Welcome and thank you for standing by. Today’s call is being recorded. If you have any objections, you may disconnect at this time. [Operator Instructions] I would now like to turn the call over to your host, Whit Kincaid. You may begin.

Good morning, everyone. Thank you for joining us on Mueller Water Products’ third quarter 2021 conference call. We issued our press release reporting results of operations for the quarter ended June 30, 2021, yesterday afternoon. A copy of the press release is available on our website, muellerwaterproducts.com. Scott Hall, our President and CEO and Martie Zakas, our CFO, will be discussing our third quarter results, the i2O Water acquisition, end market conditions and our updated outlook for fiscal 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 2. This slide identifies non-GAAP financial measures referenced in our press release, on our slides on and 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 to differ materially from those included in forward-looking statements. Please review Slides 2 and 3 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 30. A replay of this morning’s call will be available for 30 days at 1-866-448-7651. The archived webcast and corresponding slides will be available for at least 90 days in the Investor Relations section of our website. I will now turn the call over to Scott.

Thanks, Whit. Thank you for joining us today. I hope everyone listening to our call continues to stay safe and healthy. Before we review our financial performance, I would like to take a moment to talk about the tragedy which occurred at our Albertville facility. For the Mueller family, June 15 of this year will always be remembered for the senseless tragedy that occurred at our facility located in Albertville, Alabama. Our hearts are with the victims and their loved ones, the Albertville community and everyone at Mueller during this difficult time. The response from our team in Albertville and everyone throughout Mueller demonstrates the commitment our team members have to each other. We partnered with the National Compassion Fund to provide direct financial support to the families of our colleagues that were lost, our employees that were injured and employees that were impacted by this event. This fund makes it simple for anyone looking to support the families of the deceased and injured employees as they begin on their path to healing. We made an initial contribution to the fund and will cover all administrative fees. We are grateful for all of the support and encouragement we have received from the community and across the country. The tragedies in Albertville and Aurora test even the strongest resolve. Our hearts are broken and it’s going to take some time to heal. We are bringing to bear all the resources we can in support of the Albertville community. Our leadership team was on the ground within hours of the instance, and counselors were on site. The local law enforcement investigation is ongoing, and we are continuing our full and active cooperation. Our Board of Directors is committed to the safety and security of our employees and has engaged an independent consultant…

Thanks, Scott and good morning, everyone. I hope you and your families and associates remain safe and healthy. I will start with our third quarter 2021 consolidated GAAP and non-GAAP financial results then review our segment performance and finish with a discussion of our cash flow, liquidity and debt refinancing. During the third quarter of this year, we generated consolidated net sales of $310.5 million, which increased $82 million or 35.9%. The increase in net sales was driven by increased volumes at both Infrastructure and Technologies and higher pricing. Gross profit this quarter was $105.4 million, yielding a gross margin of 33.9%. Our gross margin increased 80 basis points versus the prior year. This increase was driven by benefits from increased volumes and higher pricing, which were partially offset by higher costs associated with inflation. Our total material costs increased 13% year-over-year in the quarter, primarily driven by higher raw materials, which increased double digits sequentially. While net price realization improved sequentially, our price/cost relationship was negative again this quarter, given rapidly rising inflation, particularly for raw materials. Selling, general and administrative expenses of $58.8 million for the quarter increased $11.7 million versus the prior year. The increase was primarily due to higher personnel-related costs, higher investment expenses and product development and IT, and no benefit from temporary expense reductions in the prior year quarter in response to the global pandemic. SG&A as a percent of net sales was 18.9% in the third quarter compared to 20.6% in the prior year. Operating income of $42.7 million increased in the quarter third compared to $20 million in the prior year. Operating income this quarter includes $3.9 million of strategic reorganization and other charges. These charges primarily relate to the Albertville tragedy, previously announced facility consolidation and acquisition transaction costs. Turning now…

Thanks, Martie. Before opening the call up for questions, I will discuss pricing and inflation, end markets, our large capital projects and the i2O acquisition and our updated annual guidance. As Martie mentioned, raw material inflation accelerated during the third quarter, impacting our gross margins. We continue to take actions to improve price realization with additional price increases and close management of our supply chain. During the third quarter, we announced our third price increase this year across many of our product lines. We were pleased to see the benefits from our previous pricing actions lead to a sequential improvement in net price realization in the quarter. However, due to the magnitude of the inflationary increases, especially raw materials, the lag between pricing actions and realization and the level of orders, the price/cost impact was more challenging this quarter compared with the second quarter. The sharp recovery in demand, coupled with supply constraints have led to record backlogs for our products, and extended the normal lag between the timing of inflation and realization of our pricing actions. As a result of these market conditions, we do not expect to see an improved price cost relationship until fiscal 2022. However, as we have seen in the past, when we look over the full cycle of the inflationary price movements, we expect to more than cover the inflationary expenses. Moving on to our end markets, we saw improvement in our end markets during the quarter as municipal spending continues to recover from the pandemic and residential construction benefits from strong demand for single-family homes. The third quarter was very strong with June starts at a $1.6 million seasonally adjusted annual rate. Due to a number of factors, including supply constraints and building cost inflation, we expect the growth in housing starts to…

