MUELLER WATER PRODUCTS

Welcome and thank you for standing by. At this time, all participant lines have been placed in a listen-only mode and the floor will be open for questions following the presentation. To ask a question at that time, please press star one on your phone. Today's conference is being recorded. If you have any objections to this, please disconnect at this time. Now, I would like to turn the call over to your host for today, Mr. Whit Kincaid.

Sir, you may begin. Good morning, everyone. Thank you for joining us on Mueller Water Products' fourth quarter and fiscal year-end 2020 conference call. We issued our press release reporting results of operations for the quarter ended September 30, 2020, yesterday afternoon. A copy of the press release is available on our website, MuellerWaterProducts.com. Scott Hall, our president and CEO, and Marty Zakas, our CFO, will be discussing our 2020 fourth quarter and full year results Market Conditions, and our current outlook for 2021. 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 and to address forward-looking statements and our non-GAAP disclosure requirements. At this time, please refer to slide two. 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 that 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 3 addresses forward-looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results that 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 on September 30th. A replay of this morning's call will be available for 30 days at 1-800-876-9512. The archived webcast and corresponding slides will be available for at least 90 days in the investor relations section of our website. In addition, we will furnish a copy of our prepared remarks on Form 8-K later this morning. I'll now turn the call over to Scott.

Thanks, Whit. Thank you for joining us today. I hope everyone listening to our call is staying safe and healthy. Before turning the call over to Marty to discuss our 2020 fourth quarter and full year results, I'll provide a brief overview of the quarter. I want to thank all of our employees who continue to do an exceptional job operating in an extremely challenging environment resulting from the ongoing pandemic. I am proud of their steadfast commitment to our customers, our suppliers, our communities, and other team members. We continue to improve our procedures to ensure that we maintain high customer service levels and keep our employees safe and healthy. remain inspired by our team members' sustained efforts during such an unprecedented period in our history. I believe that we will be dealing with the impacts of the pandemic for quite some time. As an essential business, we will maintain focus in operating with enhanced procedures to protect our employees, customers and communities. Our response team has continued to provide leadership and communication throughout this crisis. Most importantly, We will continue to work closely with our customers to provide the products and services needed to manage and maintain our critical water infrastructure. Our financial performance significantly improved sequentially in the fourth quarter, with net sales close to the high end of our guidance and adjusted EBITDA above our guidance. These results were due to the strength of our product offerings, our end markets, and our improved operational performance. We generated sequential net sales growth at both infrastructure and technologies, resulting from increased repair and replacement activity and the swift recovery in residential construction. Our teams executed well during the fourth quarter, evidenced by increasing adjusted EBITDA 1.2%, even though our consolidated net sales decreased 0.6%. Our improved operational performance helped deliver a 130 basis point increase in gross margin. excluding the Krause inventory acquisition costs in the prior year quarter. As a result, our adjusted EBITDA margin improved 40 basis points in the fourth quarter. Our focus on increasing cash flow during the quarter enabled us to further strengthen our balance sheet as we ended September with $209 million in cash outstanding. In the third and fourth quarters, we shifted our priorities to enhance our cash flow from operations while also continuing to invest in the business In anticipation of the markets returning to a more normalized level, we continue to be disciplined and believe that we are in a strong position entering 2021. We will prioritize investing in our business through new product development, executing our capital investments, and making bolt-on acquisitions. Given the improvements we have seen to date, we have ended our voluntary suspension on share repurchases that we instituted as a cautionary measure resulting from the pandemic. Going forward, we will continue to return cash to shareholders primarily through our quarterly dividend, which our board of directors recently increased by 5%. In summary, we finished 2020 better than we expected, especially given the pandemic. We also witnessed the resiliency of our business, which provides essential products and services for water utilities to do their planned and unplanned repair and replacement work. Despite the challenges, Our team stepped up to the task. Importantly, we believe that the lessons learned during this pandemic further reinforce the imperative of our strategic priorities to become an innovative leader in the water infrastructure industry and position ourselves for sustained long-term growth. I continue to be excited about our transformation and am confident in our ability to adapt and execute in this environment. Later in the call, I will address our key strategies and expectations for 2021. With that, I'll turn the call over to Marty.

