Welcome. And thank you, for standing by. At this time all participants are in listen only mode until the question-and-answer session at today's conference. [Operator Instructions]. Like to inform all parties. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I'll turn it over to the Whit Kincaid. Thank you, you may begin.

Good morning, everyone. Thank you for joining us on Mueller Water Products Third Quarter Conference Call. Yesterday afternoon, we issued our press release reporting results of operations for the quarter ended June 30th 2023. 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 discuss our third quarter results and 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 30. A replay of this morning's call will be available for 30 days at 1-866-510-4837. The archived webcasts 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. And good morning, everyone. Thank you all for joining our third quarter earnings call. Our third quarter results came in below our expectations. With both consolidated net sales and adjusted EBITDA below the prior year. We experienced a sequential decrease in orders during the quarter and manufacturing inefficiencies primarily associated with lower volumes and the ramp up of our new foundry. We believe these lower order levels largely reflect the return to pre pandemic lead times for most of our short cycle products, specifically iron gate valves and hydrants. Additionally, we believe the new residential construction end market continues to adjust to higher interest rates. As a result, we continue to be impacted by a more prolonged inventory correction than previously anticipated. Despite the challenges, I am encouraged by our execution in a quarter with the sequential improvements in adjusted EBITDA margin, or past pricing actions across most product lines. Again, more than offset ongoing inflationary pressures. Similar to the second quarter, water management solutions delivered strong results supported by an elevated backlog for hydrants and improved manufacturing performance. We expect the relatively low order rates for our short cycle products to continue in the fourth quarter. Also, we anticipate lower brass production levels relative to previous expectations. As a result, we are revising our annual guidance for 2023. We have taken actions to streamline our costs to help mitigate the headwinds from lower volumes, which I will address later in the call. We believe our end markets have strong long-term fundamentals, especially with the future benefits from the infrastructure bill. Our new foundry remains on track to fully ramp up by the end of fiscal 2024, positioning us to capture increased demand related to lead service line replacement projects. Though the external environment continues to evolve. We remain confident that we can return to pre pandemic margins in 2025 after we get through the current transformational period. With that, I'll turn the call over to Martie to discuss our financial results.

Thanks, Scott. And good morning, everyone. I'll start with our third quarter 2023 consolidated GAAP and non-GAAP financial results. After that, I will review our segments performance and discuss our cash flow and liquidity. During the quarter, our consolidated net sales decreased 2% to $326.6 million compared with the prior year. This decrease was primarily due to lower volumes at waterflow solutions partially offset by higher pricing in both segments across most of our product lines and volume growth at water management solutions. Gross profit of $100.1 million increased 1.8% compared with the prior year, while gross margin of 30.6% increased 110 basis points compared with the prior year. As a reminder, the prior year quarter included a $4.5 warranty accrual charge, excluding the warranty charge gross margin decreased 30 basis points. The decrease was primarily due to lower volumes at waterflow solutions, unfavorable manufacturing performance and higher costs associated with inflation, which more than offset benefits from higher pricing and higher volumes at water management solutions. We were pleased to see our gross margin improved 120 basis points sequentially, despite the lower volumes. Additionally, higher pricing more than offset ongoing inflationary pressures, as we continue to experience higher costs associated with materials and labor relative to the prior year. The level of total material cost inflation improved relative to prior quarters with a 2% increase compared with the prior year. Selling, general and administrative expenses of $60.6 million in the quarter were comparable with the prior year. Lower personnel incentive and IT costs helped to offset inflation and the impact of foreign exchange SG&A as a percent of net sales increased to 18.6% in the quarter as compared to 18.2% in the prior year quarter. Operating income of $35.6 million decreased 3.5% in the quarter compared with $36.9 million…