[Operator Instructions] Our first question comes from Deane Dray from RBC Capital Markets. Your line is open.

Thank you. Good morning everyone.

Good morning Deane.

Hi. Good morning. Can we start with price cost? You gave a lot of good color there. It’s an industry-wide phenomenon. Can you quantify how you came out, price, cost? You said you were negative. Can that be quantified? And then some color on that third price increase. A lot depends on when was it rolled out? And how much in the quarter was that realized, because I know that really will dictate when in fiscal ‘22, you would start to, at least, reach parity? So, if you could – if we could start there, that would be helpful.

Sure. So price right now, the most recent price increase was effective the first week of August. And so as you predicted, we will have so much backlog in front of that rolling through that it will be into fiscal ‘22 and potentially even calendar ‘22 before we start flushing that through our P&L. And the majority of that is in steel. So, the two big drivers for inflation that Martie referred to in her comments around raw materials, it’s really the scrap market for steel, the ferrous scrap and then the copper component of the brass ingot has really driven the brass inflation. I would – both of them culpable, to different degrees, of course. But what we have elected to do is kind of lock in our brass tonnage for our fourth quarter. So, that’s pretty much fixed. I think we still have some exposure on what could happen with the scrap steel market. As for quantification, sequentially it cost us a few million bucks when you think about how negative we were in our Q2. The thing I would like to make sure that you understand though is in the past, these have actually been positive events. Yes, we have a little short-term gain. But when the commodities markets settle down, as long as it’s a gentle settling, we would expect that all the price we get through these inflationary periods to retain into the future as we want to set a new baseline, if you will. So, I think that there is some – the lag is going to be a little bit longer. It’s probably going to be in – through our fourth quarter into our first quarter of next year. It’s going to cost us a few million bucks kind of thing, differential. But I think all-in-all, we are going to be better off through the cycle because we have been able to get the sequential price increases quarter-after-quarter-after-quarter.

That’s really helpful. And yes, we fully expect you to be able to hold on to those prices. Once it’s gone through and it’s gone through distribution, we don’t see a scenario where you would have to give it up. Alright. So, a couple of follow-up related questions, you mentioned supply chain constraints. And again, we have seen it everywhere. But if you could give some specifics as to what you are seeing? I mean, are you not able to get some products? Is this pushing out project timing? And then related, has there been any benefit this quarter, especially in infrastructure on pull-in? So, are some of your customers who are seeing the exact same dynamics with raw material input costs, trying to get ahead of your price increases by pulling, give you earlier orders that would suggest it’s been pulled in from fiscal 4Q? Thank you.

Yes. So, I think the global environment is especially challenging. Our teams are no different than the ones you referenced. I know trying to get product even from our own plant in Jingmen supply lines, time to unload availability at the offloading ports, all of those things have extended and all of them are stressed. I think if I could, philosophically go back at 90 days, 120 days ago, we did anticipate demand increases. I think the world did. I don’t think any of us anticipated the strength with which the demand has increased and the supply chain wasn’t ready for it. And so what we have done is that in fact we have taken the material supply and we have drained whatever buffer was in the system. And literally, during the third quarter, we were managing material inflows kind of from a day-to-day point of view as opposed to a 3 days, 4 days on hand, we were running thin. And so those kinds of problems, I think are going to be self-fixing once the new level of demand and the capacity for that demand is established in the supply chain. And that’s whether it’s on raw materials, component inputs, even paint supply, forget the stake. All of those things just weren’t ready for the shock, the demand we saw in our fiscal Q3. And I think that, in general, in industry, we are seeing fairly substantial peaks to Q3 a year ago. So, it’s not just us. I think on the other points around supply chain that we really haven’t touched on is the other thing that has caused the unintended consequence is that we have been running over time at extremely high levels through the heat of the summer and in our Q3. And I think it’s the labor aspect of it is something that we will have to manage through Q4 as well as we try to get people brought into our factories trained and productive as a result of these record levels of production. And so I think that there is a piece from the supply chain as we continue to staff up that we are all a little bit cautious of being as far as what does that first 90 days productivity look like at these new kind of heavy production levels? Because we know in the long run, we cannot continue to run at the overtime levels we are currently running at.