Thanks, Scott, and good morning, everyone. I hope you and your families continue to be safe and healthy. I will start with our fourth quarter consolidated GAAP and non-GAAP financial results, then review our segment performance, and finish with a discussion of our cash flow and liquidity. During the fourth quarter, we generated consolidated net sales of $265.3 million which decreased $1.6 million or 0.6% as compared with fourth quarter last year. The decrease was primarily due to reduced shipment volumes related to the pandemic impacting technologies partially offset by increased volumes and higher pricing and infrastructure. We did see a sequential rebound in our net sales from third quarter with an increase of $36.8 million. Our gross profit this quarter increased $5.1 million or 5.7% to $93.9 million with a gross margin of 35.4%. Gross margin increased 210 basis points versus the prior year, primarily due to the Kraus inventory acquisition costs in the prior year quarter, improved manufacturing performance, and increased sales at infrastructure. These gross margin benefits were partially offset by the decrease in shipment volumes at technologies and $3.6 million of expenses related to the pandemic. Gross margin increased by 130 basis points, excluding $2.3 million of costs associated with the Krause inventory acquisition costs in the prior year. Selling, general, and administrative expenses of $52.1 million in the quarter increased $3.6 million versus the prior year. The increase was primarily due to higher personnel-related costs and IT-related activities, partially offset by temporary savings related to the pandemic, including reduced travel, trade shows, and events. SG&A as a percent of net sales was 19.6% in the fourth quarter compared to 18.2% in the prior year. Operating income of $40.7 million increased $1.7 million or 4.4% in the fourth quarter compared to $39 million in the prior year. Operating income includes strategic reorganization and other charges of $1.1 million in the quarter which are primarily personnel related. Turning now to our consolidated non-GAAP results. Adjusted operating income of $41.8 million improved $13.2 million sequentially and decreased $800,000 or 1.9% as compared with $42.6 million in the prior year quarter. The decrease was primarily due to lower shipment volumes of technologies and $4 million of expenses related to the pandemic, which were partially offset by $3.1 million of temporary SG&A savings, Improve manufacturing performance and higher sales at infrastructure. Adjusted EBITDA of $57.6 million increased $700,000, or 1.2%, leading to an adjusted EBITDA margin of 21.7%, which is 40 basis points better than the prior year. For the full year 2020, adjusted EBITDA was $190.6 million, or 19.8% of net sales. For the quarter, We generated adjusted net income per share of 17 cents compared with 19 cents in the prior year. Turning now to segment performance starting with infrastructure. Infrastructure net sales of $242.5 million increased 15.5% sequentially and increased 3.3% as compared with the prior year, primarily due to increased shipment volumes and higher pricing. Adjusted operating income of $57 million increased $5.8 million were 11.3% in the quarter. The increase is primarily due to improved manufacturing performance and increased sales, partially offset by higher costs associated with inflation and $2.9 million of expenses related to the pandemic, excluding the $2.5 million of temporary SG&A savings, which primarily relate to travel, trade shows, and conferences. Adjusted EBITDA of $69.8 million increased $6.6 million or 10.4%, leading to an adjusted EBITDA margin of 28.8% and a conversion margin of 85% in the quarter. Moving on to technologies. Technologies net sales of $22.8 million increased 22.7% sequentially and decreased 29.2% as compared with the prior year. This decrease was primarily due to lower volumes related to the pandemic which continues to impact the timing of some leak detection and metering projects and large customer orders for Ecologics in the prior year quarter. Adjusted operating loss was $2.5 million as compared with adjusted operating income of $800,000 in the prior year. This decrease was primarily due to lower shipment volumes and $700,000 of expenses related to the pandemic excluding $300,000 of temporary SG&A savings which were partially offset by improved manufacturing performance and lower SG&A expenses. Technology's adjusted EBITDA was a loss of $400,000 as compared with adjusted EBITDA of $2.8 million in the prior year leading to a decremental margin of 34% in the quarter. Moving on to cash flow. Net cash provided by operating activities for the fiscal year ended September 30, 2020 improved $47.8 million to $140.3 million, primarily driven by improvements in inventory management. As a reminder, cash provided by operating activities in the first quarter included the payment associated with the Walter Tax Settlement, which was $16.6 million net of the tax benefit. We invested $16.5 million in capital expenditures during the fourth quarter, bringing the year-to-date total to $67.7 million as compared with $86.6 million in the prior year. The $18.9 million decrease in capital expenditures for the year was primarily due to the timing of spending for our large capital projects as we postponed some of the work at our new brass foundry. Free cash flow for the year improved $66.7 million to $72.6 million as compared with free cash flow of $5.9 million in 2019. At September 30, 2020, we had total debt of $447.6 million and cash and cash equivalents of $208.9 million. We did not have any borrowings under our ABL agreement at year end, nor did we borrow any amounts under our ABL during the year. At the end of the fourth quarter, our net debt leverage ratio was 1.3 times. As a reminder, we currently have no debt maturities before June 2026. Our 5.5% notes have no financial maintenance covenants. and our ABL agreement is not subject to any financial maintenance covenants unless we exceed the minimum availability thresholds. Based on September 30, 2020 data, we had approximately $133.9 million of excess availability under the ABL agreement, which brings our total liquidity to $342.8 million. In summary, we have a strong balance sheet with ample liquidity. We are well prepared to continue with our capital allocation opportunities as well as to deal with the ongoing challenges from the pandemic. Scott, back to you.

