Mueller Water Products, Inc. Class A Aktie

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 Whit Kincaid.

Good morning, everyone. Thank you for joining Mueller Water Products' fourth quarter and fiscal 2026 conference call. Yesterday afternoon, we issued our press release reporting results for the quarter and year ended September 30, 2026. The release is available on our website, muellerwaterproducts.com. Joining me this morning are Paul McAndrew, our President and Chief Executive Officer, and Mike Morgan, our Executive Vice President of Finance and future Chief Financial Officer [1.3.3]. After our prepared remarks, we will take questions about the information covered on the call. Please limit yourself to 1 question and 1 follow-up and then return to the queue. Today's call is being recorded and webcast live on the Internet.

The accompanying slides are available on our website and include our forward-looking statements and non-GAAP disclosures. Please turn to Slide 2, which identifies the non-GAAP financial measures referenced in our press release, slides, and remarks, and explains why we believe these measures are useful to investors. Reconciliations of non-GAAP measures to GAAP measures are included in the supplemental information in 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. Unless otherwise noted, all references to years and quarters on this call refer to our fiscal year, which ends September 30.

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 Paul.

Thanks, Whit. Good morning, everyone. Thank you for joining our fourth quarter and fiscal 2026 earnings call. 2026 was an excellent year for Mueller. We delivered record results and made meaningful progress in strengthening the business. Full-year net sales increased 3.2% to approximately $1.5 billion, supported by enhanced commercial execution and resilient end-market demand. Higher pricing was partially offset by lower volumes. Adjusted EBITDA grew 14.1% year-over-year to a record $372 million. Adjusted EBITDA margin expanded 240 basis points to 25.2%, bringing our cumulative expansion over the past 3 years to 940 basis points. Adjusted net income per share reached a record $1.57, an increase of approximately 20% year-over-year. Free cash flow was strong in the fourth quarter and for the full year, totaling $207 million for the year.

This cash generation enabled us to return $74 million to shareholders through dividends and share repurchases. We recently announced a $300 million increase in our share repurchase authorization and 14.3% increase in our quarterly dividend to $0.08 per share. These actions reflect our confidence in Mueller's strategy and our ability to continue investing in the business. Three things drove our progress. First, operational improvements through greater productivity and disciplined cost management, including SG&A productivity. Second, commercial execution through improved service levels, strategic pricing, and strong growth in specialty valves. Third, a stronger organization built around leadership accountability. Together, these efforts have made Mueller a more profitable business and positioned us well for fiscal 2027.

These results reflect the hard work and dedication of our employees across Mueller. I want to thank our teams for their commitment to our customers and to making the company stronger. I am proud of what we have accomplished together. I also want to highlight an important announcement about our metering business. We have entered into an agreement to transition the business, which operates through our Mueller Systems subsidiary, to ZENNER USA, who is part of the Minol-ZENNER Group. Following a comprehensive portfolio review, we believe that exiting this business will improve earnings quality, simplify operations, strengthen returns on invested capital, and allow us to direct resources towards areas with stronger growth potential. This transition is another decisive step in strengthening Mueller.

Metering requires scale and technology investments that a more specialized company is better positioned to provide. Zenner is an established global metering company with extensive industry experience and compatible technology. We believe these capabilities will support a smooth transition for our customers. This decision reinforces our focus on building a stronger, more profitable Mueller through disciplined execution of our strategy, supported by the Mueller Operating System. As we expand margins, accelerate growth, and create long-term shareholder value, we will begin the transition immediately and work closely with our customers and suppliers to maintain service continuity and ongoing support. We expect most of the transition to occur in 2027, although some activity and associated costs could extend beyond this year. The timing of customers' migration to the Zenner platform will be the main source of variability in the phased transition.

In connection with the agreement, we expect to incur approximately $26 million of one-time expenses in fiscal 2027. These primarily relate to the outstanding warranty liability, operating and customer service costs, transaction-related costs, and severance. The transition impacts will be adjusted as appropriate in our key financial metrics. The one-time and ongoing transition activities will be included in net sales, cost of sales, and strategic reorganization and other charges. The majority of the expenses will be incurred during the first quarter, with most of the remaining expenses incurred prior to the end of the year. Finally, the financial impacts and benefits will occur in the Water Management Solutions segment. For 2026, we generated approximately $40 million in metering-related sales with a negative adjusted EBITDA margin.

We expect the transaction to support adjusted EBITDA margin expansion with a 100 to 140 basis points annualized benefit, primarily beginning in the second quarter of fiscal 2027. At the midpoint of the range, this would be approximately $8 million favorable to EBITDA on an annualized basis. Taking the one-time expenses and annualized benefit into account, we believe the cash return on investment of completing this transition is very attractive relative to other opportunities. I would like to welcome Mike Morgan, who joined Mueller on October 28 and will become our Chief Financial Officer on or about November 19 following the filing of our annual report [1.3.3]. He most recently served as Chief Financial Officer of Indicor and previously held senior finance roles at LabCorp and Timken. Mike is a proven industrial finance leader with an extensive track record working with management teams and boards to improve performance and drive profitable growth. He will recap our fourth quarter and full-year performance, and I'll provide more details on our annual guidance for 2027.

Thanks, Paul. Good morning, everyone. It's an exciting time to join Mueller. Over the coming months, I look forward to meeting many of you and working with Paul and the leadership team to strengthen execution, support disciplined investment, and advance Mueller's strategy for profitable growth. In the fourth quarter, net sales decreased 1.1% versus the prior year to $376.5 million, with Water Management Solutions up 1.4% and Water Flow Solutions down 3.0%. The year-over-year decrease in consolidated net sales was primarily driven by lower volumes, partially offset by higher pricing across most product lines. In the quarter, gross profit of $139.3 million decreased 0.5% year-over-year, and gross margin expanded 20 basis points to 37.0%. We incurred $600,000 of Decatur Legacy Brass Foundry costs in the Water Flow Solutions segment. Excluding these costs, our gross margin was 37.2%.

This was down 100 basis points compared with the prior year, excluding the $5.6 million warranty charge at Water Management Solutions in the prior year. The decrease was primarily driven by lower volumes, product mix, and inflationary pressures, including the impact of higher Section 232 tariffs, partially offset by higher pricing and manufacturing performance. For the full year, we achieved a record gross margin of 37.9%, an increase of 180 basis points compared with the prior year. Excluding the impact of tariff refunds, portfolio optimization costs, and the Decatur foundry closure cost, adjusted gross margin was 37.8%. Gross margin expanded 100 basis points compared with the prior year, excluding one-time items in both periods. The increase was primarily driven by manufacturing performance and price/cost.

Total SG&A expenses for the quarter of $57.3 million decreased $9.4 million year-over-year, primarily due to lower incentive-based compensation, favorable personnel-related costs resulting from productivity actions, and reduced foreign currency headwinds, partially offset by inflationary pressures. We incurred $8.9 million of strategic reorganization and other charges, which have been excluded from adjusted results. These costs primarily relate to closure of our legacy brass foundry in Decatur, Illinois, and severance. Strategic reorganization and other charges and the brass foundry closure costs in gross profit have been excluded from adjusted results for the fourth quarter.

For the quarter, adjusted EBITDA of $95.5 million increased 4.0% year-over-year. Adjusted EBITDA margin expanded 130 basis points versus the prior year to 25.4%, setting a new fourth-quarter record. Our strong margin performance was driven by higher pricing, lower SG&A expenses, and manufacturing performance, partially offset by inflationary pressures, lower volumes, product mix, and tariffs. For the full year, adjusted EBITDA increased 14.1% year-over-year to a record $372.2 million, representing 25.2% of net sales. For the quarter, adjusted net income per share was $0.38, which was flat compared with the prior year.

Our fourth-quarter effective income tax rate was 28.0% compared with 23.4% in the prior-year quarter. The fourth-quarter income tax rate was within our expectations as our annual guidance for the full-year effective tax rate was 21% to 23%. For the full year, the effective income tax rate was 22.7% as compared with 24.6% in the prior year. The lower effective tax rate for the full year was primarily due to a one-time tax benefit resulting from the recognition of a loss on a foreign subsidiary investment. This benefit was in the third quarter and equates to a one-time cash tax benefit of $0.06 per share. Full-year adjusted net income per share increased 19.8% year-over-year to a record $1.57 per share. As a reminder, full-year earnings per share included a combined $0.09 benefit from tariff refunds and the one-time tax item associated with the i2O business exit.

Turning now to segment performance, starting with Water Flow Solutions. Fourth-quarter net sales decreased 3.0% year-over-year to $210.9 million, primarily due to lower iron gate valve and service brass volumes. These declines were partially offset by higher pricing across most product lines and increased specialty valve volumes. Adjusted EBITDA increased 7.0% year-over-year to $67.1 million, and adjusted EBITDA margin improved 300 basis points versus the prior year to 31.8%. This improvement was driven by manufacturing performance, higher pricing, and lower SG&A expenses, which more than offset lower volumes, product mix, inflationary pressures, and tariffs. For the full year, adjusted EBITDA margin expanded 430 basis points year-over-year to 33.0%, a record for the segment.

Moving on to Water Management Solutions. Fourth-quarter net sales increased 1.4% year-over-year to $165.6 million, driven by higher pricing across most product lines and volume growth in repair and natural gas distribution products. These were partially offset by lower volumes of agriculture and hydrants. Adjusted EBITDA decreased 8.4% year-over-year to $41.2 million, and adjusted EBITDA margin of 24.9% decreased 270 basis points. The decrease was due to lower volumes, tariffs, and inflationary pressures, partially offset by higher pricing and lower SG&A expenses, including reduced foreign currency headwinds. For the full year, adjusted EBITDA margin was 24.6%, slightly below the prior year.

Moving on to cash flow. For the year, free cash flow increased $35.3 million to $207.3 million and was 84% of adjusted net income. Free cash flow exceeded our expectations, primarily due to favorable working capital and lower capital expenditures. Net cash provided by operating activities for the year increased by $43.6 million year-over-year to $262.9 million, primarily driven by higher net income and lower cash taxes, offset by changes in working capital. We increased our capital expenditures by 17.5% year-over-year to $55.6 million, or 3.8% of net sales, primarily driven by investments in our iron foundries. We ended the year with $566 million in cash and cash equivalents and $454 million in total debt.

Our balance sheet remains exceptionally strong, providing significant flexibility for organic investment and strategic growth opportunities. We have no debt maturities until June 2029. Our senior notes total $450 million at a favorable fixed interest rate of 4%, and we had no borrowings under our ABL facility. Total year-end liquidity was $731 million, including $165 million available under the ABL facility. This positions us to reinvest in the business, return cash to shareholders, and pursue acquisitions in existing and adjacent markets that create value. I'll now turn it back to Paul to discuss the outlook for 2027.

Thanks, Mike. I'll now review our fiscal 2027 outlook, which excludes all metering-related financial results. We expect consolidated net sales between $1.44 million and $1.47 billion. In fiscal 2026, the metering-related sales were approximately $40 million. Excluding the portfolio optimization headwind, our net sales would range between flat and approximately 2.5% higher year-over-year. For price realization, we are assuming a low single-digit to mid-single-digit benefit for the year. This includes carryover pricing and new price increases sometime in Q2, which we have not yet announced. The year-over-year volume headwinds are mainly driven by the prior hydrant backlog benefit at Water Management Solutions.

Excluding this impact, we anticipate consolidated volumes will be flat at the midpoint. This includes double-digit specialty valve growth and benefits from commercial initiatives. These benefits will be offset by slower new residential construction activity and cautious purchasing behavior from municipalities in terms of repair and replacement. We expect our adjusted EBITDA to range from $378 million to $388 million. At the midpoint of our guidance range, adjusted EBITDA achieves a 26.3% margin for the year, reflecting a 110 basis point year-over-year improvement. This would be a 150 basis point year-over-year expansion, excluding the prior-year tariff refund benefit. The expansion is driven by the metering and i2O portfolio optimization actions, higher pricing, manufacturing performance, and SG&A productivity, partially offset by inflationary pressures, lower volumes, and product mix.

Similar to the prior year, we expect our second-half net sales and adjusted EBITDA margin to be higher than the first half of the year, with the first quarter lower than the second quarter. This is driven primarily by the seasonality of our business, where construction activity ramps up in the spring, and the timing of the benefits from the portfolio optimization and operational improvements. For the Water Flow Solutions segment, we expect net sales growth in the low single-digit to mid-single-digit range, supported by higher pricing and volume growth from specialty valves, partially offset by lower volumes of iron gate valves and service brass products. We anticipate adjusted EBITDA margin will be up slightly versus the prior year, excluding tariff refunds. Benefits from higher pricing and specialty valve volume growth will be partially offset by lower volumes of iron gate valves and service brass and inflationary pressures.

