Q2 2026 Mueller Water Products Inc Earnings Call
Speaker #1: Welcome, and thank you for standing by. Your line has been placed on listen-only mode until the question and answer session. At that time, if you would like to ask a question, you may press star one.
Operator: Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I turn the call to Whit Kincaid. You may begin.
Speaker #1: Today's conference is being recorded. If you have any objections, you may disconnect at this time. And now, I'll turn the call over to Whit Kincaid.
Speaker #1: You may begin.
Speaker #2: Good morning, everyone. Thank you for joining us from Mueller Water Products' second-quarter conference call. Yesterday afternoon, we issued our press release reporting results of operations for the quarter-ended March 31st, 2026.
Whit Kincaid: Good morning, everyone. Thank you for joining us for Mueller Water Products Q2 conference call. Yesterday afternoon, we issued our press release reporting results of operations for the quarter ended 31 March 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 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.
Speaker #2: 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.
Speaker #2: 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 Q.
Speaker #2: This morning's call is being recorded and 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.
Speaker #2: At this time, please refer to slide two. This slide identifies non-GAAP financial measures referenced in our press release on our slides and on this call.
Whit Kincaid: 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 30 September. A replay of this morning's call will be available for 30 days at 1-800-839-1334.
Speaker #2: 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.
Speaker #2: Slide three addresses forward-looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward-looking statements.
Whit Kincaid: 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.
Paul McAndrew: Thanks, Whit. Good morning, everyone. Thank you for joining our Q2 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.
Paul McAndrew: Based on our outstanding performance through the H1 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.
Paul McAndrew: 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.
Paul McAndrew: 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.
Paul McAndrew: 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 US 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.
Paul McAndrew: 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 Mueller Operating System. We look forward to sharing examples of successes along the way.
Operator: Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I turn the call to Whit Kincaid. You may begin.
Paul McAndrew: With that, I'll turn it over to Melissa to take us through the financials.
Melissa Rasmussen: 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.
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 specially valve commercial and operational capabilities to deliver highly engineered vowels 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.
Whit Kincaid: 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 31 March 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.
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.
Whit Kincaid: 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 30 September. A replay of this morning's call will be available for 30 days at 1-800-839-1334.
Melissa Rasmussen: 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.
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 dollars 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 sgna expenses for the quarter. A 59.7 million increased, 4 million year-over-year, primarily reflecting unfavorable foreign currency, impacts and continued. Inflationary pressures.
has 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.
Whit Kincaid: 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.
Adjusted evaa reached a record of 97.2 million, an increase of 15% compared to the prior year quarter adjusted, evaa 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.
Paul McAndrew: 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.
Melissa Rasmussen: On a trailing twelve-month basis, adjusted EBITDA was $348 million or 23.7% of net sales, representing a 140 basis point improvement versus the prior twelve-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 Q2 effective income tax rate was 25%, compared with 24.2% in the prior year Q2. Turning now to segment performance, starting with WSS. 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.
Partially offset by higher tariffs, inflationary pressures and higher sgna expenses.
On a trailing 12-month basis, adjusted Eva 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 400 cents
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.
Paul McAndrew: Based on our outstanding performance through the H1 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.
turning now, to segment performance, starting with wfs
Melissa Rasmussen: 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.
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 ibida, 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 evaa margin expanded 440 basis points to 33.2% compared with 28.8% in the prior year. Period representing a new record.
Moving to WMS.
Paul McAndrew: 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.
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.
Melissa Rasmussen: 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 non-cash adjustments.
Adjusted Eva dot 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 sgna expenses, including unfavorable foreign currency impacts and inflationary pressures.
Adjusted Eva 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.
Paul McAndrew: 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.
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.
Melissa Rasmussen: 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 H1, 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.
The decline was primarily driven by changes in working capital and other assets and liabilities partially offset by higher net, income and non-cash 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.
Paul McAndrew: 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 US 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 ended the quarter with 452 million of total debt and 421 million of cash and cash, equivalents
Melissa Rasmussen: 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 H1 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 H1 performance and updated expectations for volumes, price realization, inflationary pressures and tariffs, as well as ongoing manufacturing efficiencies.
That maturities until June 2029 and 450 million of senior notes at a 4% fixed interest rate. We had no borrowings under our awl 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,
Paul McAndrew: 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 Mueller Operating System. We look forward to sharing examples of successes along the way.
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 Eva dog guidance by million dollars.
