Mueller Water Products Q2 2025 Earnings Report

Mueller Water Products EPS Results

• Actual EPS: $0.34
• Consensus EPS: $0.32
• Beat/Miss: Beat by +$0.02
• One Year Ago EPS: $0.30

Mueller Water Products Revenue Results

• Actual Revenue: $364.30 million
• Expected Revenue: $352.30 million
• Beat/Miss: Beat by +$12.00 million
• YoY Revenue Growth: +3.10%

Mueller Water Products Announcement Details

• Quarter: Q2 2025
• Date: 5/5/2025
• Time: After Market Closes
• Conference Call Date: Tuesday, May 6, 2025
• Conference Call Time: 10:00AM ET

Mueller Water Products (NYSE:MWA) manufactures and markets products and services for the transmission, distribution, and measurement of water used by municipalities, and the residential and non-residential construction industries in the United States, Israel, and internationally. It operates in two segments, Water Flow Solutions and Water Management Solutions. The Water Flow Solutions segment provides valves for water systems, such as iron gate, butterfly, tapping, check, knife, plug, and ball valves, which are used to control distribution and transmission of potable water and non-potable water, as well as in water transmission or distribution, water treatment facilities, or industrial applications. It also offers service brass products. The Water Management Solutions segment offers dry-barrel and wet-barrel fire hydrants for water infrastructure development; fire protection systems, and water infrastructure repair and replacement projects; pipe repair products, such as couplings, grips, and clamps used to repair leaks; residential, fire line, and commercial water metering products, systems, and services; water leak detection and pipe condition assessment products and services; machines and tools for tapping, drilling, extracting, installing, and stopping-off; gas valve products for use in gas distribution systems; and intelligent water solutions, including pressure control valves, advanced pressure management, network analytics, event management, and date logging. It sells its products under the Canada Valve, Centurion, Ez-Max, Hydro Gate, Hydro-Guard, HYMAX, HYMAX VERSA, Jones, Krausz, Milliken, Mueller, Pratt, Pratt Industrial, Repamax, Repaflex, Singer, Echologics, Echoshore, ePulse, Hersey, LeakFinderRT, LeakFinderST, LeakListener, LeakTuner, Mi.Echo, Mi.Net, Mueller Systems, Sentryx, and U.S. Pipe Valve and Hydrant brands. Mueller Water Products, Inc. was founded in 1857 and is headquartered in Atlanta, Georgia.

Mueller Water Products Q2 2025 Earnings Call Transcript

Presentation

[Operator]

Today's conference is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to turn the call over to Mr.

[Operator]

Whit Kincaid. Sir, you may begin.

[Whit Kincaid, VP, Investor Relations & Communications at Mueller Water Products]

Good morning, everyone. Thank you for joining us for Mueller Water Products second quarter conference call. Yesterday afternoon, we issued our press release reporting results of operations for the quarter ended 03/31/2025. A copy of the press release is available on our website, muellerwaterproducts.com. I'm joined this morning by Marty Zakas, our Chief Executive Officer Paul McAndrew, our President and Chief Operating Officer and Melissa Rasmussen, our Chief Financial Officer.

[Whit Kincaid, VP, Investor Relations & Communications at Mueller Water Products]

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.

[Whit Kincaid, VP, Investor Relations & Communications at Mueller Water Products]

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.

[Whit Kincaid, VP, Investor Relations & Communications at Mueller Water Products]

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 the September 30. A replay of this morning's call will be available for thirty days at one-eight hundred -five sixty eight-three thousand six hundred fifty two. The archived webcast and corresponding slides will be available for at least ninety days on the Investor Relations section of our website.

[Whit Kincaid, VP, Investor Relations & Communications at Mueller Water Products]

I'll now turn the call over to Marty.

[Marietta Zakas, President & CEO at Mueller Water Products]

Thanks, Wet. Good morning, everyone. Thank you for joining our second quarter earnings call. I'll start with a brief overview of our performance and then turn it over to Paul. We delivered a solid performance this quarter where we achieved second quarter records for consolidated net sales, adjusted EBITDA and adjusted net income per share.