For the Water Management Solutions segment, we anticipate net sales to decrease in the high single-digit range, reflecting lower sales associated with the metering portfolio optimization and the prior year hydrant backlog benefit. We expect strong adjusted EBITDA margin expansion, even with the lower sales, primarily driven by higher pricing, lower SG&A related to the portfolio optimization benefits, and manufacturing performance, partially offset by lower volume of hydrants, inflationary pressures, and higher tariffs.

We expect total SG&A expenses of $228 million to $233 million, reflecting portfolio optimization benefits, including the metering business transition. We expect an effective tax rate of 24% to 26%, reflecting a more normalized rate after prior-year one-time tax benefit. We expect free cash flow to exceed 80% of adjusted net income, including higher capital expenditures of $60 million to $70 million. We will continue investing in growth, operational efficiencies, and domestic capacity with a focus on our iron foundries.

Before opening up for Q&A, I want to provide a few closing comments. We delivered strong results in an uncertain operating environment by focusing on customer service, disciplined execution, and investments in capabilities that support long-term value creation.

Our fiscal 2027 priorities are straightforward: protect the strength of our core business, improve operational returns, and invest in the best opportunities to create value. Our balance sheet gives us capacity to invest as we pursue above-market sales growth and continued margin expansion. While we remain mindful of market uncertainty, we enter the year with a clear agenda and confidence in our ability to take another step forward in margin performance. The Mueller Operating System supports these priorities with tools, processes, and management disciplines that strengthen execution, accountability, and continuous improvement across the company. This quarter provides further evidence that the system is taking hold. I want to thank our employees worldwide for their extraordinary commitment to our customers and communities. They are the reason for our success and why Mueller has been a trusted partner for more than a century. That concludes our comments. Operator, please open the call up for questions.

[Operator Instructions]

Brian Lee with Goldman Sachs.

Hey, guys. This is Keshav Choudhary on for Brian Lee. Firstly, your 2027 sales guidance implies some growth, even excluding the metering business. Can you maybe walk us through what you're assuming for residential construction versus municipal repair and replacement and specialty valves within that outlook? Thank you.

One moment, please. Please continue to stand by. We're experiencing technical difficulties. Please continue to stand by. Please continue to stand by. We're experiencing technical difficulties. Please continue to stand by. Brian Lee, you may go ahead and ask your question again from Goldman Sachs.

Yes. Hey, guys. It's Keshav Choudhary on for Brian Lee. So, firstly, your 2027 sales guidance implies growth, excluding the metering business. Can you maybe walk us through what you're assuming for residential construction versus municipal repair and replacement and specialty valves within that outlook? Thank you.

One moment, please.

So, just following through, sorry about technical difficulties there. Our sales guidance, excluding the metering portfolio optimization, is 1.5%. We are expecting residential construction to continue to decline at low single digits on top of double-digit decline in FY '26. We anticipate municipal spending to be cautious as they have the inflationary pressures around their budgets. Where we are expecting to see double-digit growth and where we've seen growth at that level over the last 3 years is around our specialty valve business as we continue to move this company to a broader flow control platform.

Thank you. That was helpful. And then just maybe on the price/cost side of things, you previously expected to remain price/cost positive despite lower price realization. How are you thinking about pricing relative to inflation and maybe Section 232 tariff costs as you enter '27?

Yes, the company, this is Mike Morgan, by the way, the company has strong brands and we continue to expect to be able to deliver price increases year-over-year. So, from a price/cost perspective, we would expect to be dollar positive, and in terms of margin, it's in the neutral range in terms of price/cost.

Thank you, guys. As a reminder, on our tariffs, the Section 232 impacted our steel products from Israel when the IPA tariffs came to an end. But right now, we have all that priced in our assumptions.

Cool. Thank you, guys.

[Operator Instructions]

Our next caller is Jeffrey with RBC Capital Markets.

Good morning, everyone. Just want to say congrats to Mike, and it's nice to have you on the call.

Thank you very much. Appreciate it.

Yeah, and just I want to follow up on that pricing question. So, the slides indicate I think it's low single-digit to mid-single-digit realization for next year, but this is including, I guess, a new price increase that has not been announced. This is a change from the historical practice that used to just not embed the price increase until you announced it. Just can you help us understand what gives you confidence to include that now, on the ability to capture it?

Yes, thanks, Jeff. I think twofold. Look, our price confidence is high based on the brands of our business and our commercial execution and operational execution with our customers. So, this is why we've given a range. I think previously it was a little confusing to everyone, so we wanted to make it clear this is what is baked into our guidance right now. And in terms of that price increase, it would be later in our Q2 as per we do on an annualized basis.

Got it. Okay. I appreciate that. I think it makes sense. And maybe just moving to the metering exit, can you just help us understand the economics of the agreement? Is it that Mueller's not receiving any consideration and you just have to basically take a $26 million charge and you hand over the customers? And is there any, I guess, incremental liability that can persist?

First of all, Jeff, I want to remind everyone on the metering business, the sales have been declining at a 10% CAGR over the last 4 or 5 years with negative EBITDA margin. It's really about how the team and myself have looked at the portfolio and moving what is a subscale and competitively disadvantaged business from our portfolio, allows us to really focus on where we believe we are transitioning this company to from a growth opportunities perspective.

But to answer your question directly, the annualized benefit when you back in at the midpoint is $8 million of EBITDA improvement. And the one-time charges are predominantly around a warranty, both software and hardware services to fulfill customer commitments on an ongoing basis, along with the transactional costs. Just a reminder, we do have a manufacturing facility related to this business. What we will be doing ongoing is transitioning customers to Zenner. We will continue to support them from a customer warranty perspective ongoing. The goal here is to work closely with a much larger water metering company who wants to make progress in North America and is backed by a global metering manufacturer, and transition our customers across smoothly to a much better position for them.

All makes sense. And if I can just sneak in one more, when you look across your portfolio today, are there other low-margin products or technologies that you're evaluating for divestiture?

Look, part of the Mueller Operating System in that simplification is looking constantly at the portfolio, and I take that down to a SKU level, not just a product portfolio. We believe we are positioned well now. We still believe the leak detection business is a key part of our technology going forward. How that integrates into our industrial products is critical. We know municipalities have a need to address non-revenue water, and we believe that technology is a key part of how that fits in.

Great. Thank you.

[Operator Instructions]

Our next caller is Brian Blair with Oppenheimer.

Good morning, everyone. Mike, welcome to the call.

Thank you.

I was hoping we could level set on hydrant backlog normalization. Sorry if I missed this detail, but what was the impact in Q4? I assume that would start to phase in. And then we have enough information to back into the segment and consolidated impact for fiscal '27 overall. But how should we think about the cadence throughout the year?

Yes, Bryan, as we kind of think about the hydrant backlog, it was minimal in Q4 as an impact as we caught up on that backlog and have seen that normalization with the channel. The overall impact for the year is around 2% from a sales perspective as a headwind that we're moving to FY '27 for a comp comparison.

Okay, understood. And a bigger picture, I guess medium-term follow-up. It looks like EBITDA margin will exceed 26% this year, so over 1,000 basis points expansion since fiscal '23. How should we think about runway from here? Are you willing to offer a medium-term margin target? And I guess at risk of leading the witness here, would that start with a 3?

Yes, great question. And part of Mike coming on board now is to help us kind of put that narrative together from a longer-term perspective. We're really pleased with the organization. You know, Bryan, 940 basis points in 3 years, and at the midpoint of our guidance would be 1,150 in 4 years. So, we've really transformed the company. The next step now, as I said, is how do we really take the specialty valve business, which plays in the plant work, both potable and wastewater, larger pipe distribution, water and flood control, along with importantly the growing industrial segment where we are seeing a lot of traction in our investments. I know a relatively small number to start from, but definitely seeing a lot of high-growth opportunities in our industrial applications. We believe we're a company that has deep expertise and engineering skills in flow control, and how we leverage that and change the company from that perspective.

The only thing I'd add to that is that the Mueller Operating System is just taking hold, so there's room to run.

All right. Very encouraging. Thank you.

Thank you. We are showing no further questions. I'll turn the call back over to you for closing comments.

Thank you, operator. Thanks to everyone who joined our call today. We're excited about the progress we made in 2026, leading continued margin improvement and strong cash generation. We enter fiscal 2027 focused on strengthening our core business using the Mueller Operating System and portfolio optimization to simplify operations, enhance execution, and improve returns. We remain mindful of market uncertainty, and we will stay focused on what we can control. Once again, I want to thank our dedicated team members for their commitment to our customers and communities. They are the reason for our success and why Mueller has been a trusted partner for more than a century. And with that, operator, please conclude the call.

Thank you, sir. This concludes today's conference. You may disconnect at this time and have a great rest of your day.

This live transcript is auto-generated without human intervention or review.

Good morning, and thank you for standing by. [Operator Instructions] 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 Whit Kincaid.

Good morning, everyone. Thank you for joining us for Mueller Water Products Third Quarter Conference Call. Yesterday afternoon, we issued our press release reporting results of operations for the quarter ended June 30, 2026. A copy of the press release is available on our website, muellerwaterproducts.com. I am joined this morning by Paul McAndrew, our President and Chief Executive Officer; and Melissa Rasmussen, our Chief Financial 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 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 the 30th of September. A replay of this morning's call will be available for 30 days at 1 (866) 386-1299. 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 Paul.

Thanks, Whit. Good morning, everyone. Thank you for joining our third quarter earnings call. Our outstanding third quarter results reflect strong execution and continued progress against the operating priorities we outlined in the last quarter. We achieved quarterly records for net sales, adjusted EBITDA and adjusted net income per diluted share. Net sales grew 4.1% in the quarter, supported by commercial execution, resilient municipal end market demand and strong growth in project-related specialty valves. Adjusted EBITDA margin expanded 440 basis points year-over-year, reflecting our continued focus on operational excellence, productivity and disciplined cost management.

Free cash flow was strong this quarter, enabling us to continue funding capacity and efficiency investments, while returning approximately $21 million to shareholders through our quarterly dividend and share repurchases. I am proud of what our teams have accomplished and the continued commitment to serving our customers. Last quarter, we introduced the Mueller Operating System as the framework we are using to drive greater discipline, execution and accountability across the company.

Our results provide further evidence of the progress we are making in expanding margins, strengthening cash generation, investing in growth and simplification. Following our announcement from the last quarter, we completed the exit of the i2O pressure monitoring business outside of North America. GWF AG, a utility metering and smart water technology company headquartered in Switzerland, acquired certain assets and liabilities of i2O Water. During the quarter, we incurred one-time costs associated with the transaction, along with a tax benefit, which lowered our income tax rate.

We expect the cost savings and tax benefits to support margin expansion and enhance free cash flow. With our increased fiscal 2026 adjusted EBITDA guidance, we remain on track to deliver another year of meaningful margin expansion, while we continue to navigate slower new residential construction activity and broader external uncertainty. We remain focused on what we can control, executing our strategies, investing in growth and proactively managing costs.

Our commercial initiatives are focused on increasing market penetration through our leading products and expanding into adjacent markets for our specialty valves. We believe the disciplined execution embedded in the Mueller Operating System positions us well to build on this momentum and create long-term value for our customers and shareholders. I am proud of the progress our teams have achieved this year, reflecting a focus on serving customers, strengthening operations and collaborating across the organization.

We recently published our 2025 sustainability report, highlighting our continued progress in advancing environmental stewardship, operational excellence, responsible business practices, employee well-being and community impact. As cities and municipalities confront a growing range of challenges, critical infrastructure is under increasing strain. At the same time, aging systems continue to pose significant risks. Against this backdrop, Mueller's role as a provider of resilient, reliable water infrastructure solutions is more essential than ever. Notable 2025 achievements include reaching an outstanding milestone of the lowest total recordable incident rate in our history, reflective of our team's unwavering commitment to safety.

We've also maintained strong momentum towards reducing our carbon footprint, cutting Scope 1 and 2 emissions intensity by 13% year-over-year, bringing our total reduction to 35%. This moves us closer to our goal of reducing greenhouse gas emissions intensity by 50% by 2035. As for employee engagement, we reached our goal 1 year ahead of our schedule, achieving an 80% employee engagement score in our annual employee survey. Our vision is to be the leader in water infrastructure solutions. Solving challenges, enriching lives and safeguarding the future. We will continue to drive progress through our innovative products and solutions that help utilities and municipalities strengthen system resilience, detect leaks faster and with greater precision, rehabilitate and maintain aging infrastructure and provide life-saving fire protection. Our achievements over the past several years establish a new foundation for future progress and are the direct result of the hard work, focus and collaboration demonstrated across our organization.

With that, I'll turn it over to Melissa to take us through the financials.

Thanks, Paul, and good morning, everyone. We are pleased to deliver another record quarter, demonstrating the strength of our business, the resilience of our end markets and the continued execution by our teams despite a dynamic external environment. Consolidated net sales increased 4.1% to a new record of $395.9 million, driven primarily by higher pricing across most product lines, partially offset by slightly lower volumes. Gross profit increased 6.9% to a record $155.8 million, with gross margin expanding 110 basis points to 39.4%.

