MUELLER WATER PRODUCTS

Good morning, everyone. Thank you for joining us on Mueller Water Products' second quarter 2023 conference call. Yesterday afternoon, we issued our press release reporting results of operations for the quarter ended March 31st, 2023. A copy of the press release is available on our website, MuellerWaterProducts.com. Scott Hall, our President and CEO, and Marty Zaktas, our CFO, will discuss our second quarter results in markets and current outlook for 2023. 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 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 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 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 on September 30th. A replay of this morning's call will be available for 30 days at 1-800-839-1117. The archived 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 Scott.

Thanks, Whit. Good morning, everyone. Thank you for joining us for our second quarter earnings call. I hope everyone is doing well. I am encouraged by our team's performance this quarter. We increased consolidated net sales 7.2% compared with the prior year. strong performance at water management solutions, and higher pricing across most product lines more than offset lower volumes in water flow solutions. We continue to benefit from past pricing actions, which again more than offset ongoing inflationary pressures. The decrease in volumes was in line with our expectations as channel inventories normalized to reflect lower residential construction activity and improvements in product lead times. Our teams continue to make progress on our operational initiatives, including ramping up our new brass foundry. Adjusted EBITDA margin was also in line with our expectations. While it was lower than the prior year, we sequentially improved our adjusted EBITDA margin by 40 basis points. A significant increase in hydrant shipments helped water management solutions achieve more than a 22 percent adjusted EBITDA margin for the quarter. While performance at water flow solutions was impacted by lower volumes, we anticipate improved performance in the second half of the year based on cost reduction actions that we've taken and an expected increase in brass production. We are reaffirming both net sales and adjusted EBITDA growth guidance for fiscal 2023. We just released our third ESG report highlighting our focus on sustainability. During 2022, We continue to make progress on key initiatives that enable us to help water utilities address the growing challenges related to aging infrastructure and climate change. Our broad portfolio of products and services help customers reduce non-revenue water, extend pipe life, and provide life-saving fire protection. We made progress on our targets and commitments and disclosed additional ESG metrics relevant to operations. We continue to drive down operational emissions and achieved our initial emissions target significantly ahead of plan. We contribute to the circular economy using approximately 86% recycled metal to produce our products. When compared to our total waste, we are a net negative producer of waste. Our new brass foundry is a major step in advancing our environmental commitment and is a noteworthy advancement in sustainability for our customers and communities. As we strive to become a sustainability leader in our industry, we are committed to providing intelligent products and services that help cities and municipalities repair and replace their aging infrastructures, increase the resilience of their distribution networks, and respond to water-related climate impact. In 2022, we made substantial progress against our goal for our EcoShore leak detection product that helped clients identify an estimated 1.3 billion gallons of water loss. Notably, since 2020, we have enabled our clients to identify an estimated 2.8 billion gallons of water loss. From a governance and climate perspective, we launched our first index aligned with the TCFD recommendations, representing how climate-related risks and opportunities are embedded in our business decisions. I am proud of our team's accomplishments and the way we work to advance our ESG programs. I invite you to read our 2022 ESG report available on our website. Before providing more commentary on our results and outlook for 2023, I'll turn the call over to Marty to discuss our financial results.