Thanks, Martie. I will provide additional comments on our third quarter performance, end markets an updated full year outlook for 2023. After that, we'll open up the call for questions. We are seeing lower order rates for most of our short cycle products. With lead times returning to pre-pandemic levels and the end markets continuing to adjust to higher interest rates. We are experiencing a more prolonged inventory correction than previously anticipated. During the third quarter hydrants and service brass products both benefited from elevated backlogs. However, starting the fourth quarter, our short cycle backlog was close to normalize for hydrants and iron gate valves, while backlog for service brass products remains elevated. We are working closely with our channel partners to understand sell through and channel inventories for our short cycle products at the local level. While the fundamental growth drivers of our business remain intact for the longer term, we have updated our view on ordered levels for the fourth quarter. As a result, we continue to adjust plant spending, including labor schedules to improve our conversion margins on the anticipated lower volumes. During the third quarter we improved brass production with a sequential increase in pounds produced, which translated into our highest quarter of sales since 2021. We made further progress on the ramp up of our new foundry with increased production levels. We have our sand system installed along the pouring line designed for high turnover high mix products. As anticipated, we were experiencing inefficiencies and startup costs associated with the new foundry. We are working through the engineering and technical challenges associated with the new foundry equipment and lead-free brass alloy. We are over halfway through the tooling for our highest volume parts and have slowed the new tooling process to focus on increasing production…

Thank you. We will now begin the question-and-answer session. [Operator Instruction]. First question is from Deane Dray from RBC. Go ahead. Your line is open.

Thank you. Good morning, everyone.

Good morning.

Maybe we'd start with the destocking phenomenon. And look, we're seeing this across pockets of the industrials and also in like life sciences. Yesterday, like the short cycle electrical products with Wesco, there's a common theme. This is the back side of the whole COVID product shortage. The times are now getting back to normal. And it really becomes a question of how long does it take to work through the system. It's not a question of execution. It's just absorption as long as end market demand stays steady. So, Scott, from your perspective, what has surprised you so far on the destocking side? So the hydrants and iron gates seems to have worked itself as we'd expect shorter cycle? But what's unique about service brass and why would that be taking a bit longer?

Well, I think the service brass is somewhat related to our ability to produce. So as I said in my prepared comments, we still have elevated backlog levels in service brass. And I think that the delay that you're seeing and us working that off is a really a result of continued poor, up times and poor performance at the old foundry. And in fact, during the quarter, we ultimately took the second shift off the legacy foundry and moved them to the new foundry and adjusted because we've just not been able to get the throughput on the machines that we need to satisfy customer demand. And so really, what you're seeing in the quarter was, albeit higher throughput, approximately 110 individuals being trained up on the new equipment. So, kind of changing the tires while the car is running down the highway. But we expect the recovery in brass to be pushed out. So, what you're seeing in gate valves and hydrants is probably two quarters away in brass. So that the channel will be full with all of this bulge of backlog finally getting shipped out and then we'll see a market order slowdown. With regard to gate valves and hydrants, I do want to say that I think that the channel has had sell-throughs decline year-over-year, basically on the back of their service to the resi-market.

Right, that's, that's helpful. And we see where that's connected. And just look, I don't think anyone's expecting the new foundry ramp to be necessarily linear. And we appreciate the data points that you've been giving us. The idea here on the offset to this as the outsource activity. And it was a reference about higher costs was that you were putting more volume through outsourced on the brass side, or was that just a year-over-year comparison and just kind of, if you could give us some dimensions of how much on outsource activity and what the expectation reset now is on how that eventually ramps down

Yes. So, what we tried to convey is that sequentially outsourcing went down by about a million bucks. Year-over-year, it was basically flat. Tire costs were associated in the foundries combined associated with the off shift moving from the old system to the new system. So, we basically had a few weeks of, OJT or on the job training for the operators who are on the off shift at the old foundry now on the off shift at the new foundry. But for approximately three, four weeks, most of those individuals were working days as they learned their job shadowing, other members. And so those costs associated with the ramp up those non-productive labor hours, they were all driving the year-over-year, increased cost to produce a pound of brass.

Our next question is from Joe Giordano from TD Cowen. Go ahead, your line is open.