At the midpoint to a new range of 36060 to 365 million.
Melissa Rasmussen: 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 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.
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 avadim margin of more than 24.5% and Improvement of 170 basis points. Year-over-year we are maintaining our expectations for total sgna expenses within this updated guidance.
Paul McAndrew: With that, I'll turn it over to Melissa to take us through the financials.
Melissa Rasmussen: 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.
Paul McAndrew: Thanks, Melissa. I want to provide a few closing comments before opening 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.
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 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.
Melissa Rasmussen: 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.
Paul McAndrew: 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.
Thanks, Melissa. I want to provide a few closing comments before opening 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 evolved 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, without 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: Thank you. We will now begin the question and answer session. If you would like to ask a question, please unmute your phone, press star one, and record your name clearly. To withdraw your question, you may press star two. Again, just press star one to ask a question. One moment please for our first question. Looks like our first question comes from Jeff Reeves with RBC Capital Markets. Your line is open. You may ask your question.
Thank you. We will now begin the question.
To withdraw your question, you may press star 2 again, just press star 1 to ask a question and 1 moment. Please for our first question.
Jeff Reeves: Good morning. Appreciate all the details thus far. Can you start by talking about sell-in versus sell-out trends in the quarter across your segments? How would you characterize inventory levels in the channel today?
Looks like our first question comes from Jeff Reese with RBC Capital markets. Your line is open. You may ask your question.
Melissa Rasmussen: On a trailing twelve-month basis, adjusted EBITDA was $348 million or 23.7% of net sales, representing a 140 basis point improvement versus the prior twelve-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 Q2 effective income tax rate was 25%, compared with 24.2% in the prior year Q2. Turning now to segment performance, starting with WSS. 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.
Good morning. Appreciate all the details thus far. Can you start by talking about selling versus sellout Trends in the quarter, across your segments? And how would you characterize inventory levels in the channel today?
Paul McAndrew: Good morning, Jeff. This is Paul. In terms of how we look at channel inventory, you know, 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, you know, if 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. Our specialty valve business still continues to be the large portion of our backlog.
Hey, good morning, Jeff this is Paul. Um in terms of how we look at Channel inventory.
You know, the full site, we have in the channel inventory. We believe it's at normalized levels. Um, of course, I think our Channel partners are managing the uncertainty in the external environment the same as everybody else at this point. Uh, in terms of your other question in terms of sell through,
Got a backlog reduction. Then in the quarter, we had a kind of normalized backlog change, uh, from a seasonality perspective in our Q2, where we see a, a rise in backlog, around our price increase which goes out in February, a little bit of pull ahead from an order perspective.
And and our specially valve business, still continues to be the large portion of our backlog.
Jeff Reeves: Got it. Maybe just as a follow-up on just WMS sales, they came a bit better than expected this quarter, yet you're reiterating the full year outlook. Does that imply a more moderated growth cadence of the year? Was there any pull forward there? Just anything there.
Melissa Rasmussen: 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.
Got it. And maybe it's just as a follow-up on just WMS sales that came in a bit better, than expected. This quarter yet, you're reiterating in the full year outlook. Um, does that imply more moderated? Growth, Cadence of the year. Was there any pull forward there? Just anything there.
Melissa Rasmussen: Hi, 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, H1 of the year has been a stronger growth, and we expect WMS to normalize as the year progresses.
Hi, Jeff with WMS. Yes, we did have double digit growth in the quarter and that was primarily driven by higher pricing and, uh, volume gains, which were primarily in the hydrant and repair product lines hybrid 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.
Paul McAndrew: Yeah, 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.
Yeah, just to add on to that. Obviously, the prior year, we had a, a service brass backlog, reduction, and that's been flipped. Now with the hydrant it's why the normalized backlog changes? Uh, it's just a flip between segments
Jeff Reeves: Got it. Makes sense. Appreciate it. Thanks.
Melissa Rasmussen: 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 non-cash adjustments.
Got it. Makes sense. Appreciate it. Thanks.
Operator: Thank you. Our next question comes from Brian Lee with Goldman Sachs. Your line is open. You may ask your question.
Brian Lee: Good morning, everyone. Thanks for taking the questions. 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. The revenue guidance is intact. Can you kind of speak to, you know, how much you're expecting from price versus volume? Is, you know, 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.
Thank you. And next question comes from Brian Lee. With Goldman Sachs, your line is open. You may ask your question.
