Welcome and thank you for standing by. [Operator Instructions] I would like to inform all parties that today's conference is being recorded. If you have any objections you may disconnect at this time. I would now like to turn the conference over to Whit Kincaid. Thank you. You may begin.

Good morning, everyone. Thank you for joining us on Mueller Water Products Fourth Quarter and Fiscal 2023 Conference Call. Yesterday afternoon, we issued our press release reporting results of operations for the quarter and year ended September 30, 2023. A copy of the press release is available on our website muellerwaterproducts.com. I'm joined this morning by Martie Zakas, our Chief Executive Officer; and Steve Heinrichs, our Financial Officer and Chief Legal Officer. 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 also 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 2. 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 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 30th of September. A replay of this morning's call will be available for 30 days at 1-800-819-5743. 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 Martie.

Thanks, Whit. Good morning, everyone. Thank you for joining us for our fourth quarter earnings call. I'll start with a brief overview of our fourth quarter and fiscal 2023 performance. We executed well to finish the year, despite a challenging external environment. While our fourth quarter net sales exceeded expectations, we experienced a mid-teens year-over-year decrease in volumes. As a reminder, this decrease was due to the ongoing channel and customer inventory destocking, reflecting normalized lead times mainly for iron gate valves and hydrants. Additionally, higher interest rates slowed new residential construction activity, especially land development. Continued benefits from price realization and improved execution by our operations and supply chain teams led to higher gross margins compared with the prior year. This includes strong margin improvements for both segments on lower volumes. Our supply chain team helped drive productivity improvements in the quarter, including reductions in outsourcing and freight costs. Water Flow Solutions' specialty valve operations had an outstanding quarter, reflecting the successful ramp-up of our new manufacturing facility in Kimball, Tennessee. Improved production for service brass products and better flow through for our iron gate valves also contributed. Water Management Solutions improved execution helped offset lower volumes and a warranty charge in the quarter. Lower SG&A spending, which includes benefits from our previously announced cost actions helped increase our adjusted EBITDA margin to 18.4% for the quarter. This EBITDA margin is the highest quarterly margin since the third quarter of 2021. We are on track to deliver the remaining portion of the $25 million cost savings program in 2024. Our free cash flow improved by more than $60 million in 2023, exceeding our expectations as inventories declined sequentially and we normalized our capital spending. I'll now provide an update on the cybersecurity incident announced on October 28th. We have…

Thanks, Martie, and good morning, everyone. It's great to be with you this morning from my first earnings call as Mueller's CFO. Although this is my first earnings call as CFO, I've been with Mueller for over 5 years and I'm confident that our future is bright. Mueller has a leading array of products and brands, coupled with deep industry knowledge, strong channel presence, durable customer relationships and dedicated and passionate team members. I'll now turn to our fourth quarter and full year results. For the quarter, our consolidated net sales decreased 9.1% to $301.4 million compared to the prior year. Lower volumes, mainly in iron gate valves and hydrants were partially offset by higher pricing across most of our product lines. For the full year, our consolidated net sales increased to 2.3%, driven by higher pricing, partially offset by lower volumes, mainly in iron gate valves and service brass products. In the fourth quarter gross profit of $88.4 million increased 3.3% compared with the prior year. Gross margin of 29.3% increased 350 basis points compared with the prior year. Benefits from higher pricing improved manufacturing performance and lower freight costs more than offset lower volumes and warranty obligations. As part of a regular assessment of our warranty obligations, which includes an assessment of our warranty experience and replacement costs, we increased our warranty accrual by $5.7 million in the quarter. Excluding this charge, gross margin was 31.2% with a 540 basis point expansion versus the fourth quarter of 2022. We were pleased to see improvements in gross margins for both segments despite lower volumes. The benefits from price realization were sequentially lower in the quarter, as we lapped price increases from the prior year. However, inflationary pressures lessened relative to the third quarter, especially compared to the increases we…

Thanks, Steve. Before we open it up for Q&A, I want to share some final thoughts. Since taking on the CEO position, I have spent substantial time with our employees, channel partners and customers. I have visited most of our facilities and spoken with many team members to better understand the opportunities for the business moving forward. It is very clear to me that we have a strong foundation built on our talented and committed employees, industry-leading brands and deep distribution channel, and end customer relationships. Our broad portfolio of products and solutions allows us to play a critical role in addressing the challenges and opportunities facing the water infrastructure industry. We believe we are at an inflection point with our strategic investments and operational improvements. Despite the current external headwinds we are facing, we are well-positioned to deliver long-term sustainable organic growth and margin improvements. The municipal water end market is poised to benefit from the increased attention and investment towards the aging water infrastructure, while water utilities face a growing set of challenges requiring trusted partners. We believe we have the products and solutions that are positioned to benefit from the infrastructure bill once funds begin to flow. Additionally, our strong balance sheet, liquidity, and cash flow allow us to continue to deliver shareholder value by reinvesting in our operations and returning cash to shareholders. This year, we allocated $48.1 million to shareholders through share repurchases and our quarterly dividend, which was recently increased for the eighth time since 2014. We are confident that the actions we are taking to execute our strategy will further strengthen Mueller for the long-term. That concludes my comments. Operator, please open this call for questions.

