Mueller Water Products, Inc. 2026 Q3 Earnings Call

Good morning, everyone. Thank you for joining us for Mueller Water Products' third quarter conference call. Yesterday afternoon, we issued our press release reporting results of operations for the quarter ended June 30th, 2026. A copy of the press release is available on our website, muellerwaterproducts.com. I am joined this morning by Paul 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 the 1 question and a follow-up, 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 three 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 two and three in their entirety. During this call, all references to a specific year or quarter, unless specified otherwise, refer to our fiscal year, which ends the 30th of September. A replay of this morning's call will be available for 30 days at 1-866-386-1299.

The archive 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.

Thanks, Whit. Good morning, everyone. Thank you for joining our third quarter earnings call. Our outstanding third quarter results reflect strong execution and continued progress against the operating priorities we outlined in the last quarter. We achieved quarterly records for net sales, adjusted EBITDA, and adjusted net income per diluted share. Net sales grew 4.1% in the quarter, supported by commercial execution, resilient municipal end market demand, and strong growth in project-related specialty valves. Adjusted EBITDA margin expanded 440 basis points year-over-year, reflecting our continued focus on operational excellence, productivity, and disciplined cost management. Free cash flow was strong this quarter, enabling us to continue funding capacity and efficiency investments while returning approximately $21 million to shareholders through our quarterly dividend and share repurchases. I am proud of what our teams have accomplished and the continued commitment to serving our customers.

Last quarter, we introduced the Mueller Operating System as the framework we are using to drive greater discipline, execution, and accountability across the company. Our results provide further evidence of the progress we are making in expanding margins, strengthening cash generation, and investing in growth and simplification. Following our announcement last quarter, we completed the exit of the IPO pipe manufacturing business outside of North America. We also completed the facility migration of small modular technology company, AirCore Systems, to a simpler set of facilities in electrical work. This quarter, we incurred one-time costs associated with this transaction. A lower tax, which lowered our income tax. We expect cost savings and tax benefits to support margin expansion and enhance free cash flow.

For increased fiscal 2026 adjusted EBITDA guidance, we remain on track to deliver another year of meaningful margin expansion while we continue to navigate slower new residential construction activity and broader external uncertainty. We remain focused on what we can control: executing our strategies, investing in growth, and proactively managing costs. Our commercial initiatives are focused on increasing market penetration for our leading products and expanding into adjacent markets for our specialty valves. We believe a disciplined execution embedded in the Mueller Operating System positions us well to build on this momentum and create long-term value for our customers and shareholders. I am proud of the progress our teams have achieved this year, reflecting a focus on serving customers, strengthening operations, and collaborating across the organization.

We recently published our 2025 sustainability report, highlighting our continued progress in advancing environmental stewardship, operational excellence, responsible business practices, employee well-being, and community impact. As cities and municipalities confront a growing range of challenges, critical infrastructure is under increasing strain. At the same time, aging systems continue to pose significant risks. Against this backdrop, Mueller's role as a provider of resilient, reliable water infrastructure solutions is more essential than ever. Notable 2025 achievements include reaching an outstanding milestone of the lowest total recordable incident rate in our history, reflective of our team's unwavering commitment to safety. We've also maintained strong momentum towards reducing our carbon footprint, cutting scope 1 and 2 emissions intensity by 13% year-over-year, bringing our total reduction to 35%. This moves us closer to our goal of reducing greenhouse gas emissions intensity by 50% by 2035.

As for employee engagement, we reached our goal one year ahead of our schedule, achieving an 80% employee engagement score in our annual employee survey. Our vision is to be the leader in water infrastructure solutions, solving challenges, enriching lives, and safeguarding the future. We will continue to drive progress through our innovative products and solutions that help utilities and municipalities strengthen system resilience, detect leaks faster and with greater precision, rehabilitate and maintain aging infrastructure, and provide life-saving fire protection. Our achievements of the past several years establish a new foundation for future progress and are the direct result of the hard work, focus, and collaboration demonstrated across our organization. With that, I'll turn it over to Melissa to take us through the financials.