Hey, good morning everyone. Thanks for taking the questions. Um, maybe first on the, uh, the the, um, the updated outlook for the year. Uh, it, it sounds like you've seen good pricing realization. Um, so Kudos, Kudos on the nice results here but the the revenue guidance is, is intact. Um, can you kind of speak to, you know, how much you're expecting from Price versus volume and and is, you know, some of the price actions, you saw come to fruition in the first part of the year, um, is, is that expected to persist through the rest of the year as volume. Maybe a little bit lighter wondering why there might not be a little bit more upside to the revenue Outlook given, um, the strong pricing capture you saw earlier in the year.
Paul McAndrew: Yeah, good morning, Brian. You know, we went up with our annual price increase in February, low single digit. You know, as a reminder, we had a tariff-related price increase, really taking effect in Q3 and Q4 of last year. We'll start to lap that tariff-related price as we move into the second half of the year.
Melissa Rasmussen: 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 H1, 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.
Yeah, good morning, Brian. Um you know we went up with our annual price increase in February, uh, low single digit, you know. As a reminder we had a tariff related price increase, uh, really taken effect in Q3 and Q4 of last year. So we'll start the lap that uh, tariff related price as we move into the second half of the year.
Melissa Rasmussen: Brian.
Brian Lee: All right. Fair enough.
Melissa Rasmussen: We saw price realization through Q2 in the mid-single digit range, which was slightly higher than Q1, and that was because we did see a slight benefit from our February price actions due to the execution of our commercial team.
And we are, uh, 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.
Brian Lee: Thanks. Then just, you know, 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's consistent, but can you quantify, you know, kind of the impact? Is it maybe becoming more of a headwind than you're assuming? Presumably the impact is already embedded in the balance of your fiscal 2026 guide, but, you know, thinking ahead to 2027, you know, how much of a continued headwind or just any thoughts on how this evolves over the next, you know, year or so for your business?
Melissa Rasmussen: 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 H1 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 H1 performance and updated expectations for volumes, price realization, inflationary pressures and tariffs, as well as ongoing manufacturing efficiencies.
And then just, you know, the the slowdown in resi, activity, I know. Um, you you guys have kind of been calling this out for a little bit of time, uh, so so the tone is consistent. But can you quantify, you know, kind of the impact is, is it is it maybe becoming more of a headwind than you are assuming. And uh, presumably the impact is already embedded in the balance of your fiscal, 26 guy. But, you know, thinking ahead to 27, you know, how much of a continued headwind or just any thoughts on how this evolves over the next, you know, year or so for your business,
Paul McAndrew: Look, we believe the external environment's continuing to evolve. You know, we use public home builders, data points, land development. We still believe resi is down high single to low double-digit range. But on a external market and the outlook beyond that, we know 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.
Good afternoon. We believe the external environments continue to involve evolve. You know, we use public home builders uh data points, Land Development.
We still believe resi is down high single, the low double-digit range. Um,
But on the on the external market and the Outlook beyond that we know they still pent up demand for for ready 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 and manage this closely
Brian Lee: Last one from me, I'll pass it on. You know, obviously the balance sheet's 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? Maybe, you know, what kind of pipeline you're looking at or opportunities are most interesting right now? Thank you, guys.
last 1 for me and I'll pass it on. Um you know obviously the balance sheet is in a pretty good spot here uh m&a in 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. Maybe, you know, what kind of pipeline you're looking at or opportunities or or most interesting right now. Thank you guys.
Paul McAndrew: Yeah, 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. You know, we wanna find key criteria then 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.
Melissa Rasmussen: 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 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.
Repeated balance sheet is really strong and we've definitely increased our activity uh, about how we look for Acquisitions to expand our portfolio.
You know, we want to find key key criteria then where we can expect sales and profitability cost synergies.
uh, the
the challenge here is unlocking some of those Acquisitions, but we are far more active in trying to uh,
Tap tap into, what would be a good acquisition for us as an organization?
Operator: Thank you. Again, if you have a question, just press star one at this time. One moment, please. Our next question comes from Walt Liptak with Seaport Research. Your line is open. You may ask your question.
Thank you, we can, if you have a question just press star 1 at this time.
1 moment, please.
Our next question comes from Walt lipic with seport research. Your line is open. You may ask your question.
Walter Liptak: Hi. Thanks. Good morning, guys.
Paul McAndrew: Morning, Walt.
Paul McAndrew: Thanks, Melissa. I want to provide a few closing comments before opening 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.