[Operator Instructions] Our first question comes from Bryan Blair from Oppenheimer.

I appreciate the guidance on revenue cadence through the year. I was hoping you could offer a little more color on expectations for resi land development and repair and replace demand, respectively. And along those lines, what factors may drive upside or downside relative to the assumptions you have baked into your guide?

Certainly. So as we are looking out to our 2024 sales, I think overall, the volume expectations are certainly one of the drivers as we look at it from a year-over-year. We do think that the end markets are generally healthy, specifically, looking at the muni repair and replacement market, we think it was overall pretty resilient in '23. We think that, that could still have some low single-digit growth in 2024. But as we've said, sort of the benefits that will ultimately come from the infrastructure bill, we really don't expect to start seeing them either until late in our fiscal '24 or thereafter. With respect to residential construction, we saw that single-family starts were down in our fiscal '23, about 16%. And we expect that the -- some of the lower-end market volumes that we're looking at are primarily going to be reflective of the slowdown with residential construction activity. And large reason for that has been the higher interest rate environment that we have been in, and importantly, the associated mortgage rate. So, as we think about this a little bit more, we believe that these higher interest rates have impacted some of the land development and that's typically where we come into play, is when that horizontal infrastructure begins [ rebuilt. ] But overall, there are pockets of growth that we see across the U.S. But certainly with the decision and commentary from the Fed yesterday, where they have indicated that they may slow down, didn't have a rate increase, and even highlighted that there could be some rate cuts looking into 2024, I think certainly seeing where interest rates go, but importantly, how that impacts mortgage rates could affect the residential construction market. But right now, as we're looking at it, we continue to expect a more modest slowdown in the resi construction market and sort of maintenance in and around the municipal repair and replacements market.

Understood. And those dynamics make sense. And if you're willing to provide the number, what was the expense related to outsourcing and other inefficiencies with the foundry transition in the fourth quarter? And remind us where that peaked and how you're thinking about those one-time-ish kind of inefficiencies phasing through your fiscal '24?

So, let me try to hit that. So I think overall we have identified some of the outsourcing costs that we have had and how that's impacted us due to the period of ramp-up with our new brass foundries. I would say a couple of things. We -- our outsourcing costs have improved on a year-over-year basis and they improved sequentially. I think this was in large part due to some of the -- with our supply-chain teams overall and looking at the outsourcing cost, as well as what we've been able to do with our other purchasing as well. We expect to continue to see some improvements with that as well as overall freight. Additionally, some of the -- what we're seeing is, we're adjusting to the different volume levels as we have brought down some of the backlogs, particularly with our hydrants and iron gate valves. So although we do think that we'll have a lower level of outsourcing and we'll continue to see that improve throughout 2024. With respect to the brass foundry, we did talk specifically that we're continuing to see improvements as we ramp up our new brass foundry, and with the existing brass foundry that we have, we do expect to continue that to be operational through calendar 2024. It does cause us to have some duplicative costs with both of those foundries, but importantly, as we look out with the higher backlog levels that we still have with our service brass products, we think it's important to work to continue to lower that level of backlog. Additionally, when we look at the infrastructure bill and specifically where we expect some of the earlier spending could be, it's certainly associated with the initiatives and allocations around lead service line replacement. And I'll remind you, with the lead service line replacement, that's where a lot of our service brass products can go. So our focus is on continuing to keep the improvements going with our new brass foundry, working to bring down that service brass backlog and to be prepared as well for where we think that will be one of the benefits with the infrastructure bill.

Yes. The IIJA has a fair bit in it for replacing lead service lines, and we're going to expect you to see that at the end of the year. So it's not coming in the immediate term. And so, we hope to see the benefit of that and the benefit of the reduction in operations at our old salary to improve our results.

Our next question comes from Joe Giordano from TD Cowen.

This is Michael on for Joe. So last quarter you mentioned you were around [indiscernible] through the tooling of your highest volume products to the new foundry operations, and we're beginning to focus on the production side. Can you dive into just the remaining time line of capital projects and the areas of the portfolio you still need to ramp on the production side?

Yes. So I want to make sure your question is really around sort of the CapEx spending going forward.

Yes. On the CapEx side of the foundry operations.

Okay. Yes. So, overall, with respect to our capital guidance, we are seeing, I think we have indicated overall that once we got through the 3 major capital projects, we did expect to see our capital expenditure levels falling below 4% of our net sales. As we look at 2024, specifically, we still do have some capital expenditures associated with the new brass foundry. We referenced some of the additional machining that would be coming online in 2024. Some of that, as I say, as we've seen some of the extended supply chains, that has certainly extended to some of the machinery that we purchased. So that's part of what we've got encompassed in our 2024. And then with -- other than that, I would say we continue to have investments with our other operations. Some would be along the maintenance line, as we are largely vertically integrated and operate foundries both on the iron and on the brass side. And additionally, we'll look to make some investments in our facilities that will just overall enhance our operational efficiency.