And what about the pull-in thought?

Yes. I think that everybody has – if you had orders that had fixed price that weren’t – yes, everybody is trying to get those expedited and say, well, you owe me this, get it shipped. And even if I had releases in the future, there is some of that. But I would say the water industry, in particular, there is very, very little – low to pull-in. So, if you think of a short cycle businesses, the hydrid business, the valve business, there is very little kind of on scheduled shipment basis. And so whatever pull-in has happened has been de minimis.

Excellent. Just not a question, but a comment, these are extraordinarily tough conditions. I think you guys are communicating well, you are executing well. So, I appreciate all the color here. And also our thoughts and prayers go out to folks in Albertville and once again, you guys respond so admirably as an organization. So thank you.

Thank you, Deane.

[Operator Instructions] Our next question comes from Bryan Blair from Oppenheimer. Your line is open.

Good morning everyone. Very solid quarter.

Good morning Bryan.

Hi Bryan.

The incremental price increase was not a surprise at all given the backdrop. Just curious how much price is now assumed in the revised 14% to 16% fiscal ‘21 sales guidance? And as we look to the early part of ‘22, how should we think about price realization given the aggregate increases from this year?

Martie?

Yes. So, going ahead and looking at the price, just sort of a reminder, generally, our third price increase across our fiscal ‘21 so far. I think sort of a couple of things. We did see net price realization in our third quarter, and our expectations are that we will continue to see the net price realization moving into our fourth quarter as well. Scott referenced in the prepared remarks that we are – also are seeing record backlog across some of our shorter-cycle businesses as we are seeing strong orders continuing to come in. So, I think from a net price realization, I would say we expect that to continue to improve. And obviously, that is the intent behind that is to preserve margin with respect to the higher inflationary costs that we are experiencing.

The only thing I would add, Bryan, is as you think about modeling, if you think about our full-year price, whatever you have it at, at least, almost half of it is going to come in the final 120 days of the year. The combination of timing of increases plus where they stacked up in the backlog as is heavily back-loaded for the final 120 days of the year to realize more than half of our price for the year. With that said, we do still see these inflationary pressures, if that helps.

That does. I appreciate the color. And then i2O sounds extremely strategic. There is a compelling tie-in with Echologics, Singer and your overall digital portfolio. Just to level set, what should we assume in terms of financial contribution to start with?

Well, it’s relatively small bolt-on acquisitions. I think the most important point of view from us from a strategic point of view is to get that price of transducer and the pressure controller out there in the portfolio. And I will let Martie speak to the financials, but from the product development point of view and the strategic point of view, it especially on the controller plant, it’s probably shortened our time line for the long-term plan around pressure management anywhere from 44 months to 36 months. So, it’s going to put us in the game in the fight for pressure control pressure zones and having a full dynamic range on Singer that I believe will be the only ones in the North American space that will actually have software actuated dynamic pressure control valve available here in the next, let’s call it, 90 days to 120 days. So, I think it really shortened our time to market. As for the business, our standalone pressure transducer is not a large business. Martie, if you want to talk for financials.

Yes, just exactly.

You definitely had more strategic interest than the business model of the business.

Yes. So just to expand on that, Bryan, when we look overall at i2O, annual sales for this were less than $5 million. There will be some additional costs as we look to accelerate their product development and integrate it and introduce it to North America as Scott addressed. But overall, from a valuation perspective, when we looked at the return on this versus our cost of capital over time, we think it will be a nice value-enhancing, and as I said, accelerates the development that we would have had as well with this acquisition, which will be part of technologies. And certainly, over time, we think it will be accretive to technologies margins.

Makes sense. Kind of M&A is a proxy for R&D in that regard.

Yes.

And one more, if I can. Scott, if you don’t mind offering some more color, it would be great to hear more of your take on the infrastructure bill or hopeful infrastructure bill? And how much of a catalyst that incremental funding could be for the space overall and Mueller specifically as we look out the next few years?