Hey, guys, good morning. I just want to understand kind of like, we've been talking about destock. So, like, I guess, some modest revisions. Okay. And I don't think anyone go crazy on that. The magnitude is so large that, like, almost feel like how is it caught so off guard for this type of magnitude of change, like over three months ago, when we were already talking about destock?

Yeah. I think what's fundamentally changed in our view of the fourth quarter, is the pace at which we will start to see the flow-through come back in. And I think that originally, we felt like our fiscal fourth quarter would still be a strong construction cycle quarter for both muni and resi and that the channel will have depleted its excess inventory levels, and we would start to see flow-through in June and July in gate valves first because if you recall, it was the one that was -- we exhausted the backlog there first last year. This Q3, we basically exhausted the backlog for hydrants and worked through all of that. So if you look at the flow-through models, you would have said we should have seen increased orders activity in gate valves back to kind of pre-pandemic volume levels in June and July. We have not observed those booking rates. In fact, those booking rates have been less than 50% of those. So we've checked with the channel to see what the recovery looks like. And I think what we have is a softening demand from construction for the channel, along with ending the construction season. So, I think that the recovery to flow-through is going to be muted. And so what we're now thinking, Joe, is that as we traditionally go into the winter months and we lose basically half the country's ability to do any meaningful work that's really break fix in the north at that point. And we're not going to really start to see those kind of pre-pandemic levels again until our second quarter next year when we start to start loading for construction. So we're going to have this gradual creep back up as opposed to the recovery we were forecasting only 90 days ago. And I think the recovery length is going to be extended by about two quarters.

So, are you saying that the actual sell through from your customers from your distributors to the ultimate customers? Is that deteriorating? Pretty quickly to I guess the thing that everyone needs to calibrate is like, Yes, this is weaker, fourth quarter is going to be significantly weaker. Is 2024. Demand, like materially different than what we thought it was three months ago?

No, I don't think so. I think that the channel inventories are going to be enough to get us through the end of this construction season. And so the rate to go fill it back up to just have it sit there in the winter month. I think there's low appetite for that. So, I think the non-construction season in our Q1 and Q2 for seasonally adjusted, normally, they are our lowest quarters. So, I think that there's enough inventory in the channel that we're going to have difficult booking fourth quarter, and I think we'll start to see recovery for bookings in our Q2.

Our next question is from Ryan Connors from Northcoast. Go ahead. Your line is open.

Good morning. Thanks for taking the question. I wanted to ask on the price side. It seems like price was actually pretty positive in the quarter and kind of an offset that precluded things from being maybe even tougher. So I wanted to get -- can you remind us sort of how much price you think you took in the last couple of years? And how sustainable that side is to the extent some of this continues to push right a little bit into '24, as Joe kind of intimated there. I mean, is price going to continue to be something that can offset some of this? Or are we kind of getting to the end of that rope as well?

Well, I think that price for the quarter was double-digits really on the strength of hydrant. So, if you think about what was in the tail end of what was kind of stuck in the backlog, Ryan, really all those pricing actions we took in the -- during COVID and then kind of through the inflationary period now are all paying dividends. As this industry the way it normally works is there's a February price increase. It's an annual price increase and you're giving a window to get your load in so that we encourage people to put stock in place in the February, March and two weeks of April time frame. So, that we can kind of level load our factory and not just kind of trying to spike during the summer months when the construction season is the highest. And so I think the whole price structure will return to normal for the industry. That's certainly what we anticipate and we would expect to get price kind of in that February window, but we don't announce anything until we talk to our customers. The other thing I would like to point out is that I think we're seeing a significant slowdown in inflation. It was I think raw material prices have continued to move in a different direction. So that also helped the sequential margin improvement.

Yes. Okay. Fair enough. And then the other was kind of bigger picture, I mean, given how long -- we're kind of almost a year into these manufacturing uptime issues and production issues. And given how that's kind of dragged on a bit. I mean, you have to imagine competition must be selling against you on that and trying to pick up share. I mean, what are the market share and competitive sort of ramifications of what's this process you're going through on the production side?