The improvement reflects the benefits of pricing actions and tariff refunds, which more than offset inflationary pressures, performance, volume impacts, portfolio optimization costs and product mix. During the quarter, we incurred $3.1 million of portfolio optimization costs associated with the strategic exit of the i2O pressure monitoring business outside of North America, impacting WMS cost of sales. While we continue to experience elevated tariff costs, mainly attributable to Section 232 tariffs, along with ongoing inflationary pressures, the International Emergency Economic Powers Act tariff refunds received during the quarter helped offset a portion of those impacts.

Excluding the impact of these prior period tariff refunds and the portfolio optimization costs, adjusted gross margin was approximately 30 basis points higher than the prior year's gross margin of 38.3%, demonstrating the underlying benefit of our pricing actions and operational execution despite a challenging cost environment. Total SG&A expenses for the quarter of $64 million decreased $7 million year-over-year, reflecting reduced foreign currency headwinds and lower incentive compensation expense, partially offset by continued inflationary pressures. This performance underscores our disciplined approach to cost management while continuing to invest in the business.

We incurred $11.2 million of strategic reorganization and other charges. These costs primarily relate to the i2O exit, including non-cash asset impairment charges, certain transaction-related expenses, severance and costs associated with our leadership transition. Our adjusted results do not include strategic reorganization and other charges or the portfolio optimization costs reflected in the WMS segment.

Adjusted EBITDA reached a record of $107.4 million, an increase of 24.3% compared to the prior year quarter. Adjusted EBITDA margin expanded 440 basis points year-over-year to a record 27.1%. This strong performance was primarily driven by pricing actions, tariff refunds and favorable SG&A cost management, which more than offset inflationary pressures, performance, volume impacts and product mix. On a trailing 12-month basis, adjusted EBITDA improved to $369 million or 24.9% of net sales, representing an improvement of 290 basis points versus the prior 12-month period.

Adjusted net income per diluted share increased 47.1% year-over-year to a record $0.50 per share. During the quarter, we benefited from lower net interest expense driven by higher interest income. Our third quarter effective income tax rate was 15.7% compared with 27.1% in the prior year quarter, reflecting a one-time tax benefit associated with the exit of the i2O business. This benefit contributed approximately $0.06 per diluted share during the quarter.

Turning now to segment performance, starting with WFS. Net sales were $215.3 million, declining 0.6% year-over-year as higher pricing across most product lines and volume growth in specialty valves largely offset lower iron gate valve and service brass volumes. Adjusted EBITDA increased 9.5% to a record $73.5 million. Adjusted EBITDA margin expanded 310 basis points to a record 34.1% compared to 31% in the prior year period, reflecting the benefits of pricing, tariff refunds and performance, which more than offset lower volumes, inflationary pressures and product mix.

Moving to WMS. Net sales increased 10.3% to $180.6 million, driven by strong volume growth in hydrants and natural gas distribution products, along with higher pricing across most product lines. Adjusted EBITDA increased 43.6% to a record $50.7 million, reflecting benefits from higher pricing, lower SG&A expenses, including reduced foreign currency headwinds, volume growth and tariff refunds, which more than offset performance and inflationary pressures. Adjusted EBITDA margin expanded 650 basis points to a record 28.1% compared with 21.6% in the prior year period. The continued improvement in profitability reflects the significant progress we have made in strengthening operating performance and driving leverage across the business.

Turning to free cash flow. For the first 9 months of the year, free cash flow increased $7.6 million to $110.6 million and represented 59% of adjusted net income. The increase was driven by higher net cash provided by operating activities, partially offset by higher capital expenditures. Net cash provided by operating activities increased $18.4 million year-over-year, driven primarily by favorable non-cash adjustments and higher net income, partially offset by changes in working capital and other assets and liabilities. While working capital remains elevated due to inventory investments, inflation and tariffs, these investments continue to support customer service levels and our long-term growth objectives. We invested $43.6 million in capital expenditures during the first 9 months of the year compared with $32.8 million in the prior year period, reflecting continued investments in our iron foundries that support future productivity, capacity and operational excellence.

We ended the quarter with $495 million of cash and cash equivalents and $453 million of total debt. Our balance sheet remains exceptionally strong, providing significant flexibility to support both organic investments and strategic growth opportunities. We have no debt maturities until June 2029 and $450 million of senior notes at a favorable 4% fixed interest rate and had no borrowings under our ABL facility. We ended the quarter with total liquidity of $659 million, including $164 million of available capacity under the ABL, positioning us well to execute our strategic priorities and pursue attractive acquisition opportunities.

Turning now to our outlook for fiscal 2026. Given our strong year-to-date performance and outlook for the balance of the year, we are narrowing our consolidated net sales growth guidance to a range of 2.8% and 3.5% year-over-year, reflecting our current expectations for end market demand, volumes and price realization. While we anticipate softer new residential construction activity during the fourth quarter, we continue to expect resilient municipal repair and replacement activity and strong growth in specialty valves.

Based on our record performance through the first 9 months of the year and confidence in our ability to execute for the rest of the year, we are raising our annual adjusted EBITDA guidance to a new range of $367 million to $372 million. At the midpoint, our updated guidance range represents an adjusted EBITDA margin of 25.1%, which would represent another annual record for the company. We are also reducing our expectations for total SG&A expenses within this updated guidance to a new range of $241 million to $245 million, reflecting ongoing discipline in managing costs while supporting strategic growth initiatives.

Additionally, we are lowering our effective tax rate guidance to between 21% and 23%, reflecting the onetime tax benefit recognized during the third quarter. Finally, we are reaffirming our capital expenditure outlook of $60 million to $65 million and continue to expect our free cash flow conversion to exceed 70% of adjusted net income for the full year. Overall, our performance year-to-date demonstrates the strength of our business model, the resilience of our end markets and the effectiveness of our pricing, operational and cost management initiatives. We remain confident in our ability to deliver another record year while continuing to invest for long-term growth and value creation.

With that, I'll turn it back to Paul for closing comments.

Thanks, Melissa. I want to provide a few closing comments before opening it up for Q&A. Overall, I am extremely proud of our team's outstanding performance this quarter. I'm pleased for the third consecutive quarter, we are raising our annual adjusted EBITDA guidance. We delivered strong results in an uncertain operating environment by staying focused on serving customers, executing with discipline and investing in capabilities that support long-term value creation. Our priorities remain clear: drive above-market sales growth, continued expanding margins and maintain disciplined capital allocation. The Mueller Operating System is the execution engine behind those priorities, providing the tools, processes and management disciplines to improve execution, accountability and continuous improvement across the company. This quarter provides further evidence that the system is taking hold. At the center of our success are our employees. Their commitment, collaboration and safety-first mindset enable us to serve customers well, strengthen operations and sustain our momentum.

Through the disciplined execution embedded in the Mueller Operating System, we will continue to reduce complexity, improve business processes, expand margins and generate cash to fund growth investments, including capacity, efficiency, digital tools, innovation and specialty valve capabilities. Finally, we will remain disciplined in allocating capital across organic investments, targeted acquisitions and cash return to shareholders.

Mueller is becoming a stronger, more focused and more resilient company, and we remain committed to creating sustainable long-term value for our shareholders. I want to thank our employees worldwide for their extraordinary commitment to our customers and communities. They are the reason for our success and why Mueller has been a trusted partner for more than a century. That concludes our comments.

Operator, please open the line up for questions.

[Operator Instructions] Bryan Blair with Oppenheimer.

Updated guidance implies top line down slightly year-on-year against a pretty healthy stacked comp and I think about 1% EBITDA growth, again against solid Q4 '25 performance. How should we think about segment contribution to that? The year has progressed a little differently than we expected, still very strong overall. Just curious how we should think about the Q4 dynamics by segment.

Yes, I'll give the overall first, Bryan, and then I'll let Melissa talk by segment. You are correct. We narrowed our net sales range. I guess that's based on our current expectations around orders and shipments, mainly around the slower residential construction activity. We're also lapping tariff price actions from Q4 implementation of last year. Again, we really -- overall, really pleased where we are as a company, Bryan. Pleased to be growing net sales and expanding margins for the third consecutive year. It's really where we are reflective of where we see the slower residential construction and the uncertain macro environment as we move into Q4.

As for segments, I'll pass it over to Melissa.

For the WFS segment, we are expecting adjusted EBITDA to be above prior year due to gross margin improvements, operational efficiencies and then price realization. We're expecting to see a sequential decline from third to fourth quarter, which part of that is due to the typical seasonality decline sequentially, and we expect volumes and product mix to be a driver of that as well. Volume will be impacting our short-cycle products, so iron gate valves and service brass, and we'll expect to see a shift toward specialty valves because we have continued to see strength in specialty valves throughout the year.

For WMS, we're expecting to see lower margins versus the prior year and sequentially. And that's going to be due to lower hydrant volume. We have benefited from a backlog in hydrants throughout the first 3 quarters. We expect that, that backlog will be normalized as we enter fourth quarter. So the residential slowdown will impact WMS more than it has so far this year. We do expect to see that we'll be lapping our tariff pricing that was put in place and began to benefit the fourth quarter of last year, and we'll continue to see higher inflationary pressures and ongoing tariff expense, while we have had the relief from the IEEPA tariffs, that has been replaced by higher Section 232 tariffs impacting our Krausz business line. And we do not expect to have any further tariff refunds.

Okay. Very helpful detail. You mentioned tariff refunds there. I think you gave us the math that we can back into consolidated benefit for fiscal Q3. What were tariff refunds on a segment level?

Yes. So as I mentioned in the prepared remarks, we had 150 basis point benefit overall for the tariff refunds in the quarter. For the segment, that's split about 50-50. So you would see a 140 basis point impact in WFS and 170 basis point impact in WMS.

Our next caller is Walt Liptak from Seaport Research.

Thanks for the guidance for fourth quarter. I wanted to ask about the specialty valves. You called those out a couple of times because of projects, and it sounds like the demand was strong. I wonder if you could provide some more detail about the demand levels in the third quarter and what the visibility is like in the fourth quarter?

Yes. Sure, Walt. Specialty valve is slightly different in terms of how we -- the sales cycle in comparison to our short-cycle business. So specialty valve makes up the majority of our backlog then. And it's been the fastest-growing category for us over the past few years, and we are really leveraging our operational investments and the consolidation of locations into Kimball, along with our engineering investments. And I think you know there's many different types of valves within specialty valve then that impact not just potable water, but wastewater and industrial water. And industrial water, although a small category for us, has been one of our fastest-growing categories as we kind of not just think about the potable water or the infrastructure water around data centers, we're also seeing a step increase then of our ability to get specialty valves into industrial water for data centers as well.

Okay. Great. And I wonder the data center opportunity, are you -- are these being sold through distribution? Or are you getting spec-ed into the data centers?

It's a combination. We sell through distribution. We've also made commercial investments in our teams to gain access for approved manufacturers list as well. So it's one of our commercial initiatives going forward, and we're starting to see traction right now.

Our next caller is Jeffrey with RBC Capital Markets.

Maybe just following up on the data center question. Could you size how big that business is for you today?

It's relatively small in the overall size of the business for us, Jeff. And industrial water within specialty valves is a piece of that, where we are seeing probably our fastest growth, and it is one of our highest commercial initiatives then to really work with these engineering firms around the AMLs. But in terms of size right now, relatively small.

Got it. I appreciate that. And maybe just a higher-level question, kind of the muni repair and replacement market seems to be resilient, but I think some federal stimulus seems to be sunsetting. Just like as you look over the next like year or 2, I mean, how much visibility do you have into the spending outlook?

Yes. You think about the federal sunset and federal investment is less than 5% of the total investment into municipalities, the rest coming from state and local governments. And we are seeing the sunset, and it's going to take multiple years to see that impact because a lot of those funds have already been appropriated in and they just need to be executed into projects. So over the next 1 to 3 years, we don't see any meaningful change then from the federal funding impact.

Got it. And maybe if I could just sneak in one more. I think at ACE this year, you guys are showcasing your hydrant renewal system. I think it's a really great opportunity. Can you just update us on where the commercialization stands today? Any early customer feedback and how you're thinking about revenue contribution as this scales?

Yes. So we have launched hydrogen renewal. We continue to get very positive customer feedback from customer trials. And just as a reminder for everyone, this will be replacing aged hydrants without having to dig up the part of the hydro, which is below the ground. So it gives a much more efficient solution for our customers. And we're also pleased how much positive feedback we've had, Jeff, on the leak testing capabilities integrated into that solution as well.

[Operator Instructions] Our next caller is Brian Lee with Goldman Sachs.