Thanks, Marty. Let's now discuss our end markets, key strategies, and expectations for full year 2021. After that, we'll open the call up for questions. Overall, our end markets improved sequentially during the fourth quarter. Municipal customers increased their level of activity from the third quarter, prioritizing critical network maintenance and existing infrastructure projects. The level of repair and replacement and project activity continues to vary significantly across the country. Regions experiencing faster population growth and smaller economic headwinds are recovering more quickly. Although we continue to see some delays in the approvals or implementation of new projects, we haven't seen cancellations. We continue to expect that the project-related portion of the municipal water market will remain challenged as budgets adjust to the impacts from the pandemic. This will affect the project-related areas of our business, principally metering, leak detection, and specialty valve products. We remain hopeful that additional federal stimulus efforts will help municipalities get through this challenging period relatively quickly so they can continue to address their aging distribution networks. However, we believe that the break-fix portion of municipal treatment collection and distribution budgets will be much more resilient. As a reminder, We estimate that approximately two-thirds of our net sales relate to the repair and replacement activities of utilities. The residential construction end market continued to show signs of strength in the fourth quarter, as evidenced by the double-digit increase in housing starts, primarily for single-family residences. We believe that residential construction will continue to outperform, primarily based on low mortgage rates, relatively low lot inventories, and elevated demand levels. Developed lot inventories have remained relatively low since the Great Recession. So given the backdrop, we expect builders to increase their inventories to meet the higher demand. However, the pace of residential construction is highly dependent on a number of factors, including the pandemic and the seasonality of construction activity, which could restrain some builders heading into the winter months. Regardless of the current external environment, We have made progress on our key strategies to strengthen and grow the business. New product development and commercialization efforts, especially for our digitally enabled products, remain an important part of our strategic priorities. Even with the ongoing challenges, we have some exciting new products in the late stages of the commercialization process. We are looking forward to a number of key launches in 2021, and we'll also continue to add products to the product development funnels. We believe that digital solutions, which account for a relatively small amount of utility budgets, will receive greater attention going forward as the pandemic highlights the need for and motivates utilities to increase investments in network, workforce, and asset management. Today, we have several digitally enabled products addressing their needs, and we continue to make progress with our smart hydrant, which is being piloted by customers. Our new product development and commercialization efforts will prioritize digitally-enabled products and solutions that focus on addressing utilities' most critical problems. We will increasingly incorporate technology into our existing product portfolio to leverage our Centrix software platform and our extensive installed base of infrastructure products. Additionally, we will expand the capabilities of Centrix to allow utilities to identify and prioritize leaks Measure and control network pressures, assess water quality, view metering data, remotely flush water lines, and utilize data analytics to manage their network assets remotely. Given the progress we made this year, especially amidst the pandemic, I have confidence that our teams will deliver on this vision while we navigate the challenging operating environment. We are making significant progress on our multi-year effort to drive operational excellence and modernize our manufacturing facilities. We are committed to improving our culture of execution to become a world-class manufacturing organization. Achievement of these priorities will provide a strong foundation for future growth and enable us to generate attractive returns on our capital investments. As we have discussed previously, three transformational projects are expected to account for approximately $130 million of capital spending. We believe they will drive approximately $30 million of annualized incremental gross profit through a combination of efficiencies and sales growth. This is after all of the projects are completed and production is fully ramped up. We completed the large foundry expansion in Chattanooga, Tennessee and are focused on ramping up production this year. The two still underway are the new facility in Kimball, Tennessee and the new Brass Foundry in Decatur, Illinois. As a reminder, We decided to defer the timing of the construction of our Decatur facility to help preserve cash after the declaration of the pandemic. Our fiscal 2021 annual guidance for capital expenditures of $80 to $90 million is above our long-term target primarily because of two of the large capital projects that I mentioned remain underway. Our annual guidance for 2021 is the same guidance we originally had for 2020 prior to the pandemic. Once the new brass foundry is complete, which is expected in 2023, we anticipate the capital expenditures as a percentage of consolidated net sales will decrease to less than 4%, further enhancing our free cash flow. I'll now discuss our expectations for 2021 in more detail. We are sharing this outlook to provide a framework for how we expect to grow the business this year. Clearly, we remain in a time of unprecedented uncertainty, From both national health and economic perspectives, which will impact our performance, the overall level of COVID infections in the communities in which we live and work will be a factor in our ability to increase sales and improve profitability. We believe that continued strong growth in the residential construction and market will help offset any challenges in the project-related areas of our business. Our expectations also take into account our current backlog, new product initiatives, and channel strategies. This outlook includes the strong bookings we saw at Technologies in 2020. The backlog for the metering business is $30 million higher compared with last year, primarily due to new customer wins at Newport News, Virginia and Newport Beach, California. For the full year 2021, We currently anticipate that consolidated net sales will be between flat and 3% higher than the prior year. We saw great variability in our quarterly net sales performance throughout 2020, where we generated strong organic sales growth in the first half of the year prior to the pandemic. For the first quarter of 2021, we expect consolidated net sales to increase versus the prior year, resulting from fourth quarter orders and our shippable backlog at the end of September. In the second quarter, we anticipate that the net sales will decrease versus a 10.1% net sales growth in the prior year quarter, which benefited from stocking orders. We anticipate that in our third quarter, net sales growth could be the strongest since we are lapping the beginning of the pandemic. For the full year, we expect that adjusted EBITDA will increase between 4% and 7%, as compared with the prior year, driven by the anticipated volumes and improved operational execution. Finally, we expect to generate positive free cash flow for the full year without the large working capital benefit we generated in 2020. Our expectations assume that the pandemic's impact does not significantly change from what we experienced in the fourth quarter. We also expect that we will continue to incur some level of expenses associated with the pandemic which will largely impact our results in the first half of 2021. Most importantly, our focus remains on keeping our employees safe, protecting our communities, delivering exceptional products and support to our customers, and generating strong cash flow. Our strategies are supported by our strong balance sheet, liquidity, and cash flow. We will maintain a balanced approach to capital allocation to strengthen and grow the business through capital investments and bolt-on acquisitions. Additionally, we will continue to return cash to our shareholders, primarily through our ongoing quarterly dividend, and we will continue to prioritize flexibility, primarily for potential acquisitions. Our teams remain well prepared to face the ongoing uncertainty relating to the pandemic, and I am confident in our ability to adapt and execute to any changes in our environment. Before moving to Q&A, I want to briefly discuss our view and approach to sustainability. We recognize the important role that we play in ensuring water is delivered more safely and efficiently than ever before. For many years, Mueller Water Products has had an environment, health, and safety program, including a dedicated board committee to provide oversight. Safety and environmental stewardship are top priorities and are included in our annual executive incentive targets. We will further elevate and showcase our sustainability initiatives through our inaugural ESG report to be published in December. We look forward to discussing our key strategies for becoming a leader in sustainability. And with that, operator, please open this call for questions.