Well, obviously, it’s a huge topic for us, and we are active trying in Washington to have our voices heard. And I know there are other water companies that we have joined arms that are trying to get their voices heard too. So, I think it’s critically important for us and our country to start looking after drinking water supply. And I do believe it’s long overdue to spend money not just on water infrastructure, but much of the company infrastructure. With that said, I think the current drafts of the bill that are floating around are excellent for companies like ours. Because I think what they do is – I think this is an important distinction, a lot of times when you think about ARRA and some other bills that have come around, all they have done has really changed the timing. They haven’t changed the fundamental economics of what to build and when to build it. So, if we were to go to Phoenix, Arizona and there is a pipe break, whether there is Federal money there or not, that demand is going to happen. Why, because the money exists, the infrastructure exists. It will be maintained. Their population is growing. There is – all of the pieces are in place. Just what the bill contemplate is what about those areas where there is a declining tax base or a declining tax rate. And so revenues are falling, populations are falling, and there is billions of dollars in this infrastructure bill that will be made available to those water utilities that otherwise wouldn’t have the means to go back and fix their infrastructure, to go back and remove their lead lines, to go back and improve their pumping infrastructure. So, I think that we are actually, as an…

Very helpful color. Thanks for taking my questions.

Thanks Bryan.

[Operator Instructions] Our next comes from Joe Giordano from Cowen & Company. Your line is open.

Hi, good morning Scott and Martie. Thanks for taking my questions. This is Robert Jamieson in for Joe. I think I know the answer to this, but I just want to check in on the component shortage that we are seeing elsewhere in the market and the impact that you all might have, had a competitor this morning impacted pretty heavily. I realize this is like a smaller impact versus raw material for you all, but just wondering what you are seeing there, any impact in expected timing of relief?

Well, I hate to say there is no impact that there is certainly on EchoShore-DX is chipsets around cellular, some of the components on nodes. So far, we have been able to manage the supply chain very closely, and we have not impacted scheduled shipments. And if you are talking about meters, in particular, we certainly lowered our buffers. But I think the fourth quarter should be fine, but that’s what our forecast assumes. But you are absolutely right that there is a lot of pressure, in particular, you know how these things work, Robert. The automotive industry is really pressuring all of the chipset manufacturers to convert anything they are making before to automotive chipsets and that pressure gets pushed down and down and down. And so it’s been an interesting 90 days. But so far, no real impact for us.

Okay. That’s good to hear and thank you for that. And then I just wondered if you could kind of update us on like market share dynamics and some of the actions you have taken more recently? And how you are intending to continue to improve your share over time? And that’s more like on the infrastructure side?

Yes. I think that where we have differentiation, where we have more specification position, we are the #1 player in the hydrants. We are the #1 player in distribution gate valves, butterfly valves, 24-inch and below. I think we may have some slight market share movements. But I don’t see massive shifts without real product differentiation, without real change to the use cost of ownership economics for utilities. And I think that the things like smart hydrant, things like valves with electronics embedded in them, will start to fragment the market a little bit. And we want to make sure that when that market fragmentation happens that we have the leading share of the higher tech product, and we are going to do that by continuing to bring technology to traditional infrastructure products as we have done with the small hydrants, as we have done with Insta Valves that are ready for water sampling, those kinds of things will get us a stronger specification position. But as for getting into hand-to-hand combat, all we are going to – we are going to take this over or that over, and do that based on the old technology. I think all that does in the long run it leads to modernization. And so we have to work hard on driving specification differentiation between us and our competitors. And over time, that will work.

That’s great. Thank you.

And Operator, there are no more questions.

That concludes our Q&A session. I would now like to turn the call back over to Scott.

Okay. Well, thanks, everybody, for joining us today. I think I am very pleased with the strong performance of the third quarter of our team. I think we have overcome a lot of external challenges to deliver the record net sales and increase adjusted EBITDA margins. We increased our adjusted EBITDA margin by 50 basis points through the first three quarters of this year, and we have increased our cash versus the end of 2020 even after we paid for the acquisitions and paying for the debt extinguishment associated with the opportunistic debt refinancing. So, I think we continue to take action as needed to improve price realization to more than cover inflation with price over the entire cycle. So, we will be able to pocket the majority of our manufacturing improvements that we are also driving through this period. I am confident we are well positioned to strengthen our leadership role in the water industry and benefit from the enhanced attention water is receiving, especially as it relates to things like infrastructure legislation. I think we have a strong flexible balance sheet, cash generation supporting our strategy. We are well positioned to benefit all of our stakeholders by becoming a world-class water technologies company. And I think that your continued interest in us only bodes well for the future. We are all very, very happy with Q3 and remain bullish for ‘22 and beyond. So, thank you for your time today. And I thank you for your interest in Mueller Water Products. And with that, operator, we will close the call.

Thank you for your participation in today’s conference. You may disconnect at this time.