Welcome, and thank you for standing by. [Operator Instructions]. And now I'll turn the call over to Whit Kincaid. You may begin.

Good morning, everyone. Thank you for joining us on Mueller Water Products Fourth Quarter and Fiscal Year-end 2022 Conference Call. We issued our press release reporting results of operations for the quarter ended September 30, 2022 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 fourth quarter and full year results and our outlook for 2023. 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, which address our 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 on the 30th of September. A replay of this morning's call will be available for 30 days at 1-800-834-5839. The archived webcast and corresponding slides will be available for at least 90 days in the Investor Relations section of our website. I'll now turn the call over to Scott.

Thanks, Whit. Good morning. Thanks for joining us for our fourth quarter earnings call. We were pleased to deliver our second consecutive year of double-digit net sales growth. Our fourth quarter net sales growth exceeded our expectations, driven by continued higher price realization. We saw a healthy order activity during the quarter and ended the year with record backlog. The sequential increase in orders is a testament to the resiliency of end market demand in the face of an evolving macro environment. Our fourth quarter results were disappointing as lower-than-expected shipment volumes of service brass products and manufacturing inefficiencies at our brass foundry more than offset the higher net sales. While improved price realization has helped offset the current level of inflationary pressures, it has not been enough to offset all of the headwinds. Although we continue to experience headwinds from the ongoing supply chain disruptions and inflationary pressures, our teams maintain their focus on executing our large capital projects. We have a lot more work to do, but are confident we will deliver the benefits of our key initiatives including our large domestic capital investments. Last month, we announced several corporate governance changes, including the appointment of 2 new Board members. Our Board also announced a process to accelerate the refreshment of our Board of Directors. Our Board believes in the importance of having best-in-class corporate governance, including a proactive Board refreshment process and ongoing shareholder engagement. Both new members bring valuable operating and supply chain management experience to our Board. We believe Mueller and its stockholders will benefit from the perspectives and insights of our new Board members and their support of the company's commitment to enhance shareholder value. Before turning it over to Martie, I want to thank Bill Cofield, our Senior Vice President of Operations, who recently announced his retirement. Bill has worked tirelessly to drive process improvement in our operations during the past 5 years. Most notably, he led the development and execution of our safety, excellence and leadership program, which is used to evaluate safety and environmental performance across all areas of our facilities. Bill has kindly agreed to stay on to support the transition to new leadership. Paul McAndrew just started as Mueller's new operations leader. Paul brings more than 20 years of manufacturing experience and served most recently as Vice President of Global Operations and Supply Chain, for Emerson Commercial and Residential services. Now I'll turn the call over to Martie to discuss our financial results.

Thanks, Scott, and good morning, everyone. I will start with our fourth quarter 2022 consolidated GAAP and non-GAAP financial results. After that, I will review our segment performance and discuss our cash flow and liquidity. Our consolidated net sales increased 12.1% to $331.4 million compared to the prior year with growth in both water flow solutions and water management solutions. The increase was primarily due to higher pricing across most of our product lines, which was partially offset by a decrease in volumes, mainly in our service brass products. For 2022, our consolidated net sales increased 12.3% due to both higher pricing and increased volumes. Gross profit of $85.6 million decreased 0.8% compared with the prior year. Gross margin of 25.8% decreased 340 basis points compared with the prior year as benefits from higher pricing were more than offset by higher costs associated with inflation, unfavorable manufacturing performance and lower volumes. The unfavorable manufacturing performance, which includes the impact of outsourcing, machine downtime, supply chain disruptions and labor challenges was primarily driven by our brass foundry and specialty valve operations. Inflation increased sequentially as we experienced higher costs associated with raw and purchased materials, tariffs, utilities, freight and labor. The supply chain disruptions continued to impact our total material cost, which increased around 14% compared with the prior year. However, our price realization again improved sequentially, more than covering inflationary pressures. Selling, general and administrative expenses of $63.6 million in the quarter increased 12.4% compared with the prior year. The increase was primarily driven by inflation, investments in personnel, T&E, trade show activity and professional fees. SG&A as a percent of net sales was 19.2% as compared to 19.1% in the prior year quarter. Operating income of $11.6 million decreased 58.3% in the quarter compared with $27.8 million in the…