This is Keshav Choudhary on for Brian Lee. So pricing has been a contributor for your growth in recent quarters. Can you maybe discuss the sustainability of the pricing realization going forward, particularly as the tariff-related price increases began to lap up in the second half and whether you're seeing any change in sort of customer acceptance as these increases work through the market?

We have historically been successful at taking pricing actions to offset inflationary impacts. We have typically ranged in the mid- and low single-digit range of price realization. And we continue to expect to see that opportunity into the future. We have been price/cost positive and continue to expect that, that will be the same as we move into fourth quarter. With the price realization, we will expect to see a little bit lower price realization in fourth quarter because we'll be lapping the tariff benefits that we started to see in fourth quarter of last year.

Yes. Just a reminder, we have very strong brands and very good pricing power. So we feel comfortable whatever inflation or tariff impacts we may see, we have the pricing ability to offset that cost.

That helps. Just maybe one more. So as you look towards fiscal '27, the residential demand has been slow. And if the residential construction continues to remain soft, can the municipal repair and replacement activity and the specialty valve project continue to support growth? Or do you see limits to how much of these markets can offset the resi weakness and resi will need to come back at some point to help with the growth?

Yes. We don't give our guidance for 2027 until the next earnings call. We continue to look at all those market indicators as you referenced them, and we know that we're going to be seeing continued or level out where slowdown in residential construction. We believe from a municipal perspective and our commercial and strategic initiatives, that they can really offset where we can see that kind of depressed residential construction right now. But I'd like to add, residential construction cannot stay depressed forever. There is a pent-up demand of housing, and we know that they will bounce back, and we will -- that will be a tailwind for us as well when that bounce back comes.

I will now turn the call back over to Paul for any closing comments.

Thank you, operator. Thanks to everyone who joined us on our call today. Overall, we are excited about the quarter. Our results provide further evidence of the progress we are making in expanding margins, strengthening cash generation, investing in growth and simplification. Our increased annual guidance for adjusted EBITDA reflects the confidence we have in our commercial and operational capabilities. We remain vigilant in increasingly uncertain -- we remain vigilant in an increasingly uncertain external operating environment as it relates to demand, tariffs and inflationary pressures. We will stay focused on what we can control and take action if needed.

I want to once again thank our dedicated team members. We look forward to speaking with you again on our fourth quarter results when they are announced in early November. And with that, operator, please conclude the call.

Thank you, sir. This concludes today's conference. You may disconnect at this time, and have a great rest of your day.

Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I'll turn the call over to Whit Kincaid. You may begin.

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 March 31, 2026. A copy of the press release is available on our website, muellerwaterproducts.com.

I am joined this morning by Paul McAndrew, our President and Chief Executive Officer; and Melissa Rasmussen, our Chief Financial 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 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 the 30th of September. A replay of this morning's call will be available for 30 days at 1 (800) 839-1334. 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 Paul.

Thanks, Whit. Good morning, everyone. Thank you for joining our second quarter earnings call. I am pleased with our strong performance this quarter as we set new quarterly records for net sales, adjusted EBITDA and adjusted net income per share. We delivered net sales growth of 5.5% in the quarter, demonstrating the strength of our brands and resilient end market demand. We also expanded our adjusted EBITDA margin 210 basis points year-over-year.

Our operations and supply chain teams performed well, driving year-over-year gross margin expansion. With an ongoing commitment to operational excellence and cost management, manufacturing efficiencies more than offset the impact of higher tariffs and inflationary pressures, driving year-over-year gross margin expansion. Based on our outstanding performance through the first half of the year and our current expectations for the remainder of the year, we are raising our fiscal 2026 outlook for adjusted EBITDA.

We continue to anticipate that healthy municipal repair and replacement activity and strong growth in project-related work using specialty valves will help offset slower new residential construction activity. We believe we are positioned for another record year, driven by adjusted EBITDA margin expansion and supported by our strategic priorities, including our ongoing commercial and operational initiatives and strategic capital investments. While we are experiencing greater uncertainty in the external operating environment, including changes in demand, tariffs and inflationary pressures, we are focused on driving results and investing in the capabilities and capacity needed to support long-term value creation.

I'd like to take a moment to explain the ways we are updating our approach to our strategic priorities. Throughout our long history, Mueller has played a critical and essential role as a leader in the water infrastructure in North America. We have strong brands and a broad portfolio of products and solutions. Our vision is to be the leader in water infrastructure solutions. Our value creation priorities are driving above-market sales growth, continuing margin expansion and executing disciplined capital allocation. We are fueled by our dedicated team and strong culture. We expect our ongoing investments in commercial and operational capabilities to enable us to drive above-market sales growth and further expand margins.

Additionally, we will continue to take a disciplined approach to capital allocation, balancing organic investments such as our strategic capital expenditures, pursuing targeted acquisitions and returning cash to shareholders. We have improved operational execution, strengthened stakeholder relationships and delivered outstanding results, all while navigating a challenging external environment. I believe our performance so far this year and over the last few years is just the beginning.

Now I'd like to introduce what we are calling our Mueller Operating System, which is a formalized system of tools and processes that will drive discipline, execution and excellence throughout the organization. At Mueller, this starts with an engaged employee base, which is the upper left of the diagram. Our team members are the heart and soul of Mueller and critical to our future success. We have made significant progress with our safety-first mindset, resulting in record safety levels.

Our next priority centers on enhancing our customer experience, which is supported by our commercial and operational investments. These efforts are dedicated to achieving first-class quality and delivery, fostering seamless engagement and establishing ourselves as a trusted partner. For example, we are investing in our digital customer-facing tools to enhance the customer experience and accelerate quoting and inventory management.

Next, we aim to expand margins by simplifying our business to reduce complexity, drive business process excellence and deliver strategic price cost management. As part of this effort, we recently made the difficult decision to exit the i2O pressure monitoring business outside of North America. This impacts business operations and employees in the United Kingdom, Malaysia and Colombia as well as customers outside the U.S. and Canada.

Pressure management remains a strategic priority for us as the demand for pressure monitoring continues to grow in North America, where it's increasingly specified alongside hydrants and valves. We plan to use and further develop the pressure technology originally acquired from i2O to strengthen our competitive position. We expect the cost savings and tax benefits to more than offset the revenue loss and support margin expansion and enhance free cash flow beyond 2026.

Lastly, to accelerate our growth, we will drive market-leading innovation, focused market expansion and disciplined strategic acquisitions. We have streamlined our new product R&D to focus on the most impactful near-term and long-term opportunities. We remain excited about expanding our specialty valve, commercial and operational capabilities to deliver highly engineered valves for large projects. While we have benefited from improving our commercial and operational execution, we are confident that we can build on our momentum to accelerate net sales growth and expand margins further through our new operating system. We look forward to sharing examples of successes along the way.

With that, I'll turn it over to Melissa to take us through the financials.

Thanks, Paul, and good morning, everyone. We are pleased to report another quarter of strong performance. Consolidated net sales increased 5.5% to a new record of $384.4 million, driven primarily by higher pricing across most product lines, along with modest volume growth. Gross profit increased 12.9% to $144.5 million, with gross margin expanding 250 basis points to 37.6%. The improvement was driven primarily by favorable pricing, improved manufacturing efficiencies and higher volumes.

Manufacturing efficiencies reflected the anticipated benefits associated with the transition to our new brass foundry, including the absence of approximately $800,000 of inventory and other asset write-downs associated with the closure of our legacy brass foundry in the prior year. These benefits were partially offset by higher tariffs and ongoing inflationary cost pressures. Total SG&A expenses for the quarter of $59.7 million increased $4 million year-over-year, primarily reflecting unfavorable foreign currency impacts and continued inflationary pressures.

During the quarter, we incurred $4.4 million of strategic reorganization and other charges, primarily related to expenses associated with our leadership transition, transaction-related expenses and severance. These items have been excluded from adjusted results. Adjusted EBITDA reached a record of $97.2 million, an increase of 15% compared to the prior year quarter. Adjusted EBITDA margin expanded 210 basis points year-over-year to 25.3%, also a new quarterly record. This strong performance was primarily driven by higher pricing, continued manufacturing efficiencies and increased volumes, partially offset by higher tariffs, inflationary pressures and higher SG&A expenses.

On a trailing 12-month basis, adjusted EBITDA was $348 million or 23.7% of net sales, representing a 140 basis point improvement versus the prior 12-month period. Adjusted net income per diluted share increased 17.6% year-over-year to $0.40, setting another quarterly record. During the quarter, we benefited from lower net interest expense, which declined $700,000, driven by higher interest income. Our second quarter effective income tax rate was 25% compared with 24.2% in the prior year quarter.

Turning now to segment performance, starting with WFS. Net sales increased 1% to $218.3 million, reflecting higher pricing across most product lines and increased volumes in specialty valves, partially offset by lower service brass volumes. Adjusted EBITDA grew 16.4% to $72.4 million, driven by manufacturing efficiencies and higher pricing, which more than offset increased tariffs, inflationary pressures and lower brass volumes. Adjusted EBITDA margin expanded 440 basis points to 33.2% compared with 28.8% in the prior year period, representing a new record.

Moving to WMS. Net sales increased 12.2% to $166.1 million, driven by higher pricing across most product lines and volume growth of hydrants and repair products. These benefits were partially offset by lower volumes in applications and natural gas distribution products. Adjusted EBITDA in the quarter increased 11.5% to $40.6 million. The increase reflects benefits from higher pricing and volume growth, which more than offset increased tariffs, manufacturing inefficiencies, higher SG&A expenses, including unfavorable foreign currency impacts and inflationary pressures. Adjusted EBITDA margin contracted 20 basis points to 24.4%.

Turning to free cash flow. For the 6-month period, free cash flow decreased $30.8 million to $16.5 million and was 15% of adjusted net income. The decrease was driven by lower net cash provided by operating activities and higher capital expenditures. Net cash provided by operating activities for the first 6 months decreased $20 million compared with the prior year. The decline was primarily driven by changes in working capital and other assets and liabilities, partially offset by higher net income and noncash adjustments. Higher working capital was largely driven by increased inventory levels, reflecting higher tariffs, inflationary pressures and strategic investments.

We invested $31.9 million in capital expenditures during the first 6 months of the year compared with $21.1 million in the prior year period, reflecting continued investments in our iron foundries. We ended the quarter with $452 million of total debt and $421 million of cash and cash equivalents. Our balance sheet remains strong and flexible with no debt maturities until June 2029 and $450 million of senior notes at a 4% fixed interest rate. We had no borrowings under our ABL and ended the quarter with $585 million of total liquidity, including $164 million of availability under the ABL. As a result, we continue to maintain ample liquidity, capacity and financial flexibility to support our strategic priorities, including pursuing acquisitions.

Turning now to our outlook for fiscal 2026. We are reiterating full year guidance for consolidated net sales growth to be between 2.8% and 4.2% year-over-year, reflecting our current expectations for end market demand, volumes and price realization. Based on our performance through the first half of the year, we are raising our annual adjusted EBITDA guidance by $5 million at the midpoint to a new range of $360 million to $365 million. This range reflects our first half performance and updated expectations for volumes, price realization, inflationary pressures and tariffs as well as ongoing manufacturing efficiencies.

At the midpoint, our updated guidance range represents an adjusted EBITDA margin of more than 24.5%, an improvement of 170 basis points year-over-year. We are maintaining our expectations for total SG&A expenses within this updated guidance. With increased uncertainty in the external operating environment, including the anticipated slowdown in new residential construction activity, we are working closely with customers and suppliers to adapt as needed to changes in demand, tariffs and inflationary pressures. We are reaffirming our capital expenditure outlook of $60 million to $65 million. We now expect our free cash flow to exceed 70% of adjusted net income for the full year, reflecting higher levels of working capital.

With that, I'll turn it back to Paul for closing comments.

Thanks, Melissa. I want to provide a few closing comments before open it up for Q&A. Overall, I am excited about our team's outstanding performance this quarter. Also, I am pleased to be raising our annual guidance at this point in the year. We remain vigilant as our end markets evolve in this increasingly uncertain external operating environment. We expect the municipal repair and replacement market to remain resilient. We are closely watching the anticipated slowdown in new residential construction activity.

We continue to be focused on what we can control, executing our ongoing investments in our commercial and operational capabilities. Our teams are prepared to take action to help offset changes in end market demand if needed. With our focused strategic priorities and investments in our capabilities, we believe we can continue to drive results and deliver long-term value creation. I want to thank all our employees worldwide for their extraordinary commitment and passion in supporting our customers and communities. They are the reason for our success and why Mueller has been a trusted partner for over a century.

That concludes our comments. Operator, please open the line up for questions.

[Operator Instructions] It looks like our first question comes from Jeff Reive with RBC Capital Markets.

Appreciate all the detail thus far. Can you start by talking about sell-in versus sell-out trends in the quarter across your segments? And how would you characterize inventory levels in the channel today?