Thanks, Paul, good morning, everyone. We are pleased to deliver another record quarter, demonstrating the strength of our business, the resilience of our end markets, and the continued execution by our teams despite a dynamic external environment. Consolidated net sales increased 4.1% to a new record of $395.9 million, driven primarily by higher pricing across most product lines, partially offset by slightly lower volumes. Gross profit increased 6.9% to a record $155.8 million, with gross margin expanding 110 basis points to 39.4%. The improvement reflects the benefits of pricing actions and tariff refunds, which more than offset inflationary pressures, performance, volume impacts, portfolio optimization costs, and product mix. During the quarter, we incurred $3.1 million of portfolio optimization costs associated with the strategic exit of the i2O pressure monitoring business outside of North America, impacting WMS cost of sales.

While we continue to experience elevated tariff costs, mainly attributable to Section 232 tariffs, along with ongoing inflationary pressures, the International Emergency Economic Powers Act tariff refunds received during the quarter helped offset a portion of those impacts. Excluding the impact of these prior period tariff refunds and the portfolio optimization costs, adjusted gross margin was approximately 30 basis points higher than the prior year's gross margin of 38.3%, demonstrating the underlying benefit of our pricing actions and operational execution despite a challenging cost environment. Total SG&A expenses for the quarter of $64 million decreased $7 million year-over-year, reflecting reduced foreign currency headwinds and lower incentive compensation expense, partially offset by continued inflationary pressures. This performance underscores our disciplined approach to cost management while continuing to invest in the business. We incurred $11.2 million of strategic reorganization and other charges.

These costs primarily relate to the i2O exit, including non-cash asset impairment charges, certain transaction-related expenses, severance, and costs associated with our leadership transition. Our adjusted results do not include strategic reorganization and other charges or the portfolio optimization costs reflected in the WMS segment. Adjusted EBITDA reached a record of $107.4 million, an increase of 24.3% compared to the prior year quarter. Adjusted EBITDA margin expanded 440 basis points year-over-year to a record 27.1%. This strong performance was primarily driven by pricing actions, tariff refunds, and favorable SG&A cost management, which more than offset inflationary pressures, performance, volume impacts, and product mix. On a trailing 12-month basis, adjusted EBITDA improved to $369 million, or 24.9% of net sales, representing an improvement of 290 basis points versus the prior 12-month period.

Adjusted net income per diluted share increased 47.1% year-over-year to a record $0.50 per share. During the quarter, we benefited from lower net interest expense driven by higher interest income. Our third quarter effective income tax rate was 15.7%, compared with 27.1% in the prior year quarter, reflecting a one-time tax benefit associated with the exit of the i2O business. This benefit contributed approximately $0.06 per diluted share during the quarter. Turning now to segment performance, starting with WFS. Net sales were $215.3 million, declining 0.6% year-over-year, as higher pricing across most product lines and volume growth in specialty valves largely offset lower iron gate valve and service brass volumes. Adjusted EBITDA increased 9.5% to a record $73.5 million.

Adjusted EBITDA margin expanded 310 basis points to a record 34.1%, compared to 31% in the prior year period, reflecting the benefits of pricing, tariff refunds, and performance, which more than offset lower volumes, inflationary pressures, and product mix. Moving to WMS. Net sales increased 10.3% to $180.6 million, driven by strong volume growth in hydrants and natural gas distribution products, along with higher pricing across most product lines. Adjusted EBITDA increased 43.6% to a record $50.7 million, reflecting benefits from higher pricing, lower SG&A expenses, including reduced foreign currency headwinds, volume growth, and tariff refunds, which more than offset performance and inflationary pressures. Adjusted EBITDA margin expanded 650 basis points to a record 28.1%, compared with 21.6% in the prior year period. The continued improvement in profitability reflects the significant progress we have made in strengthening operating performance and driving leverage across the business. Turning to free cash flow.