Thanks, Martie. I'll touch on fourth quarter performance, end markets and our full year 2023 outlook. After that, we'll open the call up for questions. Similar to last quarter, manufacturing challenges were the primary reason for our disappointing gross margin and adjusted EBITDA conversion compared with the expectations provided on our last earnings call. The adjusted EBITDA gap was around $10 million, primarily due to a gross margin gap of around 400 basis points, partially offset by lower SG&A. The primary driver of the gap versus our expectations was the manufacturing performance at our brass foundry. The machine downtime challenges did not improve as we anticipated for August and September. Due to the downtime in our brass foundry, our melt production was more than 20% below our forecast. The foundry production was down about 35% sequentially and more than 50% below the prior year. While machine uptime has had periods of improvements, we have been unable to get foundry production up to 2021 levels. Lower foundry production impacted our service brass shipments in the quarter and led to a significant amount of under-absorbed labor and overhead costs. Additionally, as this foundry supplies brass parts to our other facilities, we incurred higher outsourcing costs to meet our needs for brass purchase parts. While we expect the challenges to continue into 2023, we believe we can get the foundry production back to 2021 levels in the second half of the year. The new brass foundry start-up and progression to full run rate are critical for us as it is the best long-term solution for the manufacturing inefficiencies. We are on track to begin the initial start-up phase later this quarter. In the new year, we expect the production part approval process to begin. We will prioritize developing tools for the highest volume…

[Operator Instructions]. It looks like our first question comes from Brian Lee with Goldman Sachs.

This is Miguel on for Brian. I appreciate all the guidance around 2023. Maybe if I could just start there. On the adjusted EBITDA guidance for 2023, it's looking like it's implying a fairly steep ramp in adjusted EBITDA margin coming off of maybe a more challenging fourth quarter. How should we think about the cadence on margins through the year? And should we sort of be thinking about the fourth quarter as the bottom of adjusted EBITDA margins and things picking up from there?

Yes. So as you think about what the math would indicate, you're absolutely correct and that it's going to ramp in the second half -- will be higher in the second half than in the first half. The implied conversion margin is in the 20% to 35% range, with about 27% as the midpoint. There is some noise in here that you're seeing that we have. Due to the operational issues, we expect some of the outsourcing to be transitory. So as the year progresses, we will do less outsourcing and make more of the brass in-house with the new foundry. As the year progresses, we will avoid -- everybody will recall that we have signed agreements with our unions and our foundry plants that will allow us to start weekend shifts on a regular basis. As they get staffed, as that comes up, we would expect the outsourcing premiums to disappear over the second half of the year. The other thing that kind of mutes the improvement on the EBITDA as a result of the [indiscernible] is there is some pension expense change about $7.9 million to $8 million, something like that year-over-year that goes from a benefit in our baseline year '22 and to an expense of '23. So I believe the turning point comes in the middle of '23 as we get more of these challenges associated with the outsourced, associated with the restrictive language and getting staff for weekend work and associated with the equipment uptime as our brass facility has fewer and fewer pounds going through it. For everybody on the call, our problems for the year can be best described as coming from outsourcing, primarily from brass performance and the foundry, the current foundry that's had its challenges, some predictable but many unexpected. I think that the main message here, though, is that I expect most of those manufacturing performance issues associated with the outsourcing, associated with the lost absorption, for lack of a better word, in the downstream process is because of material shortages from the brass foundry is that they will be mostly transitory. And as we bring the new foundry up and as Kimball gets to run at rate, I think if you heard Martie's comments, it really was primarily brass and then a little bit of specialty. And I am pleased to report that Aurora is closed, Hammond is closed, Surrey is closed and the Western facility is closed. So I think progress is being made. I concede it's slower.

