Sorry I'm late. They had me sprinting from one end to the other, but I'm pleased to have the Mueller team. So we've got a full team here: CEO, CFO, and CEO elect, I suppose.
Yeah.
A lot of new news here. Martie's going to lead off with some prepared remarks, and then we're going to dive into a Q&A session. If you have any questions, just let me know. Either raise your hand, I'll call on you, or send me an email through the cards in front of you, and we'll make sure we wrap it into the conversation. Martie, that floor is yours. Thank you.
Great. Look, thanks so much. Thanks for having us here. Mike, always good to be joining the Baird Conference. Mueller Water Products, very pleased to be with you today.
Do you guys have a deck?
We do have a deck. I feel like it's coming. Okay, very good.
Thank you, buddy.
I'm Martie Zakas. I'm the CEO at Mueller Water Products. As Mike just shared, we did announce last week that we have a CEO succession in place, and I will be CEO through February 9th. I'm very pleased that Paul McAndrew, who is our current President and Chief Operating Officer, the board has named him the next CEO. Very pleased with the smooth transition that we have in place. Additionally, Melissa Rasmussen, our CFO, is here with us today, as well as Whit Kincaid, who is our VP of Investor Relations, as well as Communications. I'm just going to have a few brief opening remarks and certainly look forward to Mike's as well as your questions coming forward. Quick overview: Mueller Water Products. We're about a 170-year-old company. We are a leader in the water infrastructure business.
Think of us as that critical supplier of the underground water infrastructure, much of which you do not see in terms of iron gate valves and service brass products. Very importantly, some things that you do see, such as the fire hydrants, which are a wonderful connectivity for fire safety and water distribution throughout our system. We also manufacture a number of specialty valves that are generally used in water and wastewater treatment facilities. We also supply repair and installation products. Vitally critical because whenever you have got water main breaks or anything, one of the things you have to do is you have to fix it. We supply those products as well. We just completed our fiscal 2025. We are a September fiscal year-end. Pleased to say that we reported another record-breaking year. We saw strong net sales growth. We saw strong gross margin expansion.
We saw strong EBITDA, delivering an EBITDA of 22.8%. Very pleased with the end of our year. I do want to call out that with the over 8% net sales growth that we saw for the year, all of that is organic growth, just to clarify that. We are largely a U.S.-based company. In terms of our net sales, about 92% come to the U.S., with another about 6% roughly coming from Canada. When we look at our operating facilities, we are once again largely domestic. We have three foundries across the U.S., one brass, brand new brass facility that we recently completed, where we're pouring a new, more sustainable brass called eco-brass. Very important not only for the service brass products that we sell, but also for some of the components that we use in our iron gate valves, as well as our hydrants.
We also have two other foundries in Albertville, where we are the leading manufacturer of fire hydrants, and in Chattanooga, where we manufacture our iron gate valves. We do report in two different segments. We report through water management solutions, as well as water flow solutions. You see a little distribution in terms of where our main products fall. Importantly, we'll very quickly hit on the end markets. We predominantly serve a very fragmented but critical water infrastructure system throughout the U.S., where there are more than 50,000 water utilities. Very pleased with the strong brand name that we have, with the longevity that we have, with the strength of our customer relationships, and importantly, the strength of our specification position.
That is very important to that sort of, we call it the repair and replace, but that repeat business that we see across the municipal end market, which has tended to be not a very cyclical market. We look at that as being resilient as we look out. Importantly, as you look at the infrastructure bill that was passed a few years back by Congress, they did allocate $55 billion for water infrastructure. Although 90% plus of water infrastructure spending is at the local level, certainly appreciate the recognition that you see for the importance of continued investment from the federal government coming within water infrastructure as well. We also service the residential construction market. Think of that where you have got new communities that are being built out, and what you need to do is build out that underground water infrastructure to support that new community.