Jeff, this is Paul. In terms of how we look at channel inventory, the foresight we have in the channel inventory, we believe it's at normalized levels. Of course, I think our channel partners are managing the uncertainty in the external environment the same as everybody else at this point. In terms of your other question, in terms of sell-through, we had -- it's about a backlog reduction, then, in the quarter. We had a kind of normalized backlog change from a seasonality perspective in our Q2, where we see a rise in backlog around our price increase, which goes out in February, a little bit of pull ahead from an order perspective. And our specialty valve business still continues to be the large portion of our backlog.

Got it. And maybe just as a follow-up on just WMS sales that came in a bit better than expected this quarter, yet you're reiterating the full year outlook. Does that imply a more moderated growth cadence for the year? Was there any pull forward there? Just anything there?

Jeff, with WMS, yes, we did have double-digit growth in the quarter, and that was primarily driven by higher pricing and volume gains, which were primarily in the hydrant and repair product lines. Hydrant shipments are benefiting from an elevated backlog that we started the year with this year despite the lower volumes associated with a slowdown in residential construction activity. We do expect to see growth in the remainder of the year. However, the first half of the year has been a stronger growth, and we expect WMS to normalize as the year progresses.

Yes, Jeff, just to add on to that. Obviously, the prior year, we had a service brass backlog reduction, and that's been flipped now with the hydrant. It's why the normalized backlog changes. It's just a flip between segments.

Our next question comes from Brian Lee with Goldman Sachs.

Maybe first on the updated outlook for the year. It sounds like you've seen good pricing realization. So kudos on the nice results here, but the revenue guidance is intact. Can you kind of speak to how much you're expecting from price versus volume? And is some of the price actions you saw come to fruition in the first part of the year, is that expected to persist through the rest of the year? Is volume maybe a little bit lighter? Wondering why there might not be a little bit more upside to the revenue outlook given the strong pricing capture you saw earlier in the year?

Brian, we went up with our annual price increase in February, low single digit. As a reminder, we had a tariff-related price increase really taking effect in Q3 and Q4 of last year. So we'll start to lap that tariff-related price as we move into the second half of the year.

And Brian, we saw price realization through the second quarter in the mid-single-digit range, which was slightly higher than the first quarter, and that was because we did see a slight benefit from our February price actions due to the execution of our commercial team.

And then just the slowdown in resi activity, I know you guys have kind of been calling this out for a little bit of time. So the tone is consistent. But can you quantify kind of the impact? Is it maybe becoming more of a headwind than you were assuming? And presumably, the impact is already embedded in the balance of your fiscal '26 guide. But thinking ahead to '27, how much of a continued headwind? Or just any thoughts on how this evolves over the next year or so for your business?

Yes, we believe the external environment is continuing to evolve. We use public homebuilders data points, land development. We still believe resi is down high single to low double-digit range. But on the external market and the outlook beyond that, there's still pent-up demand for resi construction. It's really trying to manage the uncertainty right now, and that's why I talked about in my prepared remarks that we will pivot as an organization and manage this closely.

Last one for me, and I'll pass it on. Obviously, the balance sheet is in a pretty good spot here. M&A in the capital allocation strategy, can you kind of give us a sense of how high up the priority chain that is, how active you are there? And maybe what kind of pipeline you're looking at or opportunities are most interesting right now?

Yes. Great point. Look, our balance sheet is really strong, and we've definitely increased our activity about how we look for acquisitions to expand our portfolio. We want to find key criteria and where we can expect sales and profitability, cost synergies. The challenge here is unlocking some of those acquisitions, but we are far more active in trying to tap into what would be a good acquisition for us as an organization.

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

I wanted to ask a free cash flow question. You called out some of the working capital accounts and accounts receivable were up a little bit. I wonder if you could just provide us with a little bit more detail on the free cash flow. Did you -- I can't remember, but did you guys take the free cash flow guidance down? Or were you always at that 70% of net income for the year?

Yes. So a couple of things related to free cash flow. The second quarter is typically our lower quarter for cash generation, and that's primarily due to receivables. The first quarter is our lowest revenue-generating quarter typically. So we have a lower collections in the second quarter related to those receivables from the first quarter. Now that said, we also, during the second quarter, are ramping our inventory levels in anticipation for our seasonal ramp for the construction season. With this specific second quarter, we did have lower expectation -- lower than expectations in free cash flow, and that was primarily due to higher levels of working capital as a result of increased inventory.

The increased inventory balance does reflect higher tariffs. It also reflects inflationary pressures and some strategic inventory build. We talked about growth in sales related to our specialty valve product lines. We see -- we expect to see some double-digit growth in that product line this year. That product line particularly has a long backlog and lead time. So that will stay in inventory for a bit longer. And so we did decrease our expectation of free cash flow as a percentage of net income this period to 70% as a result of the inventory balances as well as increased capital expenditures for the year.

Okay. And what was it before? Was it 85%, now down to 70%?

Yes, it was 85% previously.

Okay. Got it. And then just a follow-up on the residential questions. Can you help us remember like when -- if the residential sector does still look pretty slow and kind of uncertain, are there any things that you guys can do around those businesses, either with some of your overhead costs or strategically to try and pick up some market share?

You know what, there's a lot of crossover in our products between the resi plus the muni market and how we distinguish those. From a strategic perspective, our specialty valve business is definitely less residential construction exposed, and that's where we continue our investments, and we've continued our investments in terms of operationally consolidating those plants from an engineering skill set perspective in terms of developing those products. And we believe there's a lot more growth opportunity that we're starting to tap into from an industrial water perspective.

And at this time, I'll turn the call over to Paul for closing remarks.

Thank you, operator. Thanks to everyone who joined us on our call today. Overall, we're excited about the record quarter and our team's ability to execute. Our increased annual guidance for adjusted EBITDA reflects the confidence we have in our commercial and operational capabilities. We remain vigilant in an increasingly uncertain external operating environment as it relates to demand, tariffs and inflationary pressures.

While we expect the muni repair and replacement market to remain resilient, we remain closely watching the anticipated slowing residential construction activity. We'll stay focused on what we can control and take action if needed. I want to once again thank our dedicated team members who have been and always will be the driving force behind our success. Thank you all, and we look forward to speaking with you again with our third quarter results when they're announced in early August.

And with that, operator, please conclude the call.

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

Good morning, and thank you for standing by. [Operator Instructions] 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 Whit Kincaid.

Good morning, everyone. Thank you for joining us for Mueller Water Products First Quarter conference call. Yesterday afternoon, we issued our press release reporting results of operations for the quarter ended December 31, 2025. A copy of the press release is available on our website, muellerwaterproducts.com.

I have joined this morning by Martie Zakas, our Chief Executive Officer; Paul McAndrew, our President and Chief Operating Officer; and Melissa Rasmussen, our Chief Financial 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 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 the 30th of September. A replay of this morning's call will be available for 30 days at 1-800-814-6745. 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 our First Quarter Earnings Call. As a reminder, this is my last week as Mueller's CEO. After my opening remarks, I will hand the call over to Paul to provide an overview of our performance followed by Melissa, who will go over our first quarter financial results and discuss our increased guidance for 2026.

It has been the highlight of my career to lead this talented team, an extraordinary company with its rich legacy and iconic brands. The sense of fulfillment I feel in what the entire Mueller team has accomplished together is beyond words. It's thanks to their hard work and unwavering dedication that we have become the successful company we are today. Mueller plays a critical and essential role as a leader in water infrastructure products and solutions every day. I have great confidence that Paul the leadership team and all our talented employees will build on our positive momentum. I believe our performance this quarter and over the last few years is just the beginning. I look forward to seeing Paul and the entire Mueller team write the next chapter in Mueller's winning legacy.

I'll now turn it over to Paul.

Thanks, Martie. Good morning, everyone. Before we view in our performance, I want to start by recognizing Martie, and thank you for her incredible leadership. With nearly 2 decades of dedicated service, she has shaped Mueller into the company we are today. I am grateful that she will continue to guide us as a senior adviser through the end of the year.

Since joining Mueller more than 3 years ago, I have witnessed firsthand the passion, expertise and commitment of our team members. I believe we are in the early stages of our transformation. We have improved operational execution, strengthened relationships with our stakeholders, and delivered outstanding results, all while navigating a challenging external environment. I am pleased with a great start to our fiscal year.

We delivered net sales growth of 4.6% in the quarter supported by resilient end markets and our focus on delivering outstanding customer service. Our operations and supply chain teams executed well, as manufacturing efficiencies more than offset the impact from higher tariffs and inflationary pressures, driving year-over-year gross margin expansion. This includes the expected benefits from efficiencies associated with the transition to our new brass foundry. These improvements led to first quarter records for net sales, gross margin, adjusted EBITDA and adjusted EBITDA margin.

During the quarter, we generated $44 million of free cash flow and continued our balanced approach to cash allocation. We invested approximately $17 million in capital expenditures and returned approximately [ $16 million ] to shareholders through our quarterly dividend payment and share repurchases. We are raising our fiscal 2026 guidance, reflecting our strong first quarter results and current views for the rest of the year. Our end market expectations are consistent with our prior guidance. We anticipate that healthy municipal repair and replacement activity and strong growth in project-related work used in specialty valves will more than offset slower new residential construction activity. Our operations and supply chain teams continue to work with suppliers to manage the ongoing tariffs and inflationary pressures mainly related to brass. With this in mind, we recently announced price actions across most product lines. We are on track to deliver another year of gross and adjusted EBITDA margin expansion, supported by our operational and commercial initiatives.

Overall, I am excited about our team's strong performance this quarter. We expect that our ongoing investments in our commercial and operational capabilities, together with strategic capital expenditures will enable us to increase capacity achieve sustained margin expansion and deliver long-term value creation. I am grateful for our dedicated employees who serve our stakeholders with relentless drive and passion.

With that, I'll turn it over to Melissa, who will take us through the financials.

Thanks, Paul, and good morning, everyone. We are pleased to report a great start to the year with consolidated net sales increasing 4.6% to $318.2 million, surpassing last year's strong first quarter performance. This growth was driven primarily by higher pricing across most product lines, partially offset by slightly lower volumes.

Gross profit for the quarter increased 16.3% to $119.8 million and gross margin expanded 380 basis points to 37.6%. The improvement in gross profit was primarily driven by higher pricing and manufacturing efficiencies as well as inventory and other asset write-downs at WFS in the prior year period that did not recur. Manufacturing efficiencies largely resulted from the expected benefits associated with the closure of our legacy brass foundry last year. These benefits were partially offset by higher tariffs and ongoing inflationary pressures.

Total SG&A expenses for the quarter of $59.8 million increased $5.9 million compared with the prior year, reflecting higher personnel costs, inflationary pressures and unfavorable foreign currency impacts. Operating income increased 19.6% in the quarter to $56.7 million compared with the prior year. Operating income included $3.3 million of strategic reorganization and other charges, which have been excluded from adjusted results along with the inventory and other asset write-downs at WFS.

Turning now to our consolidated non-GAAP results for the quarter. Adjusted operating income increased 14.5% in the first quarter to $60 million driven by higher pricing and continued manufacturing efficiencies, partially offset by increased tariffs, inflationary pressures and higher SG&A expenses. Adjusted operating margin expanded 170 basis points year-over-year to 18.9%. Adjusted EBITDA reached a first quarter record of $72.1 million an increase of 13.5% compared to the prior year quarter. Adjusted EBITDA margin expanded 180 basis points year-over-year to 22.7% marking a new first quarter record. Over the last 12 months, adjusted EBITDA was $335 million or 23.2% of net sales. a 90 basis point improvement compared with the prior 12-month period. Net interest expense of $1 million declined $0.6 million, reflecting higher interest income. Adjusted net income per diluted share increased by 16% year-over-year to $0.29, setting another first quarter record.

Moving on to quarterly segment performance, starting with WFS. Net sales decreased 0.9% to $173 million, primarily reflecting lower volumes of service brass products, which were partially offset by higher pricing across most product lines and increased volumes of specialty valves. Adjusted operating income increased 28% to $49.4 million. The increase reflects benefits from manufacturing efficiencies and higher pricing, which more than offset increased tariffs, inflationary pressures, lower volumes and higher SG&A expenses. Adjusted EBITDA grew 26.4% to $56.5 million and adjusted EBITDA margin expanded 710 basis points to 32.7% compared with 25.6% in the prior year period. WFS set a new record for quarterly adjusted EBITDA margin.

I'll now move to quarterly results for WMS. Net sales increased 12% to $145.2 million, driven by higher pricing across most product lines and strong volume growth of hydrants. The benefits were partially offset by lower volumes for natural gas distribution and repair products.

Adjusted operating income decreased 11.2% to $24.5 million. The decline reflects increased tariffs, manufacturing inefficiencies, higher SG&A expenses, inflationary pressures and unfavorable foreign currency. These headwinds more than offset the benefits from higher pricing and hydrant volume growth. Adjusted EBITDA in the quarter decreased 9.5% to $29.5 million and adjusted EBITDA margin contracted 480 basis points to 20.3%.