Okay. Great. Yes, I appreciate all the additional color there. Second question and switching gears. The infrastructure bill, I think last year was not included in the guidance. You called it out in terms of maybe seeing some of that starting to flow through maybe in the latter part of this year. What are you seeing for 2023 in terms of funds becoming available? And if -- how much of that is expected to translate into some of the growth you're embedding into the 2023 revenue growth guidance?

Yes. I think that the overall mix around IIJA is we remain excited. I think that the -- it's going to take time for the funds to flow through to new projects. I think a lot of money and tasks are starting to get processed through EPA in the state agencies. We saw the timing lag back in 2009 with the AA -- sorry, the ARRA which caused project approval delays as utilities figured out the requirements for the stimulant dollars. The first phase of annual appropriations appear to have gone through for many states, primarily the largest like California, who has started to approve projects. But we really don't anticipate meaningful benefit to later this year and believe that the benefits for next year will be limited due to ongoing supply chain constraints and labor availability challenges that the utilities will face. I expect that beyond that time period, we'll benefit from the infrastructure bill spending. I think that -- I do think that with the residential slowdown and residential construction could help make labor more available for some of those infrastructure construction projects. But the headline is starting to feel benefit in the second half of '23 and accelerate through the '28-'29 period as the bill appropriations funding profile would indicate.

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

I'd like to start with the plans for the new plant ramp because this comes with its own set of operational challenges. You've got duplicate labor going on. You've got higher working capital needs that will come into play. I'd like to know, with a little bit more color, what's baked into your guidance, especially regarding contingencies? Ramping new plants like a foundry like this just raises prospects for more things not going exactly right or in the timing that you expect it to be. So just what's baked into your guidance for these kind of contingencies as well as the higher working capital impact on cash flow?

So I think the easiest one to deal with first is the working capital. As everybody can see in our balance sheet, we've added about $98 million of inventory year-over-year. So I think a lot of that is behind us. About -- think of 1/3 of it as being inflationary driven and the balance of it being driven by the amount of actual units on hand. Those units on hand has been inflated as a result of how much third-party inventory, material in transit things like that associated with the outsource. And so I think that there is a little more pain associated with the working capital to come from an inventory perspective, but I think most of it is already in the baseline. With regard to the second question, without giving specific pounds for competitive reasons on the call, I think that there is probably about 20% contingency from what we believe the machine should demonstrate at and what we have in the forecast. If you listen closely to Martie's comments where she basically said, the foundry was 20% below our expectations, 35% below sequentially and 50% year-over-year in Q4, then you would realize that that's probably at the lower end. So there is some risk if we can't get the pounds anticipated through. So our hot commissioning begins actually next week. So we'll be melting metal and pouring it into forms and then we'll start the PPAP process. And the key is getting the first around 200 parts through that process. We get those first 200 parts through that process, and the absorption math you were talking about will basically melt away because instead of running production in the new foundry that really won't be absorbing any of the labor, it won't be absorbing any of the overhead, it will all of a sudden start to earn its way and then we'll start to get operational leverage. So for that to work for us, we really have that kind of duplicate costs through the first quarter in our guidance. I don't know if that gives you enough color, Deane, without getting into specific numbers.

No, it really does help, especially kind of framing what's your contingencies. And I also appreciate the competitive dynamics. So you're not going to give exact poundage and so forth. But the road map here is helpful. All right. So as a second question, shifting gears, can you, Scott, set expectations for the potential scale of change coming now that there is an activist, you have new board members coming in, that you've got this and maybe give some context what this capital allocation and operating committee is that you are a co-chair of, how is this all going to work? And just is there an expectation that there's some big change coming in the portfolio? Is there a big bath restructuring coming? We saw some impairment here. Is that -- was that already in the works prior to the activist deriving? So a lot baked into there, but if you could take us through that, please.

