Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Mueller Water Products, Inc. (MWA, Financial) reported record quarterly net sales with 9.2% year-over-year growth.
- The company achieved a gross margin above 36% for the second consecutive quarter, with a 620 basis points year-over-year improvement.
- Record adjusted EBITDA of approximately $85 million, representing an increase of nearly 57% compared to the prior year.
- Record quarterly adjusted net income per diluted share of $0.32, an increase of around 78% compared to the prior year quarter.
- Increased year-to-date free cash flow by more than $100 million compared with the prior year period.
Negative Points
- Lower volumes at Water Management Solutions partially offset the higher volumes of Water Flow Solutions.
- Impacts of the Israel-Hamas war affected the company's performance, particularly in the Water Management Solutions segment.
- Total SG&A expenses increased by $900,000 compared to the prior year, driven by higher incentive costs and inflationary pressures.
- Adjusted operating income for Water Management Solutions decreased by 32.8% in the quarter.
- The company expects higher SG&A expenses in the fourth quarter due to higher incentive compensation and personnel investments.
Q & A Highlights
Q: I'm hoping to dig in a little more on what's contemplated in your implied fourth quarter EBITDA guidance. What are the discrete items that represent sequential headwind versus just continuing to win conservative in the outlook provided?
A: As we look out to our fourth quarter, we expect short cycle orders to be sequentially lower, which is typical with normalized seasonality. We also have planned fewer production days, impacting short-cycle products like iron gate valves and fire hydrants. Additionally, we expect price cost to be favorable but to a slightly lower degree due to higher inflation. SG&A expenses are expected to be higher due to increased incentive compensation and personnel investments.
Q: Is there any reason to think that top and bottom line growth is not in play for next year? Are you willing to speak to a new medium-term EBITDA margin targets or entitlements margin?
A: We believe we have the right strategies for sales and margin growth next year. We have demonstrated notable improvement in margin performance and are on track for record sales. We expect to close our old brass foundry by the end of calendar 2024, which should eliminate duplicative costs. We remain focused on customer experience, operational improvements, and potential benefits from the infrastructure bill, particularly lead service line replacement.
Q: What are you seeing in the marketplace that gives you confidence in the resilience of demand?
A: The municipal repair and replacement market is fairly resilient due to aging infrastructure and local funding dynamics. The upcoming election could bring short-term uncertainty, but both parties generally support the infrastructure bill. For residential construction, single-family housing starts are stronger than multifamily, and we see stronger activity in the South, Southwest, and parts of the West. Employee construction availability remains a challenge.
Q: How are you thinking about capital deployment on a forward basis, especially with net leverage below one and major capital projects winding down?
A: We will continue to invest within our manufacturing facilities and new product development, aiming for a normalized level of 3.5% to 4% of sales. We are also looking at opportunities for inorganic growth to deploy our capital for the best returns.
Q: Can you address the geopolitical risk given Krausz's location and any plans to derisk it?
A: Krausz is less than 10% of our consolidated sales, and the team has done a fantastic job of derisking within the country and through other manufacturing locations. We are making additional investments to meet customer demand and expect higher investment in the Krausz product line in the future.
Q: Do you feel more confident in your ability to set a tighter guidance band for next year given the recent volatility?
A: We are pleased with the sales growth and strong margins, particularly in the second and third quarters. The outperformance was driven by stronger end market demand and our ability to execute on short-cycle orders. We have seen notable improvement in margins and are above pre-pandemic levels.
Q: How do you think about the growth vectors for the company moving forward?
A: Historically, we have had net sales growth around 6%. We have leading brands and strong customer relationships. The federal infrastructure bill highlights the need for investment in aging water infrastructure, which positions us well. We are coming to the end of a period of significant domestic investment, which aligns with federal initiatives like the American Iron and Steel Act.
Q: Can you help parse out what you're seeing in terms of volume growth versus price?
A: For the full year, we expect net sales to be up 0.7% to 1.5%. We saw higher pricing across most product lines and strong volume growth in Water Flow Solutions. Water Management Solutions faced headwinds in hydrants due to year-over-year comparisons. We expect benefits from both pricing and volume in the fourth quarter and beyond.
Q: Are you winning back some market share or is the municipal market seeing more money flows and projects?
A: We have normalized lead times and improved customer service levels, which have positioned us well with customers and end users. This has contributed to healthy demand.
Q: Are we now seeing the full benefits of the $25 million cost reduction, and when do we start anniversarying those benefits?
A: We believe we have achieved the $25 million in annual SG&A savings, mainly in lower personnel-related expenses and third-party fees. We will continue to manage SG&A with discipline and make appropriate investments over time.
Q: Are there any risks in the fourth quarter with inventory levels or costs as you wind down the old brass foundry?
A: We are in the final wind down of the old brass foundry and do not see any cost impacts in our forecast. We anticipate an 80 to 100 basis points improvement to consolidated financials once the old foundry is closed.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