Moving on to cash flow. Net cash provided by operating activities for the 3-month period was $61.2 million, an increase of $7.1 million compared with the prior year. The improvement was primarily driven by higher net income and noncash adjustments, partially offset by changes in working capital and other assets and liabilities. Capital expenditures through the first 3 months of the year increased to $17.2 million compared with $11.9 million in the prior year, reflecting continued investments in our iron foundries. Free cash flow for the period increased $1.8 million to $44 million and was 96% of adjusted net income, in line with our expectations. We ended the quarter with $452 million of total debt and $460 million of cash and cash equivalents. Our balance sheet remains strong and flexible with no debt maturities until June 2029 and $450 million of senior notes at a 4% fixed interest rate.

We had no borrowings under our ABL and ended the quarter with $623 million of total liquidity, including $164 million of availability under the ABL. As a result, we continue to maintain ample liquidity, capacity and financial flexibility to support our strategic priorities, including pursuing acquisitions.

I will now review our updated outlook for fiscal 2026. We are raising our full year guidance for consolidated net sales by $20 million at the midpoint of the range. Our net sales growth is now expected to be between 2.8% and 4.2% year-over-year, reflecting our strong first quarter performance and our current expectations for end market demand orders and price realization, which includes expected benefits from our recently announced price actions across most product lines.

We are also increasing our annual adjusted EBITDA guidance by $10 million at the midpoint to a new range of $355 million and $360 million. At the midpoint, our updated guidance range represents an adjusted EBITDA margin of more than 24%, an improvement of more than 100 basis points year-over-year. We are maintaining our expectations for total SG&A expenses. We continue to expect our second half adjusted EBITDA margin to be higher than the first half of the year largely driven by seasonality of net sales.

Additionally, we expect the benefits from our recently announced price actions will start to phase in the coming months, benefiting gross margins in the second half of the year. We are reaffirming our expectations for capital expenditures to be between $60 million and $65 million and continue to expect free cash flow to exceed 85% of adjusted net income for the year.

With that, I'll turn it back to Paul for closing comments.

Thanks, Melissa. I want to provide a few closing comments before opening it up for Q&A. We are excited about our start to the year as we continue to execute well despite the challenging external environment. We are pleased to be raising our annual guidance at this point in the year. We are benefiting from our strategic capital investments and improving commercial and operational execution. We are confident that we can build on our momentum to accelerate net sales growth and expand our margins further.

I want to thank all our employees worldwide for the extraordinary commitment and passion and supporting our customers and communities. They are the reason for our success and why Mueller has been a trusted partner for over a century.

That concludes our comments. Operator, please open the line up for questions.

[Operator Instructions] Brian Lee with Goldman Sachs.

This is [ Tyler Bisset ] on for Brian. So you guys took revenue guidance up for the year and reflecting the 1Q results and price increases so far. So can you quantify how much you guys have raised prices so far this year and how that compares to prior years? Should we think about this revised guidance is almost entirely due to the higher prices? Or are you seeing improved demand across any key areas of your business?

Good morning. So as we said in our prior guidance, it didn't include our annual price increase, which we recently announced, which we will see the main benefit in Q3 -- our fiscal Q3. Prior guidance included the prior year price increase, plus the tariff price increase that we put in effect, which really took effect in Q4 of the prior fiscal year. So in your question, yes, the majority of the increased growth in our guidance is predominantly price related.

All right. And then I guess like in relation to that, on water flow, you guys saw a nice pickup in margins, and you called out manufacturing efficiencies and favorable pricing. So can you break down the impact from those 2 items and how you expect margins to trend for the balance of the year?

Sure. With water flow, I want to remind you that we had mentioned last year that we would expect to see a benefit as we close the legacy Brass foundry. We saw a benefit in the second half of last year, and we expect to see a benefit from that in the first half of this year. So we benefited from the closure of the iron foundry in first quarter. And that was the largest impact. And like I said, you'll see that again through second quarter. With the -- we did have -- sorry, we had some impact related to tariffs and we'll continue to expect to see that as well. The tariffs will start to lap in the second half of the year as they started to really impact us as a whole in third quarter of last year.

Our next caller is Deane Dray with RBC Capital Markets.

Thank you. Good morning, everyone. Can I start with, once again, congratulating, Martie. I wish you all the best, and truly, you're leaving the company in really good hands. It isn't often that you see smooth leadership transitions. It's nice when it happens. And I just wanted to call that out and again, wish you all the best.

Great. Well, look, thank you, Deane. And I think just echoing what you said, I think everything was structured to ensure that it was a very smooth CEO transition, and I think things are going very, very well and look forward to Paul and the leadership team taking this company forward.

Terrific. And then just for Melissa, can you size for us the inflation pressures? And just to clarify, you said that the price increases should more than offset those pressures as they stand today?

Yes. As the price increases, we do expect to be price positive price/cost positive for the full year. For inflation, we typically see a low single-digit range of inflation. However, since the tariffs went into effect last year, that's more than doubled. In our guidance, we have incorporated an approximately 3% impact from the tariffs as we netted out the efficiencies that we expected to gain from that. So a 3% impact is what we're seeing related to the tariffs.

Great. And then just the second question, has there been any update on your assumptions regarding residential lot development, just kind of activity there? What's the expectation?

Deane, there's been no change in our assumption. We still anticipate that high single-digit range of slowdown in residential construction we track external reports. We look at the public homebuilders and they kind of all aligned in what we are guiding to there on the decline in housing starts. But I think if you think about positive vote given the low inventory on homes, the population demographics, we could see land and housing activity increase, particularly if rates lower, and we are ready to support that activity.

[Operator Instructions] Our next caller is Bryan Blair with Oppenheimer.

Thank you. Good morning, everyone. And I'll echo Deane's sentiments. Congrats, Martie, you're definitely leaving you were in a very solid place.

Very good. Thanks, Bryan.

I had a couple of higher-level questions. Paul, you had mentioned that Mueller's transformation remains kind of early innings, early stages, maybe offer a little more color on that. What are the next steps in the team's journey? And what does that mean for through-the-cycle growth prospects, margin entitlement, any of those kind of key metrics?

Yes. Bryan, we've really improved our commercial and operational investments over the last few years and bringing a lot more discipline to the organization, which you can kind of see how we've been achieving our results and our margin expansion.

I think looking forward, the capital expenditures that we got laid out in our iron foundries for domestic capability is going to drive further capacity and further efficiencies for further margin expansion. And then just continuing that strategy of how we interact with our customers, either through digitally or in terms of our training programs, our whole commercial team segued with the operational investments. And we are well positioned with our specialty valve portfolio to capture the project work that is related to that product line.

So overall, continue our commercial operational initiatives and drive capacity and margin expansion with our capital investments.

Okay. Understood. That all makes sense. And how about capital deployment? I think it's fair to say that your team is in a better position as has the rights to deploy capital more so than any time in Mueller's history. Balance sheet is in good shape, generating pre solid cash flow. So it would be great to hear the funnel development thoughts on actionability, the kinds of assets of greatest interest, if and when they're available.

Yes. Great point, Bryan. We are in a much more better position now or improved momentum on execution, acquisitions are more of a priority for us. We continue to evaluate the funnel, evaluating opportunities with a strong focus on drinking water and wastewater and infrastructure exposure where we can drive synergies with our operations and our commercial teams, it is a priority of ours.

And Brian, I'll add on related to the capital as far as our capital expenditures. We had expressed that we will begin spending 4% to 5% of net sales. in the next couple of years. And Paul's earlier point, that is related to our iron foundries and investing in domestic capabilities and to drive efficiencies and increase capacity across the board.

Understood. I was more focused on inorganic or M&A deployment with the follow-up question, but I completely understand that the higher return is on the organic side, and you have that path forward. Thanks again.

And the last question comes from Joseph Giordano with TD Cowen.

Good morning. This is Michael on for Joe. So I just wonder, can you just run through your exposures, maybe help us get a better understanding of the repair and replace contribution in the quarter, new builds, gas and [indiscernible], meters and leak detection, understanding that for the quarter would be helpful. And then as we look towards the remainder of the year, maybe just help us contextualize those assumptions and guidance.

Sure. The quarter, we had a strong quarter, grew by 4.6%, and that was related to higher pricing across most of our product lines and slightly lower volumes. We did see volume growth in specialty and hydrates and that more than offset -- was offset by a decrease in service brass and natural gas and repair.

We continue to expect to see resilient end markets. Paul had mentioned earlier that we will continue to expect to see a decrease in the residential outlook, but strong performance in the residential or the municipal market. And then how it flows to guidance we can -- as far as the overall guidance report, we expect that we'll see growth on a consolidated basis for each subsequent quarter for the year. We do expect that, that will be driven by slightly positive volumes at the midpoint and price realization in the low to mid-single digits. We'll see normalized seasonality and that, again, will be healthy municipal and strong growth in specialty valves offset slightly by the residential impact.

Great. Any way you could just drill down a little bit more deeply on like the growth rates for those particular markets. Assume the guide you mentioned kind of from a high-level qualitative perspective, but just trying to help us understand how we can kind of underwrite into the end of the year.

Yes. For the markets, we do expect to see a high single-digit decrease in the residential construction market, and that is going to be offset by the municipal repair and replacement growth. that's going to be in the low to mid-single-digit range and the project-related work with our specialty valves, which we expect to see in the mid- to high single-digit range.

And at this time, we are showing no further questions. I will turn the call back over to you for closing comments.

Thank you, operator. and thanks to everyone who joined us on our call today. We are very pleased with how we started this year with a record first quarter results while facing a challenging external environment, including the expected impact from higher tariffs.

Our increased annual guidance reflects the confidence we have in our commercial and operational capabilities as well as the resilience of our end markets. We're excited to be in a position to expand sales, our margins for a third consecutive year, especially given the external environment. We believe we're in the early stages of our transformation.

I want to once again thank our dedicated team members who have been and always will be the driving force behind our success. Thank you all, and we look forward to speaking with you again on our second quarter results when they announced in early May.

And with that, operator, please conclude the call.

Thank you. This concludes today's conference. You may disconnect at this time, and have a great rest of your day.

Good morning, and thank you for standing by. [Operator Instructions] 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 Whit Kincaid. Thank you, sir. You may begin.

Good morning, everyone. Thank you for joining us for Mueller Water Products Fourth Quarter and Fiscal 2025 Conference Call. Yesterday afternoon, we issued our press release reporting results of operations for the quarter and year ended September 30, 2025. A copy of the press release is available on our website muellerwaterproducts.com.

I am joined this morning by Martie Zakas, our Chief Executive Officer; Paul McAndrew, our President and Chief Operating Officer; and Melissa Rasmussen, our Chief Financial Officer. Following our prepared remarks, we will address questions related to the information covered on the call. As a reminder, please keep to 1 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 on the 30th of September. A replay of this morning's call will be available for 30 days at 1-866388-5360. The archive of this 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, and good morning, everyone. Thank you for joining our fourth quarter and fiscal 2025 earnings call. Before we discuss our results, I would like to briefly address the announcement made yesterday. After almost 2 decades at Mueller, I will be retiring as Chief Executive Officer and member of the Board of Directors effective February 9, 2026. It has been the highlight of my career to lead this talented team and company with such a rich legacy and heritage.

Since winning Mueller in 2006, we've driven growth, delivered innovative and sustainable solutions and strengthened our commitment to customers and the communities we serve. Paul has played an important role in these achievements. His deep understanding of our industry, portfolio of products and solutions, operations and customer relationships combined with his leadership positions Mueller for continued success. The transition will be effective February 9, 2026, and I will serve as a special adviser through the end of calendar 2026 to ensure a smooth handover.

With that, I'll recap our fourth quarter and full year performance and then turn it over to Paul.

We closed the year on an exceptional note, delivering another record-breaking performance with our fourth quarter net sales and adjusted EBITDA exceeding the high end of our expectations. Net sales growth of 9.4% in the quarter reflected strong volume gains and improved price realization demonstrating enhanced commercial execution and resilient end market demand. Our team's unwavering commitment and relentless focus on operational excellence and customer service enabled consolidated gross margin expansion of 500 basis points in the fourth quarter.

Record results set new benchmarks for quarterly adjusted EBITDA and adjusted EBITDA margin with adjusted EBITDA margin exceeding 24%. Adjusted net income per share grew 73% year-over-year to $0.38 per share which exceeded the record level from last quarter. I'm incredibly proud of how our organization continues to execute our strategy and deliver value for all stakeholders.