Melissa Rasmussen: Good morning, Walt.
Hi thanks. Uh, good morning guys.
Walter Liptak: 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 guys take the free cash flow guidance down, or were you always at that 70% of net income for the year?
Uh, 1 to ask a uh free cash flow question. Um, 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 and 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?
Melissa Rasmussen: Good morning, Walt. Yeah, a couple of things related to free cash flow. The Q2 is typically our lower quarter for cash generation, and that's primarily due to receivables. The Q1 is our lowest revenue-generating quarter typically, we have a lower co-collections in the Q2 related to those receivables from the Q1. Now that said, we also, during the Q2, are ramping our inventory levels in anticipation for our seasonal ramp for the construction season. With this specific Q2, we did have lower expectations, 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 builds. We talked about growth in sales related to our specialty valve product lines.
Paul McAndrew: 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: Thank you. We will now begin the question and answer session. If you would like to ask a question, please unmute your phone, press star one, and record your name clearly. To withdraw your question, you may press star two. Again, just press star one to ask a question. One moment please for our first question. Looks like our first question comes from Jeff Reive with RBC Capital Markets. Your line is open. You may ask your question.
Good morning Waltz. Yes. So a couple of things related to free cash flow. Uh, 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, ramps for the construction season. Um, with this specific second quarter, we did have lower um expectations 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,
Melissa Rasmussen: 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. 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.
Jeffrey Reive: Good morning. Appreciate all the details thus far. Can you start by talking about sell-in versus sell-out trends in the quarter across your segments? How would you characterize inventory levels in the channel today?
And some strategic inventory builds. We talked about growth and uh, 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, uh, product line, particularly has a long, uh, backlog and, um, lead time. So that will stay in inventory for a bit longer. And so, we did
Paul McAndrew: Good morning, Jeff. This is Paul. In terms of how we look at channel inventory, you know, 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, you know, if 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. Our specialty valve business still continues to be the large portion of our backlog.
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.
Walter Liptak: Okay. What was it before? Was it 85% now down to 70?
Okay. And what, what was it before, was it uh 85% now down to 70?
Melissa Rasmussen: Yes, it was 85% previously.
Walter Liptak: Okay. Got it. Thank you. You know, just a follow-up on the residential questions. Can you help us remember, like, when, you know, if the residential sector, you know, does still look pretty slow and kind of uncertain, are there any things that you guys can do around those businesses, you know, either with, you know, some of your overhead costs or strategically to try and pick up some market share?
Jeffrey Reive: Got it. Maybe just as a follow-up on just WMS sales, they came a bit better than expected this quarter, yet you're reiterating the full year outlook. Does that imply a more moderated growth cadence of the year? Was there any pull forward there? Just anything there.
Can you help us remember like when you know, if the residential sector, you know, does uh, still look pretty slow and kind of Uncertain? Uh, are there any things that you guys can do around those businesses? Um, you know, either with, uh, you know, some of your overhead costs or strategically to try and, uh, pick up some market share.
Paul McAndrew: You know, Walt, there's a lot of crossover in our products between the resi plus the muni market, and how we distinguish those. You know, from a strategic perspective, our specialty valve business is definitely less residential construction exposed, and that's where we continue our investments. We've continued our investments in terms of operationally consolidating those plants, from an engineering skill set perspective in terms of developing those products. We believe there's a lot more growth opportunity that we're starting to tap into from an industrial water perspective.
you know, what is a lot of crossover and our products between the resi plus the Moody Market um, and how we distinguish those
Melissa Rasmussen: Hi, 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, H1 of the year has been a stronger growth, and we expect WMS to normalize as the year progresses.
You know, from a strategic perspective I was special evolved 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 uh from an engineering skill set perspective perspective in terms of developing those products.
And we believe there's a lot more growth opportunity that we start into table into from an industrial water perspective.
Walter Liptak: Okay. All right. Thank you.
Okay, all right. Thank you.
Operator: Thank you. At this time I'll turn the call over to Paul for closing remarks.
Thank you. That's just how I turn the call over to Paul for closing remarks.
Paul McAndrew: Thank you, operator. Thanks to everyone who joined us on the 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 Q3 results when they're announced in early August.
Thank you, operator.
Thanks to everyone who joined us on the call today.
Paul McAndrew: Yeah, 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.
To execute.
Our increased annual guidance for adjusted ebita reflects the confidence. We have in our commercial and operational capabilities.
Jeffrey Reive: Got it. Makes sense. Appreciate it. Thanks.