[Marietta Zakas, President & CEO at Mueller Water Products]

Healthy order levels and resilient end market demand supported net sales growth of 3.1%. We exceeded our strong results from the prior year quarter, which included benefits from elevated backlogs for service brass and natural gas distribution products. This quarter, we were pleased to see a sequential increase in net sales of repair products, thanks to everyone's efforts over the past year. Our focus on delivering exceptional customer service, improving operational excellence and maintaining cost discipline enabled us to increase both our gross margin and adjusted EBITDA margin compared with our first quarter. Our teams are diligently working through the challenging external environment as we maintain our focus on providing outstanding customer service while closely managing our supply chain.

[Marietta Zakas, President & CEO at Mueller Water Products]

We expect that the recently enacted tariffs will increase costs for many of our products to varying degrees. We are taking appropriate steps to mitigate the higher costs through pricing actions, supply chain mitigation plans, operational initiatives and cost discipline. We are pleased to be increasing our annual guidance range for 2025 net sales and are maintaining our adjusted EBITDA guidance range due to the higher costs associated with the recently enacted tariffs. Before Paul provides details regarding tariffs and our work to mitigate the impacts for Mueller and our customers, I want to express my continued confidence in our ability to adapt and overcome external challenges. Mueller has been a leading supplier of infrastructure products and solutions for more than one hundred and sixty five years.

[Marietta Zakas, President & CEO at Mueller Water Products]

Approximately 92% of our net sales are in The U. S. And we are largely vertically integrated for our major product categories like iron gate valves, hydrants and brass products. We estimate that 60% to 65% of our net sales are used for the repair and replacement of municipal water infrastructure. We have leading brands, a large installed base and a comprehensive distribution network, which gives us a strong foundation.

[Marietta Zakas, President & CEO at Mueller Water Products]

While we are operating in a significantly more volatile external environment, we have teams that have been tested with many challenges before and after the pandemic. With that, I'll turn it over to Paul.

[Paul McAndrew, President & COO at Mueller Water Products]

Thanks, Marty. Good morning, everyone. I was pleased with our second quarter performance. This quarter, we saw a strong sequential increase in order activity across most product lines, reflecting our customer experience investments. Also, our improved execution enabled us to benefit from healthy order levels, which were supported by continued resilient end market demand.

[Paul McAndrew, President & COO at Mueller Water Products]

While facing increased external challenges, we delivered sequential improvements in margins, supported by our focus on improving operational excellence, increasing supply chain efficiencies and developing advanced manufacturing capabilities to drive productivity. Over the past few years, we have invested in our supply chain and operational teams to enhance our team's skills and resources. Our team has continued to work diligently through the rapidly changing tariff situation. Our manufacturing facilities and vendors are mainly in The U. S.

[Paul McAndrew, President & COO at Mueller Water Products]

And we are largely vertically integrated for our major product categories. Our core products, including iron gate valves, hydrants and brass products are primarily supported by five manufacturing facilities in The U. S, including two iron foundries and the new brass foundry. In addition, we have a facility in Israel for most of our repair products and one in China for some of our specialty valve products. Therefore, China and Israel account for a substantial portion of our supply chain exposure.

[Paul McAndrew, President & COO at Mueller Water Products]

From a cost of sales perspective, approximately 15% of our total cost of sales is exposed to the newly enacted tariffs. We estimate that the annualized impact of the recently enacted tariffs is approximately 8% to 9% of our cost of sales. With the China related tariffs accounting for approximately 75% of our analyzed tariff exposure. This estimate excludes any benefits from our price or cost mitigation actions. Due to the magnitude of the enacted tariffs, we have recently implemented targeted pricing actions for specialty valve and repair products.

[Paul McAndrew, President & COO at Mueller Water Products]

We expect to see a lag between the higher tariffs and the associated price actions. While we anticipate tariffs will start to phase in later during the third quarter, we don't expect to see the benefits from the higher pricing until the fourth quarter. Given the uncertainty associated with tariffs and the potential impact on broader inflation and end market demand, we will closely monitor the situation and take additional price actions as needed. In addition to implementing targeted pricing actions, our teams are taking steps to mitigate the tariffs through supply chain and operational initiatives, including shifting sourcing geographies, implementing supplier cost sharing and driving productivity at our facilities. Over the past few years, we have worked to expand our international sourcing options outside of China, including opening our specialty valve manufacturing facility in Kimball, Tennessee.