In 2025, even as we navigated a complex external operating environment, we achieved record levels for net sales, gross margin, adjusted EBITDA and adjusted net income per diluted share. Our annual performance significantly exceeded the initial annual expectations for net sales and adjusted EBITDA, which we provided a year ago. This year was marked by exceptional achievements and continued progress. We increased net sales by 8.7% to over $1.4 billion, reflecting strong demand and effective execution. Adjusted EBITDA grew 14.6% year-over-year to a record $326 million, with our adjusted EBITDA margin expanding 110 basis points year-over-year to 22.8%. For the year, we delivered record adjusted net income per share of $1.31, an increase of approximately 37% year-over-year. We generated $132 million of free cash flow and returned $57 million to shareholders through dividends and common stock repurchases. We recently increased our quarterly dividend for the 11th time since 2014, underscoring our commitment to delivering long-term value.

Our transformation over the past 2 years has delivered remarkable results, including expanding our gross margin by more than 600 basis points. We are energized by the progress we've made and the opportunities ahead as we continue to invest across all aspects of our business. Our performance over the past few years reinforces our team's commitment to driving further improvements and leveraging favorable market trends in infrastructure spending. Looking ahead, we expect to deliver continued net sales growth and margin expansion in 2026, which Melissa will describe later in the call.

I'll now turn it over to Paul to address some of our commercial and operational insights and highlights.

Thanks, Martie. Good morning, everyone. It's great to be with you. I am extremely pleased with how we closed out the year and the strong foundation we have built for the future. Our teams delivered exceptional execution despite a challenging external environment. Through discipline, dedication and teamwork, we delivered another year of gross margin improvement, expanding by more than 100 basis points year-over-year. This improvement was primarily driven by higher volumes and manufacturing efficiencies, partially offset by the newer tariffs. Our commercial investments, which enhanced customer service and expanded market penetration contributed to mid-single-digit volume growth this year. We delivered double-digit net sales growth for iron gate valves and specialty valves, hydrants and repair products. Our specialty valve portfolio continues to perform exceptionally well since transitioning to the new facility in Kimball.

With the benefits of our capital investments, improved operational execution, and enhanced product and commercial strategies, we have tremendous position into this year. I am confident that we will build on this success and unlock even greater opportunities ahead.

Earlier this year, we completed the transition to our state-of-the-art brass foundry, which in addition to service brass products manufactures critical components for our orion gate valves and hydrants. In the first half of 2026, we expect to continue to achieve the remaining year-over-year gross margin benefit from the closure of the legacy family, while unlocking significant multiyear opportunities for volume and margin expansion as we scale production and drive efficiencies at the new foundry.

Over the last several years, we have strengthened our foundation by elevating operational standards delivering outstanding customer service, optimizing supply chain processes and advancing manufacturing capabilities to achieve greater productivity across our facilities. Additionally, we have fostered collaboration and teamwork throughout the organization as we build a culture of performance and accountability. I am especially proud of our safety performance this year. where we achieved the lowest TRIR in our history. This safety improvement reflects the tremendous progress our teams have made.

This year, we will continue to make disciplined investments in both commercial and operational capabilities to drive additional performance improvements. Commercially, we are making investments to a digital customer experience, launching new product offerings and optimizing processes to improve delivery times.

Operationally, we are focused on driving margin expansion through productivity gains and strategic price cost management. We continue to look for ways to position Mila for the future by growing and strengthening our talent, especially in the commercial and operation areas. These efforts will continue to support the business with leaders have an extensive experience and a proven history of success. I am confident that our current future leadership will accelerate our efforts to improve our all regional and commercial strategies while positioning Mueller for future growth. We believe that now is the time to accelerate our capital investments to expand capacity and drive efficiencies, including increasing our domestic capabilities with 2 mature iron foundries we are committed to maintaining the appropriate level of investment in our facilities to increase efficiencies and expand innovation to support sales growth and margin expansion.

As a reminder, our 2 iron foundries are mainly focused on supporting our iron gate valve and hydrant products. planned equipment upgrades of these foundries, along with other key projects are expected to increase capital expenditures to 4% to 5% of net sales over the next 3 years. We anticipate that these strategic investments, along with our commercial and operational initiatives will position us to expand our capacity deliver sustained gross margin expansion and promote long-term value creation.

With that, I'll turn it over to Melissa so she can provide you with a deeper dive into the financials.

Thanks, Paul, and good morning, everyone. We are delighted to close another record-breaking year with strong fourth quarter performance. Net sales grew 9.4% to $380.8 million setting a new quarterly record. This growth was primarily driven by increased volumes and higher pricing across most product lines with both segments delivering an exceptional finish to the year. For the full year, net sales increased 8.7% and exceeded $1.4 billion, reflecting robust growth fueled by increased volumes and favorable pricing in both segments. In the quarter, gross profit of $140 million increased 26.2% year-over-year and gross margin expanded 500 basis points to 36.8%. The improvement in gross profit was driven by manufacturing efficiencies, volume growth and favorable price cost dynamics, including the expected benefits from pricing actions taken to offset higher tariffs.

For the full year, gross margin was 36.1%, an increase of 120 basis points compared with the prior year, which is a record level for Mueller. The improvement was driven by manufacturing efficiencies and increased volumes, which more than offset the impact from higher tariffs. Excluding the tariffs implemented in 2025, which were primarily associated with specialty valves and repair products, price/cost was favorable for the year.

For the quarter, total SG&A expenses of $66.7 million were $3.6 million higher than the prior year, primarily due to higher personnel costs, inflationary pressures and unfavorable foreign currency fluctuations, partially offset by lower amortization expense.

Operating income increased 145.1% in the quarter to $69.6 million compared with the prior year. Operating income includes $3.7 million of strategic organization and other charges as well as a $5.6 million warranty charge at Water Management Solutions. These items have been excluded from adjusted results.

Turning now to our consolidated net GAAP results for the quarter. Adjusted operating income increased 39.6% in the quarter to $78.9 million, driven by manufacturing efficiencies, volume growth, lower amortization expense and favorable price cost, partially offset by higher SG&A expenses. Adjusted operating margin expanded 450 basis points year-over-year to 20.7%, which is a record level for Mueller. Adjusted EBITDA and adjusted EBITDA margin reached new records in the quarter and year. For the quarter, adjusted EBITDA of $91.8 million increased [ 26.6% ] year-over-year and adjusted EBITDA margin expanded 330 basis points year-over-year to 24.1%.

For the full year, adjusted EBITDA grew 14.6% year-over-year to $326.2 million or 22.8% of net sales. Adjusted net income per share increased 72.7% year-over-year to $0.38 per share, and for the full year rose 36.5% year-over-year to $1.31 per share, both are new records for Mueller.

Moving on to quarterly segment performance, starting with WFS. Net sales increased 8.6% year-over-year to $217.5 million, driven by volume growth in iron gate and specialty valves and higher pricing across most product lines. Adjusted operating income increased 32.5% year-over-year to $55.1 million, resulting from benefits from manufacturing efficiencies and volume growth and lower amortization expense, which more than offset higher SG&A expenses.

Adjusted EBITDA increased 21.3% year-over-year to $62.7 million, and adjusted EBITDA margin improved 300 basis points year-over-year to 28.8%. For the full year, adjusted EBITDA margin of 28.7% was similar to the prior year.

I'll now move on to quarterly results for WMS. Net sales increased 10.4% year-over-year to $163.3 million, led by volume growth of hydrants and repair products as well as higher pricing. Adjusted operating income increased 33.6% year-over-year to $39.8 million, reflecting benefits from manufacturing efficiencies, favorable price cost volume growth and lower amortization expense, which more than offset higher SG&A expenses. WMS set new records for fourth quarter and full year for adjusted EBITDA and adjusted EBITDA margin.

For the quarter, adjusted EBITDA increased 22.6% year-over-year to $45 million and adjusted EBITDA margin of 27.6% improved 280 basis points. For the full year, adjusted EBITDA margin of 24.7% improved 170 basis points.

Moving on to cash flow. Net cash provided by operating activities for the full year was $219.3 million, a decrease of $19.5 million compared with the prior year. The decrease was primarily driven by changes in working capital, including decreases in other current liabilities, partially offset by higher net income compared with the prior year.

Capital expenditures of $47.3 million for the year was similar to the prior year. Free cash flow exceeded our expectations at $172 million and 84% of adjusted net income. We ended the year with $452 million in total debt and $432 million of cash and cash equivalents. We have a strong and flexible balance sheet, with a net debt leverage ratio below 1. No debt maturities until June 2029 and $450 million in senior notes at a fixed 4% interest rate. We had no borrowings under our ABL and ended the year with $595 million of total liquidity, including $164 million of availability under the ABL.

As a result, we continue to have ample liquidity, capacity and flexibility to support our strategic priorities, including acquisitions. I will now review our outlook for fiscal 2026. We expect consolidated net sales between $1.45 billion and $1.47 billion, representing year-over-year growth between 1.4% and 2.8%. Consolidated net sales seasonality is anticipated to be normalized with quarterly consolidated net sales highest in the third quarter and lowest in the first quarter. We also expect a sequential increase in consolidated net sales in the second quarter as the construction season begins to ramp up for the spring.

Our net sales guidance includes the expected benefit from last year's pricing actions and does not contemplate potential future pricing actions. As a reminder, our practice is to announce price increases to customers before disclosing them to the public. We expect our adjusted EBITDA will range from $345 million to $350 million, reflecting year-over-year growth of 5.8% to 7.3%. At the midpoint of our guidance range, adjusted EBITDA achieved a 23.8% margin for the year, reflecting a 100 basis point year-over-year improvement.

We expect our second half adjusted EBITDA margin to be higher than the first half of the year, primarily driven by seasonality of net sales. Our estimate for annualized tariff impact is approximately 3% of cost of sales based on tariff announcements through November 6. We have taken actions to offset the annualized tariff impact through targeted pricing actions as well as supply chain and operational initiatives. Free cash flow is expected to exceed 85% of adjusted net income. This includes a higher level of capital expenditures expected to be between 4% and 5% of net sales as we invest in growth, operational efficiencies and domestic capacity with a focus on our iron foundries. Our strong financial position ensures we can continue executing on our strategic initiatives and driving long-term value.

With that, I'll turn it back to Martie for closing comments.

Thanks, Melissa. Before we open it up for Q&A, I want to share some final thoughts. We are proud to celebrate our second consecutive year of record results, reflecting significant momentum behind our transformation. This achievement is a direct result of the hard work, dedication and commitment of our employees. Our team members are passionate about being leaders in water infrastructure solutions solving challenges, enriching lives and safeguarding the future. We are connecting communities to water, life's most essential resource with exceptional people, solutions and products. I am confident in our future because of how Mueller's team members differentiate us in the market.

While the external landscape remains uncertain, we are leaning in and increasing investments in our facilities and employees to enhance operational efficiencies and expand our domestic capabilities and capacity. Fueled by our improving commercial and operational execution, we will continue to build on our momentum to accelerate net sales growth and expand margins. Additionally, our strong flexible balance sheet gives us capacity to advance our strategic priorities, including capital investments and acquisitions while continuing to return cash to shareholders.

That concludes our comments. Operator, please open the call for questions.

[Operator Instructions]. Bryan Blair with Oppenheimer.

Martie and Paul, congratulations to both. To level set a bit on your initial fiscal '26 outlook, how did muni and residential market sales shake out in fiscal '25 and what's contemplated on each side in FY '26 revenue guidance of 1.4% to 2.8% growth.

Brian, as it relates to our '26 sales guidance, we have contemplated slightly positive volumes, and that's predicated on expecting a slowdown that we started to see in the fourth quarter with residential construction. We're contemplating that residential concession will be down in the high single-digit range and unit repair and replacement growth will be in the low single-digit to mid-single-digit range and project-based specialty valves will be in the mid-single digit to high single-digit range. We think -- we're expecting that both the newly repair and replacement in the specialty valves will more than offset the slowdown that will be seen in the residential construction.

And just to hit a little bit on what we saw coming in, in '25 with our results, we did see very solid volume growth through our 2025 results, and that was certainly reflective of a very resilient and continuing healthy municipal market. We had indicated probably back in the May time frame that we had expected to start seeing the residential construction markets slow down. particularly with respect to single-family housing starts. And I would say we did see some of that in our fourth quarter. But I think as you heard earlier, with that, we did have good volume growth overall with strong volume growth, particularly across our gate valves, hydrants, specialty and repair products.

Understood. Very helpful color. And as a follow-up, Paul, you were walking through a number of initiatives and investments that will take place going forward? And maybe provide a bit more detail on those if there are any anticipated benefits, whether that's fiscal '26 or beyond? And then in terms of capital deployment, also touch on how your team is thinking about the M&A environment and potential actionability in fiscal '26?

Brian, I'll take you through the actual capital in the facilities, and then I'll ask Martie to you through the M&A. In terms of the benefit in the short term in '26, the capital we're able to deploy in our -- 50-year-old iron foundries, which make our iron gate valves and hydrants, they will be multiyear investments to add capacity, more dramatic capabilities and upgrade those facilities. So there's no anticipated margin benefit in '26 as we continue to roll out the additional equipment and new equipment that we're going to be installing. But what it will position us for is a lot more growth in the future, a lot more capacity, and there will be margin expansion in the future from these investments, but not in the short term.