We remain Vigilant in an increasingly uncertain, external operating environment.
Operator: Thank you. Our next question comes from Brian Lee with Goldman Sachs. Your line is open. You may ask your question.
As it relates to demand tariffs and inflationary pressures.
Brian Lee: Good morning, everyone. Thanks for taking the questions. 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. The revenue guidance is intact. Can you kind of speak to, you know, how much you're expecting from price versus volume? Is, you know, 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.
While we expect the mun 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.
Paul McAndrew: With that, operator, please conclude the call.
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.
Operator: Thank you. That does conclude today's conference. We thank you for your participation. At this time you may disconnect your lines.
Thank you that does conclude today's conference. We thank you for your
Paul McAndrew: Yeah, good morning, Brian. You know, we went up with our annual price increase in February, low single digit. You know, as a reminder, we had a tariff-related price increase, really taking effect in Q3 and Q4 of last year. We'll start to lap that tariff-related price as we move into the second half of the year.
Melissa Rasmussen: Brian.
Brian Lee: All right. Fair enough.
Melissa Rasmussen: We saw price realization through Q2 in the mid-single digit range, which was slightly higher than Q1, and that was because we did see a slight benefit from our February price actions due to the execution of our commercial team.
Brian Lee: Thanks. Then just, you know, 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's consistent, but can you quantify, you know, kind of the impact? Is it maybe becoming more of a headwind than you're assuming? Presumably the impact is already embedded in the balance of your fiscal 2026 guide, but, you know, thinking ahead to 2027, you know, how much of a continued headwind or just any thoughts on how this evolves over the next, you know, year or so for your business?
Paul McAndrew: Look, we believe the external environment's continuing to evolve. You know, we use public home builders, data points, land development. We still believe resi is down high single to low double-digit range. But on a external market and the outlook beyond that, we know 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.
Brian Lee: Last one from me, I'll pass it on. You know, obviously the balance sheet's 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? Maybe, you know, what kind of pipeline you're looking at or opportunities are most interesting right now? Thank you, guys.
Paul McAndrew: Yeah, 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. You know, we wanna find key criteria then 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: Thank you. Again, if you have a question, just press star one at this time. One moment, please. Our next question comes from Walt Liptak with Seaport Research. Your line is open. You may ask your question.
Walter Liptak: Hi. Thanks. Good morning, guys.
Paul McAndrew: Morning, Walt.
Melissa Rasmussen: Good morning, Walt.
Walter Liptak: 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 guys take the free cash flow guidance down, or were you always at that 70% of net income for the year?
Melissa Rasmussen: Good morning, Walt. Yeah, a couple of things related to free cash flow. The Q2 is typically our lower quarter for cash generation, and that's primarily due to receivables. The Q1 is our lowest revenue-generating quarter typically, we have a lower co-collections in the Q2 related to those receivables from the Q1. Now that said, we also, during the Q2, are ramping our inventory levels in anticipation for our seasonal ramp for the construction season. With this specific Q2, we did have lower expectations, 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 builds. We talked about growth in sales related to our specialty valve product lines.
Melissa Rasmussen: 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. 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.
Walter Liptak: Okay. What was it before? Was it 85% now down to 70?
Melissa Rasmussen: Yes, it was 85% previously.
Walter Liptak: Okay. Got it. Thank you. You know, just a follow-up on the residential questions. Can you help us remember, like, when, you know, if the residential sector, you know, does still look pretty slow and kind of uncertain, are there any things that you guys can do around those businesses, you know, either with, you know, some of your overhead costs or strategically to try and pick up some market share?
Paul McAndrew: You know, Walt, there's a lot of crossover in our products between the resi plus the muni market, and how we distinguish those. You know, from a strategic perspective, our specialty valve business is definitely less residential construction exposed, and that's where we continue our investments. We've continued our investments in terms of operationally consolidating those plants, from an engineering skill set perspective in terms of developing those products. We believe there's a lot more growth opportunity that we're starting to tap into from an industrial water perspective.
Walter Liptak: Okay. All right. Thank you.
Operator: Thank you. At this time I'll turn the call over to Paul for closing remarks.
Paul McAndrew: Thank you, operator. Thanks to everyone who joined us on the 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 Q3 results when they're announced in early August.
Paul McAndrew: With that, operator, please conclude the call.
Operator: Thank you. That does conclude today's conference. We thank you for your participation. At this time you may disconnect your lines.