Well, I think that there's a couple of things here that we have in the context of your question. So number one, I think that the main message is that the settlement came, we've had a number of discussions. I think they were collaborative mostly with Ancora to understand their views and to share ours as to why we've invested as heavily as we've invested. Their view as to whether it was going fast enough or not. I won't get into the specifics. But what I can share is that the Board was pleased to have reached an agreement and it accelerates our ongoing -- the ongoing Board refreshment process. I think Brian and Nicholas bring valuable operating and supply chain management experience to our already diverse Board. And I think our stockholders will benefit. But as to a foreshadowing of major restructurings and portfolio rebalancing things of that nature, at this time, I don't see any of that. I think the goodwill issue that you referenced is just a byproduct of the changing macro environment, but I'll let Martie handle where we ended up on goodwill. But the message on the Ancora agreement, I think, is that we're in this vulnerable period of having made the investments. We're basically almost fully invested. We probably have 9 months of investments left with the 3 majors. They're ramping up. I think the progress in the large casting foundry, the progress in Kimball are about where we expect. Certainly, they're dilutive in the duplicate period of time. But as we start to get on the other side of this, I expect this outsourcing magnitude, which we did not anticipate, and the flexibility we get with the new labor contracts, as I said earlier in the call, most of these will become transitory. And so I think both Ancora and our other shareholders will stand to benefit from that. I think that their interest is in making sure we execute on that. Martie on the goodwill.

Yes. Let me go ahead, Deane, and just talk specifically about the goodwill impairment we took this quarter. It was a noncash expense of $6.8 million. It relates back primarily to an acquisition we had in 2014 with Lined Valve Company. So this is part of our specialty valve product line. On an annual basis, we test our reporting units for any potential impairment and largely as an increase that we have with respect to the discount rates that we needed to use. That was the primary reason as to why we determined that we needed to write-off this goodwill of $6.8 million in the quarter.

Our next question comes from Joe Giordano with Cowen.

Can you just comment on what price contribution was in the quarter? And how much is carrying over in that 6% to 8% revenue growth guide?

Yes. I think that the price was above our expectations in the quarter. So it more than covered the inflation and the dilution effect. I'd say to everybody that we're still in, we're keeping track of the inflationary cycle that kind of began late 2017, early 2018. And we're still dilutive. So we still have some more price to get in total. But in Q4, total material cost inflation, which included the purchase parts, it remained elevated, increasing kind of mid-teens. The improved price realization more than covered that for the third quarter, but we're still down cumulatively, and I currently expect price to -- and inflation to continue into 2023. As for the second part of your question regarding what's the implied volume, the implied volume from the guidance would indicate that we'll have slightly less units year-over-year in this environment as the headwinds associated with the resi market, offset by the tailwinds associated with IIJA, and the muni and the break/fix market are going to leave us down slightly to maybe flat.

Yes. But being very clear, when we look at the short-cycle backlog and the series of price increases that we took, we go into 2023, knowing that we'll experience higher price realization as we continue to work through the backlog that we have with a series of price increases that were taken.

Perfect. And then can you just like level set us on all the capital projects. I know there's a lot been happening over the last several quarters, but you're starting up the brass foundry, you said, in like a week you're starting commissioning there. You're going to spend $70 million to $80 million in fiscal '23. Like where are we at the end of that? What's still -- what, if any, still needs to happen? Are all your major projects going to be done by then? Just so we kind of maybe like an updated time line on everything and where we stand.

Yes. So I think the Decatur foundry is nearing completion. It's the last of the 3 major capital projects at ballpark-ish $150 million of multiyear spend that was associated, remind everybody, large casting foundry in Chattanooga. The facility consolidation play to move Woodland, Surrey, Hammond, Aurora and some Mexico maquiladora into the Kimball facility, and then last but not least, Decatur. So I think, especially in the large valve investments, the first 2 are in the process of ramping up now, with the vast majority of the CapEx investment completed. We're completing the transition of the Aurora facility to manufacturing in Kimball. Aurora is closed and nobody is there as of September. We remain confident that we will ramp up in 2023 with the margin benefits following accordingly in the kind of second half of the year run at rate for Kimball. The brass foundry, which will now pour the new lead-free brass, which will be an advancement in sustainability for customers and end users, it will allow us to be completely lead free by 2030 and achieve 100% lead-free manufacturing processes by 2030. I think it's the one with some execution risks today around it as some of the unknowns. We've turned the power on. We got the lights on. We've done some cold commissioning that is moving molds, punching patterns, doing things like that. I think, combined, to answer your question specifically, all 3 projects are accounting for about 85% of their spending is through. So if you were to say there's $22 million, $23 million of the $85 million, 15%, the $22.5 million of the $150 million is in the new capital budget, and then you'd see what kind of we see as the maintenance budget If you took the guidance and subtracted that. And I think if you look at every year, since 2018, and subtract the large CapEx projects, we've been kind of in that maintenance range of that 3% to 4% range of sales since then with these valve. Yes, next question you had was, are we done? I believe we are done. Certainly, I'm not in a position to say that the Board has approved anything of a scale and scope as to the 3 large capital projects that we conceived 4 years ago when we set off on this path. But with that said, of course, there's always things around [indiscernible] innovations. There's always things around energy efficiency, [indiscernible] things of that nature that could one day come in. But I think that in the end, this next year should be mostly the end of the CapEx associated with the large capital projects.

