profit improvement and operational excellence benefits in 2024 and continuing in 2025.