[Paul McAndrew, President & COO at Mueller Water Products]

Given our recent investments and experience with the post pandemic inflationary cycle, I am confident in our team's capabilities as we continue to strengthen our presence in the market. We remain vigilant and are monitoring our channel partners and end customers closely to evaluate impacts on order patterns to remain nimble and adjust quickly as patterns evolve. With that, I'll turn it over to Melissa, so she can take you through the financials.

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

Thanks, Paul, and good morning, everyone. Before reviewing the financials, I want to express my gratitude to the Mueller team for their warm welcome. I am thrilled to be part of such an iconic company, which plays a vital role in our critical water and natural gas infrastructures throughout North America. I am quickly getting up to speed and have had the opportunity to see some of our facilities and interact with many team members across the organization. I look forward to continuing this collaboration as well as working with the investment community.

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

Now turning to the second quarter. Consolidated net sales increased 3.1% to $364,300,000 surpassing the strong second quarter net sales delivered last year. The growth was primarily due to the higher pricing and increased volumes across most of the product lines. We saw growth in net sales at both segments. In the second quarter, gross profit of $128,000,000 decreased 1.8% compared with the prior year, and gross margin of 35.1% decreased 180 basis points year over year.

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

Though benefits from the increased volumes were notable, they were more than offset by manufacturing inefficiencies, most of which were expected as a result of the Brass Foundry transition. Excluding asset write downs of $800,000 associated with the legacy Brass Foundry, our gross margin was 35.4%. We remain excited about the efficiencies we are gaining as the new brass foundry ramps up, and we continue to expect margin benefits in the second half from the legacy brass foundry closure. For the quarter, total SG and A expenses of $55,700,000 were $8,000,000 lower than the prior year. This reduction was primarily driven by lower amortization expense, favorable foreign currency fluctuation and diligent expense management of third party fees and personnel related costs, partially offset by inflationary pressures.

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

Operating income increased 10.1% in the quarter to $69,900,000 compared with the prior year. Operating income includes $2,400,000 of strategic reorganization and other charges, primarily related to the leadership transition and fixed asset impairment as well as other asset write downs, which have been excluded from adjusted results. Turning now to our consolidated non GAAP results for the quarter. Adjusted operating income in the second quarter was $73,100,000 an increase of 9.6% compared to the prior year. This improvement was primarily due to lower SG and A expenses, including lower amortization and increased volumes, which were partially offset by manufacturing inefficiencies.

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

Our adjusted operating margin improved 120 basis points to 20.1% compared to the prior year. Adjusted EBITDA came in at $84,500,000 an increase of 2.8% versus the prior year quarter, which was a record second quarter adjusted EBITDA. We achieved an adjusted EBITDA margin of 23.2% in the quarter, which was two thirty basis points higher on a sequential basis and down 10 basis points from the prior year. For the last twelve months, adjusted EBITDA was $305,700,000 or 22.3% of net sales, a three twenty basis point improvement compared with the prior twelve month period. Net interest expense in the second quarter declined $1,300,000 year over year to $2,300,000 primarily due to higher interest income.

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

For the quarter, we increased adjusted net income per diluted share by 13.3% to zero three four dollars per share compared with the prior year, setting a new second quarter record. Moving on to quarterly segment performance, starting with WFS. Net sales increased 5.1% to $216,200,000 compared with the prior year, primarily due to increased volumes of iron gate and specialty valves and higher pricing across most product lines. While we experienced lower volumes of service brass products due to the timing of backlog normalization and customer and channel destocking, we remain optimistic about future volume growth. As a reminder, our prior year shipments benefited from serving an elevated backlog, which was down more than 50% compared with the prior year.

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

Adjusted operating income increased 6.3% to $55,900,000 in the quarter. The benefits from increased volumes and lower SG and A expenses, including lower amortization, more than offset manufacturing inefficiencies primarily associated with the lower volumes of service brass products. We are excited about the transition to our new brass foundry and the efficiencies it will bring, especially as volumes normalize. Adjusted EBITDA decreased 0.3% to $62,200,000 and adjusted EBITDA margin was 28.8% compared with 30.3% in the prior year. I'll now move on to quarterly results for WMS.