Thank you, sir. At this time, we will now begin the question and answer session. If you would like to ask a question, please first unmute your phone and then press star 1. You will be prompted to record your name and your name is necessary to ask a question. If at any time your question has been answered, you may remove your request by pressing star then 2. Once again, if you would like to ask a question at this time, please press star then 1 now. One moment please for our first question. And our first question will come from Dean Dre of RBC Capital Markets. Sir, your line is open.

Thank you. Good morning, everyone.

Good morning, Dean.

Good morning. Hey, maybe we can start just to confirm what's behind the delays and the projects, the delays in the approvals. So I would imagine just getting access and workers out to the facilities and into Holmes for the meters, that's just a COVID delay. So kind of take us through that frame for us, how much has been, if you could quantify how much of that has affected the quarter and, you know, when might we see those released? And then anything on the approvals, when you said there's delays in approvals, is this just, you know, is there election delay? Uncertainty, is it still COVID? Is there budget constraints? Any further call there would be a big help. Thanks.

Sure. So I think yes, on the first part, for sure. You know, if you look at the technologies business, You know, $39 million increase in the backlog for the metering business, continued strong bookings in the leak detection business. Really, the fourth quarter performance for us is an access issue. So there's, you know, there's a fairly healthy book of installs for meters and a fairly healthy book of pipe condition assessment and leak installs for echo. And so, you know, we think that is a timing issue kind of moving between quarters as a result of COVID. For the project business, though, I would say it's really more budgetary related. And you'll recall, Dean, that when I started in 2017, it had just been the election. And we saw a pretty good freeze up as there was some economic uncertainty. Is there going to be a stimulus package? and, you know, I think there was a whole lot of questions around should we spend the money right now? What do receipts look like for us as a utility? And I think you have some of that same dynamic going on right now. I would say the capital budgets are somewhat in flux as a result of the pandemic and that uncertainty has led to, you know, kind of this, you know, we're not saying no to this project. We know we have to do it. I'm going to push the decision down the road a quarter. kind of discussions when we start talking about stuff that's already been tendered. I think you see some reticence on the parts of some of the municipalities to commit to a path right now as they wait to see how both the election funding situations and frankly their own receipts. From our discussions there is some concern at the water utility level that what does the economic That's helpful. And can you expand on the point regarding your dialogue with utilities regarding these new digital offerings like your smart hydrant?