That's great color. And if I could just sneak in one. Just strategically, as we didn't mention it once today, like is metering being somewhat deprioritized internally?

No, I would not say that metering is internally deprioritized. I think that we still have significant investments in product development in that space. We continue to have a lot of focus in the market with it. I think if anybody was at WesTech recently, our booths and our main uptake was around Sentryx, around metering, around leak detection, around the introduction of the pressure solutions and integrated the I2o equipment with the pressure control valves from Singer. And so I think that we have the most compelling economic solution for pressure zones and pressure management on an integrated remote control basis using our user interface. And so not deprioritized, but certainly become less of a discussion with investors as the noise we have had with these manufacturing problems these last 2 quarters has become a bigger focus. But when we start getting back to execution like clockwork, I would expect that we'll spend a lot of time discussing the progress made with the field trials that we've done. Anybody that recalls, we have a pressure management zone going on up in Canada right now at the City of Halifax. We have a couple of other trials going for pressure zone management and a couple more pending that we think will start to give traction to that particular solution.

Our next question comes from Bryan Blair with Oppenheimer.

Circling back to top line trends and outlook, what were your growth rates in muni repair and replace and resi new construction in fiscal '22? How did order trends diverge between those exposures in October? And what's contemplated in your fiscal '23 outlook?

So in fiscal '23, is easiest to answer. What we see is in the break/fix world, double-digit growth, right there at the double-digit number. MRO spending kind of in the mid single digits. Those 2 are going to be offset by what we anticipate resi construction marketing. I think Martie has the actual numbers. But my recollection is it goes from at 1.6-ish number back to 1.5 million-and-change, could be as low as 1.4. So that's going to have a negative impact on that MRO spend. They probably offset, which is why the implied guidance is for units to remain down slightly to flat and that we will have our lift come from the pricing power that's in the backlog. And so that's how you should think about the market in the go forward. In the current segment, it's really hard to differentiate what is associated with new construction versus what is associated with MRO. The distribution channel itself is extremely healthy, but it's also become extremely choppy. And the choppiness is a result of if pipe is the long pole in the tent, which I believe it still is, then hydrants on hand that could be said for MRO purposes, that were originally earmarked for new subdivision construction, that visibility, that flexibility in the channel is happening more and more as our chief channel partners trying to manage their inventory investments and manage their opportunistic model. So it's becoming more difficult, Bryan, to say, which is which what's showing up in the new subdivision, new home construction and what's going to MRO because as the order was placed, it may have been tended for X, but it's being redeployed as Y as they wait on other materials. But the break/fix continues to be a very healthy part of the business for us.

Okay. That's all fair. I appreciate the detail. And to help us level set a little bit more on what took place in fiscal '23 and then thinking about the progression in your '23/'24 profitability that should be there, can you give us a dollar impact of production downtime, outsourcing headwinds, et cetera for the full year? It sounds like it's around $10 million for 4Q. Just trying to gauge what took place here and if it is, in fact, transitory, what should roll off during '23 provide further tailwind into '24 and then you have the assumed benefit of getting to a run rate on your major projects going into the out year.