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

Net sales increased 0.3% to $148,100,000 compared with the prior year. The growth was primarily driven by increased volumes of repair products and higher pricing across most product lines. We saw lower volumes of natural gas distribution products due to similar factors as service brass products at WFS. Adjusted operating income increased 8.3% to $31,400,000 in the quarter. The benefits from lower SG and A expenses, including lower amortization and favorable pricecost, more than offset lower volumes and manufacturing inefficiencies.

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

Adjusted EBITDA in the quarter increased 2% to $36,400,000 with adjusted EBITDA margin improving 40 basis points to 24.6%. Moving on to cash flow. Net cash provided by operating activities for the six month period was $68,400,000 an increase of $6,200,000 compared with the prior year period. The increase was primarily driven by higher net income, partially offset by changes in working capital, including decreases in other current liabilities, such as incentive compensation. Through the first six months of the year, we invested $21,100,000 in capital expenditures compared with $15,800,000 in the prior year.

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

This increase was primarily driven by investments in our foundries. Our free cash flow for the first half of the year was $47,300,000 which was $900,000 higher than the prior year period and was 51% of adjusted net income, which is in line with expectations. At the end of the second quarter, our total debt outstanding was $451,000,000 and we had cash and cash equivalents of $329,000,000 We continue to have a strong and flexible balance sheet with a net debt leverage ratio below one, no debt maturities until June 2029 and a 4% fixed interest rate on the $450,000,000 senior notes. We did not have any borrowings under our ABL at quarter end, nor did we borrow any amounts under our ABL during the quarter. We ended the quarter with $492,000,000 of liquidity, including $163,000,000 of excess availability under the ABL.

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

Now turning to our outlook for 2025. We updated our fiscal twenty twenty five outlook and are increasing our guidance for consolidated net sales by $15,000,000 at the midpoint of the range, which is between $1,390,000,000 and $1,400,000,000 This increase reflects our second quarter performance, expected benefits from new price actions being implemented to help mitigate tariff impacts and current expectations for end market demand. We are maintaining our adjusted EBITDA range between $310,000,000 and $315,000,000 This guidance reflects our second quarter performance and expected benefits from higher net sales and lower total SG and A expenses, which are offset by the increased costs related to the newly enacted tariffs. For clarity, our guidance reflects the anticipated costs from the recently enacted tariffs as of May 5. We continue to expect benefits to the second half margins from the closure of our legacy brass foundry.

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

At the midpoint of our guidance range, this adjusted EBITDA range achieved a 22.4% margin for the year, reflecting a 70 basis point year over year improvement. We are maintaining our free cash flow expectations to be more than 80% of adjusted net income in 2025. This outlook continues to assume our capital expenditures are between 45,000,000 and $50,000,000 for the year as we continue investing in our future growth, operational efficiencies and domestic facilities. With that, I'll turn it back to Marty for closing comments.

[Marietta Zakas, President & CEO at Mueller Water Products]

Thanks, Melissa. I want to provide a few closing comments before opening it up for Q and A. We and others continue to believe municipalities will prioritize upgrading expanding the aging North American water infrastructure to be more resilient and efficient for future generations. The American Society of Civil Engineers' most recent assessment of America's infrastructure maintained a C minus grade for drinking water in The U. S.

[Marietta Zakas, President & CEO at Mueller Water Products]

And a D plus grade for wastewater in The U. S. With a broad range of products and solutions, Mueller is uniquely positioned to capture the benefits from the investments needed to address the aging North American water infrastructure. The external environment is rapidly changing and leading to increased uncertainty for our customers, channel partners and vendors. Over the past few years, we have made significant personnel and capital investments to strengthen our supply chain and operational capabilities and enhance our domestic manufacturing presence.

[Marietta Zakas, President & CEO at Mueller Water Products]

I am confident in our team's ability to adapt and maintain our focus on delivering the critical products and solutions valued by our customers. Our teams will continue to focus on executing our key strategic priorities and serving our customers to drive continued net sales growth and future margin improvements, which are supported by our purpose driven organization. We have a strong financial foundation with very low net debt leverage and a flexible balance sheet, which continues to provide ample capacity to support our strategic priorities, including capital investments and acquisitions, as well as returning cash to shareholders. That concludes our comments. Operator, please open the line for questions.