When you presented at our RBC Water Conference in September, that was one of the themes that we heard from the other utilities that they were now finally beginning to look at these opportunities to both leverage the technology network as a service type applications and specifically smart hydrants came up. So what's the dialogue now? Is COVID a turning point because utilities just need this additional technology capability, not to send a truck out if possible, but how do those conditions look today to you?

Yeah, I think COVID has definitely accelerated the adoption of the digital solutions kind of model. And I think that almost without reservation that utilities feel like through SCADA they have good visibility at their pumping stations and their treatment centers. If they are an AMI customer, they have a single data point kind of out at the end of the network. But the blind spot between the treatment center and the delivery point is the infrastructure distribution network, whether it be mains or even the smaller six and eight inch pipes. They recognize also that their likelihood of getting the workforce to be enlarged over the next five, 10, 15 years is very, very limited. And so you see that they're going to have the same amount of labor, but the nature of work is going to have to change. So instead of dispatching a truck to go flush a hydrant, instead of dispatching a truck to go see and do hunting for leaks or contacting a subcontractor to clean up manholes and all of those kinds of things, they realize that they need some level of automation in the network. Not because they have any less work, but because the fact that the infrastructure is aging, because the fact that water quality is becoming more important in society and there's more contaminants and more things like that, they need that workforce to do different kind of work. They don't need them finding leaks, they need them fixing leaks. They don't need them flushing hydrants, they need them fixing treatment centers and adjusting chemical levels. There's a whole bunch of stuff that says the nature of work for the water utility employees has got to change over the next 10 to 15 years, and certainly this has been an accelerator. That's your question about the smart hydrant? Absolutely. I think that if you think of it not as a hydrant but really as an information collection hub for whatever it is you want to know, and that the number of sensors it could communicate with is only limited by your imagination, then you know you can see that they see the value at some density of putting these information collection points out in their network so that they can you know have visibility whether it be pressure, temperature, turbidity, whatever it is they want to know at that point and so I think there is a great deal of interest and as I said in our prepared comments you know the I'm hopeful that the trials that we have undergoing or have ongoing sorry you know Give us something to report to you back in a year or so that will give us promise for widespread adoption. That's all very helpful. Thank you.

Thank you, Dean. Thank you. Our next question will come from Walter Liptak of Seaport. Sir, your line is open. Hi.

Good morning. Good morning. Good morning. I wanted to ask one about on the residential side. It seems like there's better activity going on, and you mentioned the lot development. I wonder what kind of visibility you get into residential lot development. Are there projects that you see through your distribution channel or through your sales channel that will provide some visibility into 2021?

Yeah, I think that, you know, You're absolutely right. We get some visibility on some of the developments that are, I guess, you know, large enough, for lack of a better word, that they get some profile from a, you know, home builder like a D.R. Horton or a Pulte or something like that. And so, yeah, there's a piece of it that's that. But I think in an aggregate, you know, the residential construction and market continues to show signs of significant strength in Q4. I think the double-digit increase in housing starts in Q4. you know, I think it was 11% overall, 17% for single family, you know, bodes well for us because I think that, as you know, you know, we're kind of early in the cycle. The curb and sewer goes in with the hydrants and the water supply, not when the house building permit gets pulled, but, you know, several weeks or in some cases months ahead of that. And so we use Housing Starts as a proxy to kind of give us The leading or trailing indicator, if you will, of what lot inventories look like. And then we scour the home builders that have public information out there to look at what their lot development looks like. And, you know, given what we've heard, given what we talked about, where we are, that's why we have this kind of remain bullish throughout certainly the first three quarters of the year as we think about where interest rates are. Our visibility, though, to answer the question precisely, I would say is mixed. You know, we take the big trends. We know the big projects. We know who the big developments and where those lot inventories are going, those big, let's call them, you know, neighborhood development projects. But they're often, you know, only 40% or 50% of the market. And so there is a piece that we don't have visibility to, to be clear.