Thanks, Scott, and good morning, everyone. I'll start with our second quarter 2023 consolidated GAAP and non-GAAP financial results. After that, I will review our segment performance and discuss our cash flow and liquidity. During the quarter, our consolidated net sales increased 7.2 percent to $332.9 million compared with the prior year. This increase was primarily due to higher pricing across most product lines in both segments and increased volumes at water management solutions which more than offset decreased volumes at water flow solutions. Gross profit of $97.8 million increased 5.4% compared with the prior year. However, gross margin of 29.4% decreased 50 basis points compared with the prior year, as benefits from higher pricing were more than offset by a decrease in volumes at water flow solutions, higher costs associated with inflation, and unfavorable manufacturing performance. For the fifth consecutive quarter, higher pricing more than offset ongoing inflationary pressures. We continue to experience higher costs associated with raw and purchased materials, freight, and labor relative to the prior year. Our total material costs increased around 6% compared with the prior year. The unfavorable manufacturing performance was primarily driven by outsourcing and underabsorption at our Chattanooga and Decatur facilities. We continue to use outsourcing, primarily for brass parts used in hydrants, to mitigate lower production at our brass foundry operations as we work through the startup of our new brass foundry. The cost premiums related to outsourcing represented about 150 basis points year-over-year headwind for gross margin in the quarter. We expect that outsourcing will continue until our new brass foundry is at run rate production levels. Selling general and administrative expenses of $64.2 million in the quarter increased 10.7 percent compared with the prior year. The increase was primarily driven by inflation, deferred compensation, consulting and legal fees, and increased travel and trade show expenditures. SG&A as a percent of net sales increased to 19.3 percent in the quarter as compared to 18.7 percent in the prior year quarter. Based on our annual guidance for SG&A expenses, we expect the year-over-year increase to decelerate in the second half of the year. Operating income of $32.9 million decreased 3.8% in the quarter, compared with $34.2 million in the prior year. Operating income includes strategic reorganization and other charges of $700,000 in the quarter, which were primarily related to severance and certain transaction-related expenses. Turning now to our consolidated non-GAAP results. Adjusted operating income of $33.6 million decreased $1.2 million compared with $34.8 million in the prior year. The benefits from higher pricing were more than offset by the decrease in volume, increased costs associated with inflation, unfavorable manufacturing performance, and higher SG&A expenses. Adjusted EBITDA of $48.1 million decreased 4.9 percent in the quarter leading to an adjusted EBITDA margin of 14.4% compared with 16.3% in the prior year. As a reminder, we incurred $1 million of pension expense other than service during the quarter compared with a benefit of $1 million in the prior year quarter. For the last 12 months, adjusted EBITDA was $188.7 million, or 14.4% of net sales. Net interest expense for the quarter declined $600,000 to $3.9 million compared with $4.5 million in the prior year. The decrease in the quarter primarily resulted from higher interest income. For the quarter, adjusted net income for diluted share was $0.14 compared with $0.15 in the prior year. Turning now to segment performance, starting with Waterflow Solutions. Net sales of $157.2 million decreased 14.5% compared with the prior year. Higher pricing across most of the segment's product lines was more than offset by lower volumes for iron gate valves and service brass products. Specialty valves experienced double-digit net sales growth compared to the prior year, driven by both higher prices and increased volumes. Service brass product shipments were impacted by machine downtime that contributed to both reduced throughput and manufacturing inefficiencies. Adjusted operating income of $15.2 million decreased 57.1 percent in the quarter. The benefits from higher pricing were more than offset by lower volumes, higher costs associated with inflation, and unfavorable manufacturing performance. Adjusted EBITDA of $23 million decreased 46.4%, leading to an adjusted EBITDA margin of 14.6% compared with 23.3% last year. Moving on to water management solutions. Net sales of $175.7 million increased 38.8% compared with the prior year due to increased volumes, primarily in hydrant and water application products, and higher pricing across most of the segment's product lines. Adjusted operating income of $31.9 million increased 170.3 percent in the quarter. Benefits from higher pricing and increased volumes more than offset higher costs associated with inflation, higher SG&A expenses, and unfavorable manufacturing performance, largely due to higher costs as a result of outsourcing. Adjusted EBITDA of $39.6 million increased 107.3 percent in the quarter, leading to an adjusted EBITDA margin of 22.5 percent, compared with 15.1 percent last year. Adjusted EBITDA conversion margin for the quarter was 41.8 percent. Moving on to cash flow. Net cash used in operating activities for the six-month period ended March 31, 2023, was $22.2 million, compared with net cash provided by operating activities of $800,000 in the prior year period. The decrease was primarily due to higher accounts payable turnover, partially offset by higher collections of receivables. Average net working capital, using the five-point method as a percentage of net sales, increased to 29.9%, compared with 25.8% in the second quarter of last year, primarily due to higher inventory levels. During the six-month period, we invested $20.5 million in capital expenditures compared with $26 million in the prior year period. Free cash flow for the six-month period was negative $42.7 million compared with negative $25.2 million in the prior year, primarily due to a decrease in cash provided by operating activities, partially offset by lower capital expenditures. For the full year, We anticipate that free cash flow will improve based on the seasonality of our operating cash flows, including a decrease in net working capital in the second half of the year. We did not repurchase any common stock, and as of March 31st, we had $100 million remaining under our share repurchase authorization. As of March 31st, 2023, we had total debt outstanding of $447.5 million in cash and cash equivalents of $89.2 million. At the end of the second quarter, our net debt leverage ratio was 1.9 times. We did not have any borrowings under our ABL agreement at quarter end, nor did we borrow any amounts under our ABL during the quarter. As a reminder, we currently have no debt financing maturities before June, 2029. At March 31st, 2023, we had total liquidity of $251.7 million, giving us plenty of capacity to support our strategic initiatives. Back to you, Scott.