[Operator]

Thank you. Moment please. Deane Dray with RBC Capital Markets, you may go ahead sir.

[Deane Dray, Managing Director at RBC Capital Markets]

Thank you. Good morning and welcome to Melissa.

[Marietta Zakas, President & CEO at Mueller Water Products]

Good morning, Dane.

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

Good morning.

[Deane Dray, Managing Director at RBC Capital Markets]

Hey, just a couple of clarifications please. And first of all, Slide five is really helpful. Lots of detail there and appreciate how you broke it out for China and Israel. That squares a lot of the perspectives that we were looking or specifics that we were looking for. So thank you for that.

[Deane Dray, Managing Director at RBC Capital Markets]

And can you clarify on was there any pre buy? I mean you talked about in the slides some channel destocking. I was thinking you might have had it flip where distributors were adding some product to avoid some of the tariff commotion. But if you just clarify if you did see any pre buying?

[Paul McAndrew, President & COO at Mueller Water Products]

Yes. Good morning, Deane. This is Paul. That's something we analyze closely. And we know there's a number of drivers in the second quarter, typically one of our strongest orders quarter as we move into the construction season alongside our price increase.

[Paul McAndrew, President & COO at Mueller Water Products]

So nothing has stood out to us yet from any kind of pre buy perspective, but it's something we're analyzing closely.

[Deane Dray, Managing Director at RBC Capital Markets]

Great. I appreciate that.

[Deane Dray, Managing Director at RBC Capital Markets]

And then can you just give us a sense of the new foundry? Is it fully operational? Are all the products certified? Any other kind of milestones? And just the impairment that was taken was that related to the old foundry and can you size that please?

[Paul McAndrew, President & COO at Mueller Water Products]

Yes. I'll take the first half of that and I'll pass the impairment over to Melissa. So in terms of the new foundry, it's fully operational. The old South foundry is no longer producing any product. We have all products transferred to the new foundry that we want to transfer at this point.

[Paul McAndrew, President & COO at Mueller Water Products]

We'll obviously continue to evaluate that as new products become online. In terms of the impairment, Melissa?

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

Yes. In terms of the impairment, we took an impairment charge during the quarter of $800,000 and that was related to the legacy foundry. As we continue to decommission the foundry, we'll incur other costs and write downs. However, we don't have an estimate of what that overall amount will be at this point and we'll continue to update you all as that information unfolds.

[Deane Dray, Managing Director at RBC Capital Markets]

Appreciate it. Thank you.

[Operator]

Thank you. Our next caller is Brian Lee with Goldman Sachs.

[Analyst]

Hi, everyone. This is actually Nick on for Brian Lee. How's everybody doing today?

[Marietta Zakas, President & CEO at Mueller Water Products]

Hey, good morning, Nick.

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

Good morning.

[Analyst]

I just had a quick question on, I guess, your CapEx. Given that now the new foundry is up and running, I think CapEx guide is relatively similar to what it was last year, but we kind of saw a decrease or a step down in 2Q. I guess what is going to be requiring further CapEx commitments for the remainder of the year now to the new foundries online? And I guess why should or shouldn't we be expecting a step down in the back half of the year?

[Paul McAndrew, President & COO at Mueller Water Products]

Hey, good morning. This is Paul. Most of the capital for the new foundry had already been spent in the prior years. We are a vertically integrated company with foundries. So the anticipated CapEx spend is the main driver there in terms of ensuring that we are keeping those core iron foundries running efficiently.

[Paul McAndrew, President & COO at Mueller Water Products]

Obviously, have operational improvement projects as well. So we anticipate our capital remaining at that 3% to 4% of sales range.

[Analyst]

Awesome. No, that's helpful. If I can just follow-up with one more on end market demand. I mean, as you know, there are all these puts and takes with new tariffs and what seem to be changing day by day. Have you heard anything from customers either not looking or looking to put projects on hold or push them out as they try to get a better understanding of what total cost could be for a project?

[Analyst]

Or just any other commentary that you guys have heard from the customer level would be great? Thank you.