Okay. Are you getting any visibility from the – The Distributors, and any sort of inventory channel build that's maybe uncharacteristic for this time of year?

Yeah, I think we've seen, you know, we talked about it, obviously, with our key channel partners. And I would say that if you recall our Q3, we were down 17%, and we think the market was probably down 5%. That's an aggregate. That's Muni and Resi. So, you know, there was certainly a piece of the inventory, a large piece of inventory that came out in our Q3. As we look at Q4 and we had a very strong booking quarter, certainly our backlogs grew across the business. You know, a couple of fold reasons. One, probably getting some inventory back in the level, certainly not to the level it was prior to Q3. But, you know, maybe a modest return of inventory in our Q4. and I think there's capacity for the channel to take inventory in 2021 and beyond because I think that they took a big slug out in Q3. So I think there is inherent in that number for Q4 is a little bit of inventory bill.

Okay, got it. Thank you.

Thank you.

Thank you. The next question will come from Brent Thielman of D.A. Davidson. Your line is open, sir.

Hey, great. Thank you. Good morning. Good morning. Scott, the taxing foundry is scheduled to be completed, I guess, this year, 2020. Are you expecting any incremental gross profit benefits from that coming online, I guess, into fiscal 2021? I can't recall if that was sort of a smaller portion of getting to that $30 million you talk about.

Yeah, so if I understood your question, yeah, we are now focused on, you know, bringing large bodies and pieces into the large casting foundry in Chattanooga. We've had some, you know, I would call them more a drag in the first three months on manufacturing performance as we go through our PPAP processes. We make tools and, you know, we get our, you know, let's call them, you know, Debugging Systems Dumb, especially on some of the automation we put in place. And so, you know, if you look at our forecast, what's inherent in that assumption is that the, you know, kind of let's call them the first half inefficiencies associated with PPAPs, associated with the debugging. will be offset by improvements in the second half as we start to get the benefit of the incremental volume and start to get the benefit of the incremental absorption. And so it's basically neutral in our 2021 and then starts adding manufacturing performance dollars, margin, et cetera, 2022. And then it's fully operational by 2023, carrying its own load in that $30 million of incremental gross profit we talk about. when we talked about the three capital projects. Got it.

Okay, that's great. And then the larger backlog in metrology, should that all convert in fiscal 2021 or is that spread out over a number of years?

So, no, it shouldn't all convert. You know, I guess the ones that most people know about, the Newport News, I believe, is a three-year install project. Newport Beach is a three-year install project. We have some other projects that are going to go end of life. So really strong performance as remote disconnect technology starts to get adopted. Excitement around Centrix. We expect that we'll continue to be able to have a fairly healthy order book for the meter business. Continued acceptance of the leak detection technology. The fact that both will be on a single platform in Centrix, integration of HydroGard and some other things onto Centrix as well. And so we think we have a fairly compelling growth story coming in the technology segment. But I think it's going to be dependent on, you know, kind of A, rate of adoptions and B, access to manholes and access to enclosed work spaces and access to consumers' homes. So I think the real increase this year is going to be what the shippable backlog in our iron gate valves and hydrants business is, which I think, you know, we had a really strong booking in our Q4. You know, the backlog grew in valves and hydrants. And there was one thing I didn't say in my prepared comments that I would say now, too, is around this notion that We had some absenteeism issues in our Q4 as we weren't able to ship everything that we booked as a result of COVID. But all in all, I thought the order was extremely strong for the manufacturing group given the challenges they had. So on the whole, I feel really good about where the backlog is. I feel really good about where our service levels are going as manufacturing works through it.

Sure, yep. I guess maybe a follow-up to that would be, you know, it seems like there's certainly some customer deliberation or hesitation, you know, at the onset of the pandemic. It seems like that's eased up a bit, and I'm speaking specifically to the technology group. I'm wondering if the timing to a decision or an award to you is narrowing a bit, at least from, you know, where we were several months ago at the onset of this.

I wouldn't say that the award process has been delayed for the meter business as much as it's been for the really large capital project business. You think about our specially developed business in particular. These municipalities go out, they hire the consultants, they evaluate, they get requests for proposals, they enter negotiations. I think that's remain relatively intact. I think what's delayed is even once they've made the decision in the meter business, then gaining access to your home or to my home, especially if in the early stages of the pandemic. So, yeah, I expect that things now that we know how to take safety precautions we know how to keep people I still don't think we're going to be doing any basement installs anytime soon but anything that's curbside or in a hand hole I think we'll start to see some normalization of that activity as the year goes on.