Yes. And as we said, our expectations for capital spending in '24 is around 4% of net sales or between $45 million and $50 million. And as we were concluding these major capital projects that we've embarked on over the prior years, we expect it to decrease a bit from there.

Great. That's helpful. And just one more, if I may. You mentioned last quarter restructuring of the sales and marketing organization. Can you just give some color on the nature of those changes and how far along you have been through and how much has been realized?

Yes. So overall, in terms of the SG&A, and there were a couple of areas across our selling general and administrative expenses, we did have some reductions. We identified that we expect to have about $25 million in annual savings from that. We have realized some of those savings in our third quarter as well as in our fourth quarter, and have realized almost 30% of those savings in our fiscal '23. A lot of those savings are really coming from lower personnel-related expenses as well as third-party fees associated with that. As we move into '24, we do still expect to realize the balance of those identified savings. Some of those savings will be offset by looking at some additional investments in personnel, importantly some inflation, as well as some of the additional investments we'll make in and around cyberstructure-related infrastructure costs. Also in '24, we do expect it to be offset. When I said personnel, what I really meant was some of the incentive costs that we will have in '24 relative to '23 in terms of projections.

Our next question comes from Deane Dray from RBC Capital Markets.

This is Jeff Reive on for Deane. My first question is kind of regarding the cybersecurity incident. I think it's great to see that it's mostly contained and limited impact to the fiscal first quarter. But firstly just, can you confirm that you're not really expecting any lost or deferred sales at all from this? Also, will there be a free cash flow impact in the first quarter, like any delayed billings leading to delayed collections on accounts receivable? And regarding the cost associated with remediation, do you have any business disruption insurance in place to kind of recoup some of that?

All right, so let me go through and make sure we hit all of your questions on this, and if we didn't, certainly come back and please ask them again. So, let me just sort of start off with bigger picture and then we'll get into some of the more specifics. So for the cyber incident that we announced on October 28, very quickly after that, we implemented our response and containment protocols. We also engaged in third-party cybersecurity specialists to help support us. We were focused on containment, but importantly also how to continue to run the business and servicing our customers. Although most of our facilities were impacted to a certain degree, we were able very quickly to -- with most of our facilities to maintain our operations and to continue to take orders and ship products to our customers during this time. I would say we have learned a lot through this event. Unfortunately, we're seeing across the U.S., and I say overall even more concentration in the manufacturer industry, that these attacks are increasing, which is certainly regrettable. But I know we referenced in our prepared remarks, but certainly the team [indiscernible] cybersecurity specialists that we engaged, really worked very quickly and effectively to not only address the incident but to continue to service our customers. We adjusted our processes where we needed to, but I think importantly, that allowed us to largely be operational in servicing them. So I think hitting some of your other specific questions in and around insurance and free cash flow, I'll turn that over to Steve.

Yes, we do have cyber and business community insurance, but as we mentioned in our prepared remarks, the full cost of the incident have not yet been determined, and we're assessing and still working on our position with respect to that right now. We anticipate that the incident had some negative impact on us, but it would have been relatively modest for the first quarter of '24. And that's kind of where we stand with respect to the estimation of the cost of the cyber incident.

Yes. And with respect to free cash flow, I would say we don't expect any meaningful impact in our first quarter.

Okay. That's great. And then just maybe a broader question, but do you think there needs to be a larger internal investment into some of your software systems? I don't know if maybe some of these systems were old and this could be part of it, but is there any plans to kind of upgrade your systems internally?

So what I would say with respect to that is maybe taking a different -- I think -- and this is one of the comments in and around our SG&A and our outlook for 2024. I do expect that we will be making more investments in and around cybersecurity. So I do expect that we will have more investments in our 2024.

[Operator Instructions]

All right. Well, look, thank you all for being on the call this morning. When I stepped into this role as President and CEO and joined the Mueller Water Products Board of Directors, I did so with a commitment and conviction that I would lead Mueller on a path to continue increasing margins, improving its operational performance and enhancing our positions with our customers, suppliers, and employees. We have made progress and we continue to execute on our strategic plan and initiatives. Our challenges over the last few months have only highlighted what a terrific, dedicated group of employees we have, as they most recently showed their agility, focus and determination to service our customers and run our business as we navigated these challenges. We play a critical role in helping to improve our aging infrastructure, and I am privileged and honored to lead this team. Our employees make a positive difference each and every day to serve the water infrastructure industry. We are seeing operational improvements across the business, and I am confident in our future opportunities for growth and margin expansion. Thank you all.

That concludes today's conference. Thank you for participating.