[Marietta Zakas, President & CEO at Mueller Water Products]

Yes. No, certainly. Thanks. So as we take our views and looking out really to the second half of our year, I think as we said, we've seen a strong start to the year and I think that's reflected not only in the net sales performance, but as well with what we described with our order activity and certainly the order activity looking through April. We are moving now into the portion of our fiscal year, whereas the construction season commences, we typically see greater activity.

[Marietta Zakas, President & CEO at Mueller Water Products]

And I think certainly as we look out to our third quarter, we do expect to continue to see resiliency with the municipal market, which we think will continue through the year. I think where we probably see more ahead of baked in some uncertainty level is really in and around the residential construction market. Specifically, as we look out to our fourth quarter, I would say that's where we see there could be some greater uncertainty with respect to the end markets, largely due to some of the overall uncertainty and inflation concerns in the marketplace.

[Analyst]

Awesome. Thank you. I'll pass it on.

[Operator]

Thank you. Mike Halloran with Baird. You may go ahead, sir.

[Analyst]

Hey, good morning, everybody. This is Pez on for Mike.

[Marietta Zakas, President & CEO at Mueller Water Products]

Good morning.

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

Good morning.

[Analyst]

So I believe previously, we were thinking about pricing in the range of low single to mid single digits. Kind of given the updated tariff discussion and given the raised sales guide and held EBITDA, are we implying the expectation to offset tariffs one for one on a dollar basis? Is that a fair way to think about it?

[Marietta Zakas, President & CEO at Mueller Water Products]

So let me jump in on price and I'm going to sort of break it into two different buckets. I think first of all, as we referenced on our first quarter call, we did announce price increases across most of our products and that was sort of the typical timing that we expect in and around that. And at that time, those price increases did not reflect any expectation in and around tariffs. With what we have most recently announced, it is focused largely on our specialty valve and repair products that are most impacted by the recent tariff announcements. And with that, we have announced double digit targeted price increases for those product lines.

[Marietta Zakas, President & CEO at Mueller Water Products]

With the price increases that have been implemented, we expect it just to mitigate some of our expected higher costs with the tariffs not to fully cover the expected impact of the tariffs. I think as Paul has outlined in his in our prepared remarks, we have a number of other mitigation actions that are under way to help offset the expected impact of the most recently announced tariffs. I think the other area that I want to highlight for you as we expect the tariff impact to hit our results that is most likely to hit later in our third quarter. We do not expect to get any of the benefit of the most recently announced price increases until our fourth quarter and that's just due to the expected lag.

[Analyst]

Got it. Marty, that color sorry, Paul, go ahead.

[Paul McAndrew, President & COO at Mueller Water Products]

Yes. So just to add on to that, obviously the supply chain activities have started well before tariffs, the team that we put in place and the resources. So we're already on that journey of becoming less exposed to products coming out of China, which will help mitigate these tariffs going forward.

[Analyst]

Thank you. That's super helpful. Obviously, balance sheet is in a great shape and Mueller is starting to position itself more on offense. Maybe you could talk a little bit about how the pipeline formation is coming. I know that we are more focused on product expansion.

[Analyst]

Maybe talk a little bit about how some of those early pipeline formations are going and what the state of the funnel looks like today, actionability and whether those conversations have changed in light of all the tariffs?

[Marietta Zakas, President & CEO at Mueller Water Products]

Yes. So I think overall just addressing capital deployment and certainly as we've expressed, we look to have a very balanced approach, which is the investment from a capital expenditure perspective as well as returning cash to stockholders both through dividends and share repurchase. But I think importantly, acquisitions, as we said, do remain an important priority for us to enhance our growth. I would say overall with our large capital investments behind us that we are more active today and we are looking to find the acquisitions that we think will best allow us to expand our product portfolio, leverage the distribution, leverage our customer relationships and or enhance our manufacturing capabilities. I think certainly the challenge that we have certainly does focus in and around the actionability of items and we also always intent on where the valuation is to ensure that we get an appropriate return for our shareholders.

[Marietta Zakas, President & CEO at Mueller Water Products]

So I would say, yes, overall with where we are, we do remain more active in terms of what we are looking for in the marketplace.