Okay and then one more from me you have this very defined kind of internal CapEx plan over the next few years here and you did talk about You know, a willingness or appetite to look at some bolt-on M&A. I'm just curious if, you know, any of those sorts of discussions are starting to perk up on your end.

Yeah, I mean, we're looking constantly. Every month we have process around our M&A pipeline, who's in, who's out. Is it actionable? All of those things. Where do we think? So we have our eyes, obviously, on several companies. And, you know, we're disciplined about how we approach it. And I think Our track record is that we're disciplined about how much we'll pay. I don't think that we're going to have interest rates at these levels in perpetuity. I don't allow the team to use discount rates that are assuming that you're going to have access to really, really cheap debt money in perpetuity. I think that we have strengthened our balance sheet to the point where We could definitely do something, and I have the appetite to do something, but we're going to remain disciplined, and that's been our mantra for four years, and it's not going to change.

Great. Well, thank you for taking the questions. Thank you.

Thank you. Our next question will come from Joseph Giordano of Cohen. Your line is open, sir.

Yes. Hi. Good morning. This is Francis going for Joe. Can you maybe put some numbers or a range around municipal budget expectations for both CAPEX and OPEX next year? Any sort of incremental color over there would be helpful.

Yeah, I think where we ended up is I think CAPEX is going to be down slightly year over year. I think OPEX, you've got to kind of split into two pieces, the planned OPEX and the unplanned. We expect the unplanned to continue to grow kind of at that 5%. Let's call it 10 even percent rate, but the planned piece probably planned right now for zero to three. And I would say that what's going to happen is because I have a much higher unplanned budget, I expect that that is going to shrink as time goes on. And so we expect kind of flat. I think what's going to happen and has been happening for a while, I want to be clear with everybody on the call about that, is that the unplanned spend, the frequency of pipe breaks, the frequency of pump seize, the frequency of a lot of these things going wrong in especially the post-World War II installed part of the infrastructure is taking more and more dollars from the planned part of the OPEX budget and moving it into kind of emergency response. Along with the increase in variability in our weather pattern, Disasters, whether you go back to Houston spend after the hurricane, Harvey, and those kinds of things, they're taking more and more dollars every year. I expect that trend to continue. So, you know, overall, I would expect that muni budgets are going to try to be managed to flat to low single digits as they kind of ride out what is going to be a little bit of an economic downturn, and that's That's kind of a collective view. I don't believe that that's an only, you know, a Mueller view of the world. I think, you know, if you listen to what people are saying out there, there's a great deal of uncertainty, and so people are kind of just holding back, if you will.

Okay, thanks. That's helpful. And for my follow-up, what kind of impact do you expect on the single-family housing market if a vaccine does come towards the end of the year?

That's a great question. I think it's going to continue. I think one of the outcomes of the pandemic and the reason you almost see a rebalancing, if you will, of the preference for single family over multifamily dwellings I'm guessing here there's no causation data, but certainly it's grown faster since the pandemic started. And I think people now appreciate the idea of having a single family house, a little space of their own, a little lawn of their own, a little distance from the neighbor, not have to worry about hitting elevator buttons and then grabbing your hand sanitizers. I think there's some underlying trends and demographics going on there that... Thank you. Thank you. Once again, if you would like to ask a question, please press star then 1 on your phone's keypad.

and our next question will be from Andrew Buscaglia of Barenburg. Sir, your line is open.

Morning, guys. I wanted to follow up on some of your guidance for next year in that I can see the conservatism in the top line based on everything you've said, but on your EBITDA line, can you talk about what you expect for pricing next year? Pricing versus cost, because I would think that Given the actions you've taken this year, I would think the low end is pretty conservative and even the high end is achievable or you could exceed if pricing seems to be holding up.

So, yeah, so to start off, as we said, we've got a range on net sales from about 0% to 3%. As we look at that, I think in terms of pricing, I would say we do expect to continue to benefit from pricing into our 2021. I'll give you a reminder that we did have some periods in our 2020 where we had the benefit of a couple of pricing increases and have lapped that. Additionally, from an inflationary perspective, we had a tailwind on some of our raw material costs in our fiscal 2020, and as we look out right now to 2021, we think that we'll be experiencing inflation there, but we'll obviously look to continue to balance that price-cost All that said, as you hear from the outlook that we gave, we are expecting improved performance as we look at our EBITDAs. We gave guidance of a 4% to 7% increase with that. And certainly, I think performance as we look out into 2021, some of the investments that we've made and the The continued focus on operational excellence, we do expect that we'll get some benefit from improved performance as we look out to our 2021, leading to what we expect to be EBITDA growth.

Do you expect your typical annual price increase? Did you mention that?

