Mueller Water Products, Inc. (NYSE:MWA) Q2 2024 Earnings Call Transcript

Marietta Zakas: Yes. So as we look with the guidance that we have just given in and around the second half of the year. I think overall, first half of our year, we saw net sales down and we are looking for net sales growth with the recent guidance that we just gave in the second half of the year. I think importantly, as we look more now on the profit line or the bottom line and what our expectations are for the — as we look to the second half of the year. I know you just referenced the bit of pull forward that we think we saw as a result of the timing of the price increase. We talked about some higher costs that we expect to continue to have in and around our Krausz repair products. We’ve got higher costs largely with labor, materials and freight.

We did experience some of those in our second quarter. As a reminder, we really didn’t have any in our first quarter. But we do expect that we will continue to have those higher costs as we move into the second six months of the year. With respect to inflation, probably impacted more by labor inflation, I would say, in the first half of the year. But as we look out into the second half of the year, we think we could see more inflationary pressures in and around some of the material costs that we have, which could also be reflected in the purchase parts. Additionally, from an SG&A perspective, I think you saw us increase our guidance a little bit in and around SG&A as we move to the second half of the year. And some of that guidance is really coming from differences in and around our incentive accruals, inflation, personnel investments as well as additional cybersecurity protection investments.

Bryan Blair: Okay. Understood. And your updated full year guide implies around 20% margin. So that achieves, assuming execution continues, the fiscal ’25 outlook that your team had in place for a while, and you walked through a lot of good guides in terms of margin outlook and an opportunity that still lies ahead for your team? Is there a new margin target that you’re willing to speak to if we think about fiscal ’25, ’26 or any medium-term kind of time frame?

Marietta Zakas: Yes. So I’d say, looking out beyond 2024, I’d say we haven’t put anything out there at this point. I think absolutely right to call out what we had been saying is that we did have an expectation that as we looked at gross margin and EBITDA margin, we felt that we could get back to the pre-pandemic margins as we look to 2025. And I think certainly, as you point out, with the second quarter and the outlook, we’re certainly moving in that direction, but specifically other than looking to hit and move above the pre-pandemic margins that’s where we are today.

Operator: Our next question comes from Deane Dray with RBC Capital Markets.

Deane Dray: I’ll add my congrats to Martie and Paul. Maybe we can start off with the any more specifics on the new foundry. I know there are limitations in terms of comparisons, you can’t say necessarily what inning or how many SKUs or product certification. But just any color in terms of where you stand on the process of being closer to a full ramp?

Steven Heinrichs: Yes, Deane, our foundry teams are continuing to improve the operations in the new foundry. And as you can see, this translated into higher year-over-year production volumes and better sales through the foundry. The new foundry is using new equipment, which pieces of it continue to be installed, and we’re focused on ramping up the production volumes there to satisfy the backlog while continuing to work through our tooling process. We do expect to close the old foundry at the end of calendar 2024, which does continue to run today. We think that the impact of the duplicative costs of running two foundries is around 80 to 100 basis points as a headwind to gross margin. And with the closure of that facility, we expect to see that benefit coming in 2025 and going over to 2026.

Deane Dray: Those duplicative costs, those ramp down, we can just assume linearly or can there be any kind of step function as you eliminate outsourcing?

Marietta Zakas: Yes. No, look, that’s a great question. And it’s — think of it more as a step function because they’re going to — they’re just certain — when you’re running the foundry, there are just certain basic fixed and other costs that you’re going to have as long as that South foundry is running. So we do not expect it to be linear just because of all the basic — the lights on, the maintenance, importantly for the workforce that’s there, et cetera.

Deane Dray: That’s great. And then, Martie, just the idea on the pull forward, you’ve put through price increases before in the past. Was the magnitude of the pull forward surprising at all? I know, look, that’s a high-quality problem to ask about more business coming through in the quarter. But just the idea, did the pull forward surprise you in any way?

Marietta Zakas: Deane, I’d probably think of it maybe a little — here’s the way I’m thinking about it. I think with the timing of the price increase, I think, number one, it was the ability that we had to deliver and ship the product, which was a piece of it. I think the other piece of it is reflective of the market outlook. And as we talked about all the destocking that had been done, which we thought was pretty much by the end of the quarter, I think, in terms of looking at the end market, we’ve talked about the municipal market sort of being fairly resilient, and certainly, the residential construction market in a much better position than it was last year. That said, we know that still the high interest rate environment that is reflected in mortgage rates does impact the demand somewhat.

But I really think it was probably those factors that came into play. So it’s just, I would say, one of the call outs in terms of explaining part of the strength of our second quarter net sales growth.

Operator: The next question comes from Mike Halloran with Baird.

Michael Halloran: Martie, congrats on the formal announcement. A quick one here on margins. As we think about the cadence, particularly in WFS margins, how much should we be thinking about the margin levels kind of tracking with revenue as we move into 3Q and 4Q, and we think about the impact of the pull forward or rather, should we be more focused on the kind of the sequential trend and the impact of the internal initiatives and the pricing? Just trying to think about which kind of item — which line item we should be keying more off of?