[Analyst]

Great. Thanks. I'll pass it on.

[Operator]

Thank you. Our next caller is Walt Liptak with Seaport Research. You may go ahead, sir.

[Walter Liptak, Industry Analyst at Seaport Research Partners]

Hi. Thanks. Good morning, everyone. I wanted to ask sort of, I guess, a follow-up or more detail about just the pricing going up. And it sounds like double digit price increases.

[Walter Liptak, Industry Analyst at Seaport Research Partners]

It sounds like they're happening now. Does that cause any of the municipal customers or other kind of infrastructure projects to have to go through a redo on pricing and potentially causing delays? Like how do they absorb that without any sorts of delays?

[Paul McAndrew, President & COO at Mueller Water Products]

Walt. This is Paul. I think as we spoke about we've been targeted on our price increases for specialty valve and repair products. Repair products are typically very fast turn products. So that's not really going to be baked into a project.

[Paul McAndrew, President & COO at Mueller Water Products]

And most of the specialty valve projects products sorry that we are talking about here would not be impacted to municipality from a project perspective. So we don't anticipate any concerns there.

[Walter Liptak, Industry Analyst at Seaport Research Partners]

Okay. Thanks for pointing that out. I appreciate that. The you talked about the lag too or it sounds like there might be a lag effect from the third quarter price increases and then the catch up into the fourth. Is that right?

[Walter Liptak, Industry Analyst at Seaport Research Partners]

I wonder if you could just help me understand that a little bit better.

[Marietta Zakas, President & CEO at Mueller Water Products]

Yes. Just to help you understand. So the reason that we have an expectation that the most recently enacted targeted price increases in and around specialty and repair will have a lag is largely due to the backlog levels. Specialty valve, just as Paul just talked through, tends to be more customized projects and or valves. And therefore, given the backlog levels, we don't expect to see any benefit from those most recent price increases until later in our fiscal year.

[Marietta Zakas, President & CEO at Mueller Water Products]

Additionally, just as a reminder with respect to repair products, given the challenges associated with the Israel Hamas war, we do have higher backlog levels for the repair products than we typically see. As Paul said, that's generally a short cycle product. We have been working to lower the backlog levels, but given the backlog levels where we currently are, that's why we don't anticipate seeing the benefits of the most recently announced price increase until our fourth quarter.

[Walter Liptak, Industry Analyst at Seaport Research Partners]

Okay, great. And maybe just the last one, I wonder if you could help us with gross margin in the coming quarter, like what kind of assumption do you have in for the next quarter gross margin?

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

Sure. As we think about gross margin in the coming quarter and actually for the back half of the year, we're expecting that we'll see improvements in gross margin as the year progresses. We had anticipated that we would have challenged gross margin in the second quarter as we were running the two foundries and the new foundry continues to ramp. We'll expect to see those improvements throughout the back half of the year as well as the improvements in the repair side of our business now that we're lapping the Israel Hamas headwind that we encountered last year in second quarter. We're expecting in the back half of the year about an implied 37% gross margin range for the back half of the year at the midpoint of our updated guidance.

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

And we'll continue to expect, as Marty said, to have a lag related to the benefit of the pricing that will show in fourth quarter and the tariffs will start to impact third quarter. So third quarter will look a little more challenged than fourth quarter will.

[Walter Liptak, Industry Analyst at Seaport Research Partners]

Thanks very much. Appreciate it.

[Operator]

You. Joe Giordano with TD Cowen. You may go ahead, sir.

[Analyst]

Good morning. This is Michael on for Joe. Good morning. So segment margins in the quarter were positive progression year over year, though probably came in a little bit lighter than most were modeling. But then the consolidated performance came out ahead due to the lower corporate costs.

[Analyst]

So can you just elaborate any puts and takes when it comes to margin in the segments? And then how should we be thinking about corporate expense on the go forward? Thank you.

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

Sure. For gross margin in the second quarter, we had expected to see a little bit of a dip in the second quarter. And while we did have some favorable volumes and price cost benefits, we did however have manufacturing inefficiencies as we had talked about with the running of the two foundries. Now that we have moved past the legacy foundry, we should be past the one time manufacturing inefficiencies that we experienced in the prior quarter related to that foundry. We'll expect to see that the improvements in the back half of the year that we had talked about previously as that new foundry continues to ramp.