You know, I've always made it a really, we don't talk about price. until we talk to our channel partners and our customers first. And certainly there's a lot of dynamics going on in the market right now from the underlying raw material movements that would put some inflationary pressures on there. But we're not going to announce a price increase on an investor call. We'll do that with our channel partners. But I would say this, that whenever we have had an inflationary environment, we have had corresponding price increases through the channel into the market as a result. and that's been long before I got here. It's been like that since, you know, the 80s and 90s. Okay.

And I was pleased to see, you know, you're talking about a little bit more ESG in your press release and your prepared remarks. Can you just, you know, high level, what are some of the early findings you're starting to talk about more? And maybe how do you stack up against, you know, some of your water peers in terms of ESG or I think that's one area that Mueller deserves some credit for. I'm just curious what your initial thoughts are.

Thank you, Andrew. I think that we've always been very, very conscious of what the principles of ESG are. I think I heard our investment base basically say, yeah, you guys did a great job around getting TRI under control. Under 2 and the 1.1 rates, you've always told us that you're measuring things like your greenhouse gas emissions or pounds to landfill and things like that on the manufacturing side, plus the actual products, trying to find water leaks and conserve precious resources. So we've always done it. I think that since we went public, long before I got here, the Environment, Health, and Safety Committee of our board has been very, very conscientious around making sure this business and its people understand it's always best to do the right thing in your community. And you'll never, ever get any retribution for being safe or for keeping our environment clean. With that said, I think our method of disclosing and saying those things so that it's easy to access for our investors, we've heard that it's not easy enough. Thus, we're going to do our first inaugural, if you will, ESG report. I think that we now understand the framework, and we've got in front of us a I think a really, really good first level out there as it relates to governance, social, and environmental, or environment. And so I think that we are well on our way. With our kind of manufacturing background, you could expect that we have a real employee and environment focus. as we learn more and as we become bigger parts of our community and we continue to increase our employee pool, we're definitely picking more up on the social. So this first one I would say will be social. Socially not as heavy as we would expect in the future. I know there's a lot of talk around gender equality in pay and things like that and I would expect that people are free to have those discussions with us but we don't have all the data yet and there'll be things we get into in the future but I am proud of this team and I am proud of the progress we've made every year reducing the number of pounds we take to landfill every year reducing or improving our electricity efficiency the board investing in in the latest technologies so we don't have any impact on our environment. It's something that we hold very dear. I'm very happy to have that out in December.

Just to add on a couple of things, for a number of years, as you can see in our proxy, we have incorporated as part of the metrics that we use for incentive compensation, we have had metrics in and around safety and in and around environmental stewardship. That has been I'd say sort of a fundamental piece of our program for a long time. The other as we talk about technologies, as we talk about looking to integrate more digitally enabled information through our infrastructure products, I think the other piece that you will see in our sustainability report is really talking about how we are ensuring that with a lot of our new products, we are looking to address sustainability issues and opportunities that our customers and others will have in the marketplace as well. So I think that's another piece that we've certainly been talking about a lot here, and we'll highlight it as well in the report that's coming out.

Great. Thank you, guys. Thank you. Okay, operator, we're almost near the end. And if there are no other questions, I would like to finish with, you know, I think it was a really good quarter. We had some challenges, as I mentioned in my comments. We had some absenteeism issues as we quarantined our people to make sure, you know, we kept the disease out of our plants. We had really good manufacturing performance. In spite of that, we saw a really good sequential improvement in our order book activity. you know we booked some big technology projects we booked some big infrastructure projects and so all in all I took it as a really really good quarter and I feel like we have now going into 2021 some momentum I think we've got you know some uncertainty as well as a result of the pandemic but all in all I think that the thing I want to get through to everyone is after you get six months into kind of having your world turned upside down and they kind of look around the The Zoom room, for lack of a better word, and everybody's masked up and you're managing through a crisis, and you all know we've been through crisis before for different reasons, you start to get a sense of where the team is. I want to assure you, I have faith this team is ready to adapt and ready to do what needs to be done in order to look after employees, in order to look after communities, in order to look after customers. and I feel that we will adapt as we go and we've learned a lot about each other over the last four years and I expect us to learn even more next year but I do have faith that we will be able to adapt to deliver the best results that we can as a management team and to deliver clean, safe drinking water to the population who depend on us. So I feel good about the quarter and I just want to make sure everybody understands that. Thank you very much.

Operator?

Thank you, sir. We have no further questions at this time. And we will go ahead and... Go ahead, sir.

We'll just say goodbye. Thank you.

Thanks everyone for your participation on today's conference call. At this time, all parties may disconnect.