Yes. I think that the dollar amount, we have obviously, but I would prefer everybody to think of it this way, Bryan, that here we are in '24. And I have not lost sight of the fact that I said before our investors or I said that our EBITDA margins could expand 50 basis points a year from about a 19.5% EBITDA margin level until we got as high as even 24%, 25%. I'm not forgetful. And I think I've always been fairly straight with you guys. I know it seems far away right now. But there is, I think, a pat back over the next couple of years towards that kind of baseline that we set on that 19.5%, 20% EBITDA margins. Some of it is going to come from performance. Some of it's going to come from price management. Certainly, a big piece of it this year is going to come from avoiding outsource. But I think that as we go through these CapEx projects -- the things I said 4 years ago, I still firmly believe are within our grasp. And I believe they're within our grasp. And I believe that the path just as I did 4 years ago was to get the manufacturing house in order so that we could build a culture of productivity and start implementing some of these lean tools and start implementing some of these Six Sigma concepts. And so I definitely believe that's still within the realm of possibility. I think some of these temporary setbacks, certainly at previous quarter, auto pour going down, [indiscernible] going down, some of these problems we've had associated with the brass foundry are, I certainly didn't see them, and I'm not trying to say I did see them coming. But I do think that we have the ability to adapt -- one of the things I'm most proud of for the team was the fact that, yes, we did really have difficulty in the order meeting production because of what happened, but we were still able to satisfy customer demand. The team adapted. They got more outsource in the door. They made sure we didn't lose customers and made sure we didn't lose share, and they exceeded the selling number. And it wasn't just because they had something else they could ship to make up the numbers, we met our commitments. And so I think that those pieces of where we were 4 years ago and where we are today, leave us in good stead for EBITDA margin growing. I think the way you should think about the outsource though is that if our total performance for the year was on a chart, let's say it's 100%, that somewhere around 40% of the year's performance problems occurred in 25% of the year in the fourth quarter.

[Operator Instructions]. Our next question comes from Brent Thielman with D.A. Davidson.

Scott, are you seeing any unusual inventory rebalancing into year-end among the distributor customers just given some of the sort of growing caution around the housing market?

Yes. I think that there's certainly going to be things in the current channel inventory level. I think we work closely with distributors to understand their sell-through, manage their delivery time, satisfy orders if we have to jump and bundle things to make sure contractors were able to meet commitment dates so they don't get into penalties. That dynamic is going on day to day. I believe many of the distributors continue to maintain higher inventory levels due to expected higher inflation and some of the supply chain disruptions. I think lead times for projects generally remain much longer than the pre-pandemic levels. And so distributors need to take that into account in their inventories. They manage product availability to match installation schedules with extended time lines due to labor availability. And whatever the long pole of the tent is, as far as the long lead times and stuff is accumulating that they wait for, it's no good for a contractor to receive all of my valves and my hydrants if they don't have pipes to hook them up to. Conversely, running service lines from new home constructions to lines that don't exist out there is also something they're not going to do. And so as some of the variants, if you will, and the various lead times move out, there is more noise in the channel inventory, too. So I think additionally, depending on our distribution partners' expectations for slowing customer demand towards that housing market you were talking about, we could see some added pressure on inventory levels as the channel leads to destock. But certainly, some of the backlog we have is dependent on those lead times. So I think in the -- what will become timing differences in specific quarters is why we prefer to kind of look at it at the macro level and do the guidance in years and precisely why the noise in the channel is precisely why I don't like getting into the quarterly fluctuations.

And at this time, I'm showing no further questions.

Operator, well, I'd like to thank everybody for joining us. I think that I'm looking forward to getting the fourth quarter and get our activities and our actions in place to continue. I'm excited about the new foundry. I'm excited about the progress we're making in Kimball. Very excited about some of the pound achievements, setting records in our third quarter in the large casting foundry. But acknowledge too and I'm sober about the fact of where we are, what we have to do in order to meet our numbers and to continue to grow the business. So I'd like to thank everybody for spending time with us this morning, and I look forward to talking to you all again next quarter. Thank you, operator.

Thank you. And this does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.