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

And again, we expect that we'll see implied guidance range of 37% in the back half of the year versus the 34.5% that we saw in the beginning of the year. And as far as overall SG and A, we had expected that we would see a benefit related to the prior year as the amortization from the customer relationship intangible had fully been amortized. With that, we did continue to see in addition to that benefit, we saw some favorable foreign currency exchange in addition to some diligent expense management. So overall, we had reduced our SG and A expense expectation for the year by $4,000,000 at the midpoint. We do expect to see a step up in the back half of the year, which is typical per our seasonality.

[Melissa Rasmussen, SVP & CFO at Mueller Water Products]

And we're also investing in some decisions that we had made as far as IT investments and commercial investments as well as some personnel investments in the back half of the year. So you'll see a step up versus the first half of the year.

[Analyst]

Great. Thanks. And then just one more if I may. Earlier you mentioned about two thirds of the business is tied to muni water infrastructure. Can you just elaborate how much of that is actually tied to new lot development versus just repair and replacement business?

[Analyst]

And then are there any like mix considerations that you would like to highlight to expect over time? Thank you.

[Marietta Zakas, President & CEO at Mueller Water Products]

And let me just clarify. When we give the end market estimates for our business, the roughly, we'll call it two thirds that we call repair and replace, that is all looking at existing municipalities where there already is the built out infrastructure. And generally, that's where you would be seeing any of the maintenance or the upgrades over time. When we look at what we call the residential construction piece, that is where the new lot development and or new construction comes into play. So think of that as when you've got the raw land, you historically have not had distribution systems and due to the development of the new communities, we they are putting in the underground infrastructure associated with it.

[Marietta Zakas, President & CEO at Mueller Water Products]

Does that address your question?

[Analyst]

Yes. I'm sorry if I might have missed this earlier in the call. Do you mind just maybe breaking out on a percentage basis or just generalize, percentage wise the exposures of those two things you just mentioned? I don't think it was necessarily clear. Thank you.

[Marietta Zakas, President & CEO at Mueller Water Products]

Certainly. So as we when we estimate for 2024 overall where we stood, we estimate that roughly about 60% to 65% of our revenue was associated with what we call repair and replacement, which really is in and around the municipal business. And when we think about the residential construction component of our business, that probably falls right around, we'll call it sort of 20%, twenty five %. And then we also have an end market exposure, is in and around the natural gas distribution products, which runs a little less than 10%.

[Analyst]

Great. Thank you.

[Operator]

Thank you. At this time, I am showing no further questions.

[Marietta Zakas, President & CEO at Mueller Water Products]

Very good. Well, thank you, operator. We thank everyone for taking time to join our call today. We certainly welcome Melissa to the team and are delighted to have her here. Overall, we think we delivered a very solid performance with some new records in our second quarter.

[Marietta Zakas, President & CEO at Mueller Water Products]

The healthy order levels and resilient end market demand, I think specifically in and around municipal support the guidance that we gave where we did increase our expectations for our 2025 net sales, maintaining our adjusted EBITDA guidance range and that really is largely due to the higher costs from the recently enacted tariffs. I think with respect to the tariff environment that we are all addressing and certainly the uncertainty that that brings, I think with the enhanced investments and enhanced operational and supply chain team talent that we have, actions we're taking with respect to pricing, supply chain mitigation, operational initiatives and cost discipline. We are putting ourselves in the best position that we can to address that. So thank you very much and we look forward to speaking with you again when our third quarter results are announced in August. And with that, please conclude the call.

[Marietta Zakas, President & CEO at Mueller Water Products]

Thank you, operator.

[Operator]

Thank you. This concludes today's conference call. Have a nice day. You may now disconnect.

Participants

Executives

• Whit Kincaid, VP, Investor Relations & Communications
• Marietta Zakas, President & CEO
• Melissa Rasmussen, SVP & CFO

Analysts

• Paul McAndrew, President & COO at Mueller Water Products
• Deane Dray, Managing Director at RBC Capital Markets
• Analyst
• Walter Liptak, Industry Analyst at Seaport Research Partners