Yes. And then just to hit your question in and around acquisitions. I think as Melissa walked through it, I think as we continue to see, we are very well positioned with the flexibility and capacity that our balance sheet structure affords us.

Additionally, we have a strong cash position. And I would say we continue to look across capital allocation, thinking about the dividend, which was just increased share repurchase. Paul just talked through the opportunities we see to reinvest in our business, which we think continue to position us well for the future. And I would say we also are more active today in terms of looking for acquisitions that we think will be beneficial to our long-term growth.

The types of acquisitions that we are interested in, I would say, anything that we think could either expand or deepen the product portfolio that we have. largely within water infrastructure. We continue to talk about the strength of our customer relationships, the investments we have from a commercial perspective. And if there are opportunities for us to leverage those distribution channels and customer relationships, we certainly will look for that with our acquisition opportunities.

And certainly manufacturing and operations are core capabilities of ours, and that could also represent an opportunity. We do focus on the drinking water and wastewater primarily. We like well-established brands and/or opportunities where Mueller brand could position us even stronger. We're going to look for good sales and profitability and organic growth. as well as identifying revenue and cost synergies.

I'll tell you the challenge that we have is -- really relates to a lot of the actionability of some of the targets that we think are interesting. You tend to find a lot of private and/or family-owned businesses in our space. But we think that we are certainly very well position today with a lot of our transformation behind us with the operational improvements. I think as a team, we feel that we are much better positioned as we look for the acquisition opportunities. And I can always go back and certainly give the Krausz acquisition with the repair products, I think, is very representative of the type of acquisition that can be meaningful for us and for our shareholders from a long-term growth perspective.

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

Congrats on a great career at Mueller, Martie. I guess the first question I had was around -- just the margin trajectory. You guys did a great job this year and have really started to execute on that strategy of margin expansion. Kind of what's the -- what's sort of the cadence and trajectory we should think about as we look across the 2 segments in 2016 given all the success you've had throughout '25. Just how should we think about the margin expansion cadence across the segments for this year.

As we think about the segment cadence for 2020, we're expecting that the net sales growth will be in the similar guidance range that we put forward for the consolidated view. With that, we're expecting that we'll see margin expansion in both segments. And expect that, that will be greater in the second half, similar to what we saw in 2025.

We do still anticipate that we'll see the benefit from the closure of the legacy brass foundry in the first half in the WFS segment. And we expect that we will see -- we will not see the same impact related to foreign current repeat in 2026 that we saw in 2025. So we would expect gross margin to be higher in WSS and we would expect EBITDA margin to be higher in WMS.

We do expect both segments to be impacted by tariffs. We had anticipated that 3% of total cost of sales would be the impact of 2026 tariffs. And in the WFS segment that is mostly focused on our -- or I guess, related to our specialty valves in WMS, that's related to our repair products. We do still anticipate that we'll have some benefits from the 2025 price actions that were put in place. But 2026, potential price actions are not factored in as we typically expect to announce to our customers any price actions we plan to take before announcing those to the public.

That's super helpful color. Maybe just a quick follow-up on the pricing actions. I know you're not prepared to announce anything on this call, just given that needs to go to customers first. But when we think about the revenue guidance of 1.4% to 2.8% up for fiscal '26. It sounds like there's some spillover from the '25 pricing actions. Is there I guess, potential upside to the revenue growth targets for fiscal '26 if you implement what has historically been kind of your systematic pricing actions each year if maybe low single digits and nontariff non-supply chain impacted environments? Is that kind of the way to think about it?

Yes, Brian, I think that's a fair way to think about it. We implemented our pricing in Q2 of fiscal year '25. We also implemented the target pricing as we spoke about, really sort of phased in, in Q4 of fiscal year '25. And you are correct. Our current guidance does not include any new pricing. And so your way of thinking about it is fair, how you lay that out?

Thank you. Our next caller is Mike Halloran with Baird.

Congratulations, Martie. We've worked together a long time and wish you nothing about the best moving forward. And same for you, Paul. Congratulations on the job title change and the new responsibilities. So a couple of questions. First question, just how should we think about inventory in the channel where your backlog stands? And any kind of those puts and takes, are we at the point where we're seeing normalization across those types of threats -- or is there a little bit more to do in the channel or with your backlog or whatever it might look like?

We've kind of marked that all the time and I don't think there's any kind of change in that channel inventory there. We think it's normalized from most product lines. We are continuing to watch if there's been any buy ahead, particularly around any tariff-related buy ahead from a supply chain perspective. Where we are right now, we -- from a seasonality perspective, as things slow down in the construction season, we believe that channel inventory is at a normal level.

Got it. That makes sense. And then just to follow up on the first question that was asked. Just when you think about the expectations that you laid out by the end markets for this year. Is the expectation that you just run at a relatively normal seasonal pattern from, call it, the run rate entering the year or the run rate exiting fiscal '25. Is there any assumption for improvement or deceleration from what that current run rate looks like? And just maybe how you think about the trajectory underlying those assumptions.

Yes. We expect that for 2026 that we'll see our -- see the typical seasonality where we would expect our highest period to be in third quarter. and we would expect that to just follow the typical seasonality for the entire 2026 period.

So there's implicitly no acceleration or deceleration from an assumption of what the end markets are going to give you relative to what you're seeing today.

No, not as we've looked out for the full year. I think basically sort of with the expectation that you got a fairly resilient, healthy municipal market. And then I think importantly, resi is where we are anticipating that we will see lower levels on a year-over-year basis. But I think as we had indicated, I think we started to see that in our fourth quarter. And that's what we expect with the view that we have right now into 2026.

Our next caller is Deane Dray with RBC Capital Markets.

Martie, I start with you fabulous run. Congratulations and you really are leaving the company in great shape. But I will note you've had back-to-back record quarters and you're really going to make it a tough act to follow for Paul.

There is a great team at...

Of course, congrats, everyone. And Paul, wishing you the best year. And you and I overlapped when I was covering Emerson. So we've had lots of interaction and wishing you hit the ground running in February. So for the questions here, maybe just -- anything on the government shutdown? I know most of all spending is state and local. It's not federal government, but there's some funding of programs potentially. Have you seen any of that ripple into your business?

Yes. No, look, it's an important question and certainly a very current question. Look, we do -- from what we have seen with the government shutdown, certainly, most of the spending that we see in our area does come at the municipal level, as you know, with very little coming from the federal level. So I would say, at this point, we don't think we have seen any noticeable impacts from a government shutdown.

Federal funding, if you go back to the infrastructure bill, certainly, as we shared, it is always slow for that to actually roll out into projects. And I think as you've heard with the guidance that we've given, we are not anticipating really any material impact in our as well from all of that. I think more what I would say, the government shutdown is it's just that overall sentiment of uncertainty, I think that comes with the government shutdown that we've seen, but specifically, I would -- I can't say that we've had a direct impact.

Great. That's good color there. And then just a quick follow-up for Melissa. Any color around the warranty charge that was taken, what product line and any other reserve changes that you could talk about today?

Yes, the overall warranty charge as similar with past adjustments with warranty. That's related to our metering products. So the WMS segment is where you're seeing that warranty impact. We monitor and analyze our warranty accruals periodically and over -- excuse me, at an annual basis, we leverage a third party to look at the historical failure rates and help forecast the projected replacement rates. With that, we make adjustments as necessary based on information that's available at that point in time. Now that said, I also want to remind you that the metering products by the industry standards have a very long warranty period.

Our next call is Joseph Giordano with TD Cowen.

This is Chris on for Joe. You've addressed as -- my question, so maybe just 1 from me. In the recent past, you've highlighted achieving the leak detection goal ahead of schedule. And just curious if you could update us on how many of these initiatives or products are translating into commercial opportunities for you as you look to the next year? Any recent wins, partnerships or developments that are -- that you see accelerating adoption or contributing to growth in '26 in that area?

Yes. No, look, thank you for the question in and around leak detection importantly, you're sliding 1 of the important metrics that is part of the -- our annual sustainability report. So certainly, as you look at not the particular product and solution that we have in and around leak detection, but importantly, how it's addressing overall the challenges of non-revenue water and water loss when you see so many challenges with aging infrastructure.

So we continue to believe that the product solution that we have through Echologics that use it a noninvasive methodology for leak detection is a terrific offering for the market. And importantly, what we have continued to work to do is to find ways to integrate the benefits of that solution into the infrastructure products that we are largely known for. We did introduce a new product at ACE in Denver. And it was a hydrant renewal to give a quick description of what that is.

It basically is offering a municipality to replace an aged hydrant but the installation process is substantially easier because it's primarily replacing the top part, the upper portion of the hydrant such that the construction costs and time required are substantially easier, but the benefits through to the municipality is they've got a brand-new hydrant new parts in a new 10-year warranty.

To further differentiate this and really make it even more meaningful to that local municipality, we are also including the Echologics monitoring technology that will also be offered with that product. And I think it's important because you're replacing an older hydrant and it's allowing that municipality to begin to see the benefits of leak detection with that.

So we think it really does help to solve some of the challenges that communities and municipalities are seeing with aging infrastructure, and it further differentiates us from our competition. We are still in the pilot phase with this new product introduction. We expect to roll it out more in 2026. We've got customer field trials underway, but I think it is, I think, a good example reflective of the question that you asked.

[Operator Instructions]. Our next caller is Walt Liptak with Seaport Research.

Congratulations and the 600 basis points of gross margin are -- have really been something. I wonder if you could tell us, based on your kind of feel for where we are in the transformation. Do we have more to go? Or is it just a continuation kind of into the future with these CapEx programs.

Yes. So look, I think, certainly, as we look at the results that we just posted for the fourth quarter and the full year, very pleased with that and pleased with what we have delivered with the transformation that has been underway. I think the team has worked hard, and I think we're really energized by the progress that we've seen.

But I think importantly, as you look out to the guidance that we've just given for 2026, implicit in there that does look at continued margin expansion from an adjusted EBITDA and from a gross margin perspective. As we look at our end markets over the longer term, we certainly continue to see opportunities, municipality have always been a fairly resilient and healthy end market. And although we do expect to see low a downturn on the residential construction side, that's just the outlook that we have for 2026.

Paul talked about, we have been making disciplined investments both on the commercial side and on the operational side. And I think commercially with the investments that we're making, not only in our sales team, but also looking for ways to enhance the customer experience with the investments that we have on our digital offerings and ways for us to better work with and deliver through to our customers. I think that over the longer term can continue to yield benefits.

Paul and Melissa both talked through our expectations. And importantly, I think the opportunities we see to invest in our facilities that will give us more capacity as well as can create further opportunities for operational improvements.

So as we look forward, I would say we do see continued opportunities for growth over the longer term. Certainly, in 2025. And with our outlook for 26, the tariffs have certainly provided challenges. But when we look at the teams that we have, they have worked diligently to mitigate the impact of the tariffs both through the targeted pricing actions that we've talked about as well as the initiatives from our supply chain and operational teams.

Okay. Great. And maybe I'll follow on to that one for Paul. As we think about you doing the job as a CEO, is it the CapEx programs you think that are sort of the top priority at this point? Or what would your top priority be?

I think the -- just to expand on what Martie spoke about, the capital is one priority in terms of how we reinvest in our core iron foundries. We already started in terms of our broader commercial and operational investments and how they are going to position us from a top line growth perspective, and importantly, from a margin expansion year-over-year margin expansion, the investments we've made is not just in equipment, but we've also in the people that we brought into the organization. So from my priority, that perspective is how we drive long-term value creation for the organization.

Okay. Great. Okay. And maybe just the last one for me. The special charge that you guys announced, not the warrant the other operational one. What was that expense for?

The other item was related to strategic reorganization and other charges.

Okay. So is that part of the people investment?

Some of it goes back as we look at it with respect to some of the leadership transition that has -- that we have undertaken, and that's largely what you're seeing under that with the restructuring and other charges line. And then there are also just some other transaction-related expenses.

Okay. Great. Thanks for clarifying.

Thank you for all the participants. Thank you, operator. Certainly appreciate everyone who joined us on the call today. As we said, we are very pleased with how we finished our 2025 with record net sales and adjusted EBITDA, especially given the uncertainty and complexity in the external environment.

We are very excited about the progress we've made in just a few years. With the annual guidance we've given for 2026, we are on track for another year of net sales growth and margin expansion. I want to once again thank our dedicated employees. They have been and always will be the driving force behind our success.

While this is my last earnings call, I want to thank everyone in the investment community who have gotten to know over the years. I so enjoy sharing the Mueller story with you. Thank you all, and we look forward to speaking with you again on our first quarter results when they are announced in February. And with that, we'll conclude our call, operator.

Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.