Well, I think interestingly, both our competitors in brass have now announced increases in capacity. One is building a brand-new foundry. We feel like we have a three-year head start on them. And one is going to try and modify an existing footprint and add melt and mold capacity. And that's in the public domain, you can look at the various. So, I think that they are now realizing what we identified three years ago, we not just led service line, but dependence on Chinese business, a lot of the other factors that kind of spurred us into investing in the foundry. I think if you were to criticize us, you would criticize us and say when we paused the project in Q3 of 2019, it cost us -- it might have been in 2020, sorry, it cost us more than the 3 months we paused because of the supply chain implications, inability to get equipment in and things like that. And I think that, that is fair. But I would say in brass, we have not been able to keep the old foundry running at even its historical rates as we've had more and more difficulty even getting parts, [indiscernible] and table parts, sinter [ph] parts, I mean, it's been a very challenging engineering environment for our team. And I think that is a fair criticism that we should have been able to keep that kind of daily throughput at the old foundry for longer than we have. But as I said in my comments, this quarter, we have had to -- I just finally said, take everybody off that second shift at the old foundry. Let's get them getting productive at the new foundry because there are just too many complex, technical and engineering challenges at the 100-year-old foundry. As for the brass -- I mean the iron side of the business, yes, I think we've had share moving back and forth as lead times dropped. When we were inside our two competitors there on gate valve, I think we took share. While they were inside us on lead times and hydrants, I think we probably lost some share. So I think it's been kind of an opportunistic, but I don't think the share in either direction, either the share we gained in gate valves or the share we lost potentially in hydrants is permanent by any sense of imagination. These are all service-related projects.

[Operator Instructions]. Our next question is from Walt Liptak from Seaport Research.

I want to go back to one of the earlier questions and just better understand like we have been talking about destocking, why was the visibility on this destock? So why didn't we get a heads up on it? And then maybe as the follow-up -- and then maybe as a follow-up, it's good to see you're taking costs out of SG&A., was this something reactionary that you guys did? Or was this a response to -- like a quick response to what's happening with the destock in the channel?

I think that first and foremost, the SG&A as a percent of sales is something that Martie and I review every quarter. We look at where we've placed our bets, both in marketing and in selling initiatives. I think we got out of ACE and we looked at where the market was and thought we were a little heavy in cost to serve in a couple of our businesses and started with the selling restructuring. But I'm a firm believer that once we got into the downturn of having to lay off the hourly personnel as well as doing the sales restructuring that we create a sense of urgency, and I think we went after the G&A costs during our fourth quarter, certainly, we've had done the planning in the third quarter. And so yes, to both, yes, it was partly a response to the declining outlook. But it was also part of a more proactive look at our cost to serve in selling and marketing. And so that's why it was done in two steps. And we will continue to watch SG&A as a percent of sales, and we'll continue to watch our cost to serve various customer groups and make sure that we're making money and have the ability to get leverage as we grow sales. With regard to your first part of your question, I think that the first thing I would rephrase it, like what do I think the failure mode was in the drawdown in inventories. And I think it really comes down to what we thought the sell-through rates were going to be through the construction season. So if you think about the construction season from May, June, July and August, and you say, okay, the sell-through rates for gate valves are going to…

Okay, yeah, it does. Thank you.

I show no further questions at this time. I will now return the call back to Scott Hall. Go ahead.

Thank you, operator. Look, thanks to everyone for joining us on today's call. Obviously, this is a transformational time for both Mueller and the water industry in the U.S. I believe we are poised to benefit from the accelerating age of our water infrastructure and increased federal spending. And we're focused on driving the operational improvements and commercial strategies as we believe there is a substantial long-term margin improvement opportunity for Mueller and for our shareholders. I'm confident we can grow net sales and significantly increased margins over the next two years as we look to get back to pre-pandemic margins in 2025. And I thank you for your continued interest in our company. And operator, please conclude the call.

That concludes today's conference. Thank you for participating. You may disconnect at this time.