The strength that we have on the municipal side is very important to that residential side because once that new community is up and running, the management of it is then turned over to the water municipality. The strength of our customer relationships, the strength of our brand, the strength of that specification position is important to us there. We also service some distribution products within the natural gas marketplace and sell industrial valves as well, which make up the balance of roughly 10% of our market. Talked briefly about our customer relationships. We sell largely through distribution partners. Think of two of the largest distribution partners of ours: Core & Main and Ferguson. To reach the fragmented end market, we have a number of distribution partners across the U.S., but we also pay a great deal of attention to those end-use customers.
We have delivered strong performance recently and are very pleased with the outlook that we see overall looking into our 2026 and beyond. This just gives you a financial snapshot of the quarter that we just completed, as well as the fiscal year-end that we just completed, looking across most of the metrics that you see on this page, demonstrating either strong year-over-year, quarter-over-quarter, and/or records as we look at where we are. We'll also reference our free cash flow and touch on our capital allocation. In terms of our overall debt structure, we have a fairly flexible structure with good capacity. Importantly, as a business, we continue to generate free cash flow. Free cash flow after our capital expenditures in 2025, we were at about 84% of our adjusted net income.
Again, as you look overall at strategically where we see ourselves going, we have invested, and we continue to believe that we've got additional opportunities to improve our operations, to continue to identify opportunities across our supply chain and sourcing expertise, and are making additional investments in our foundries to further expand our capacity and identify additional productivity improvements. We've invested in our commercial teams. We want to make ourselves the partner that is easiest to do business with, and that's where we're continuing to enhance our digital interface with our customers to further strengthen that relationship. Across our business, I think we have continued to elevate not only our employees, but the employees in the way that we work through and service our customers.
As I said, we continue to see opportunities over the long term against a backdrop of the need for water infrastructure investment to further grow our margins and further grow our sales. With that, Mike, I'll turn it over to you.
Yeah. Why don't we just talk about some of the leadership changes that are happening? I'm actually just going to go all the way down the line with each of you. First, why now, Martie? Why is this the right time for you to step back?
Yeah. So I have had a wonderful career at Mueller. I've been at the company about 19 years and had the privilege of working through a number of different roles. I think as we look at what we set up and what we've accomplished over the last couple of years, we have greatly enhanced our operational performance. We have really looked to bring the company together, thinking more holistically about how we can better service our customers, how we can better look at efficiencies across our operations, our manufacturing facilities, and importantly, really seeing the opportunity over the long run. I think it's been we've delivered a lot of what we have looked at, I think, from a change management perspective. I think importantly, we have set up with Paul moving into the Chief Operating Officer role a little over two years ago.
I think we have done a very nice job of bringing in talent into the organization, I think elevating talent within the organization. Just as we look across where we are and what's going to be important for our next chapter, you never know what the perfect time is, but I think it feels like the right time and just very excited about the Mueller team and about the opportunities that lie ahead for the company.
Paul, Melissa, this will be somewhat of a similar question for you, but Paul first. I mean, simplistically, what do you see as the opportunity for you as you fill Martie's shoes here? What's the next evolution for the company? And where do you see the company going under your stewardship?
Yeah, it's a great question, Mike. You know, it's actually three years this month that I started with Mueller. So I've been reflecting on that time. Three years ago, where we were, we were slightly fragmented of how we operate as a business. We were probably at underdeveloped systems in our operations and supply chain. I don't know, commercial talent then. And with Martie over the last two years, we've made significant investments in those areas, which you can see from the sales growth, plus nearly 700 basis points of EBITDA over the last two years. I think, okay, where are we right now? Where are we going to go next? I think we're only on the beginning of our transformational journey then. We still have a lot of opportunities for strong market growth.
We want to change the organization, so we focus on the fewer, the bigger opportunities instead of focusing on everything. You know, using simplification to drive complexity out of the business. You know, using that then, not just from a growth perspective as we look for any inorganic opportunities as well as organic growth, but thinking about our margin expansion story. You know, we still have further opportunities with strategic pricing. The talent that we've brought into the organization from an operations perspective, recently added the previous EVP of operations from ADS. You know, we think there's more opportunities to double down on that value creation. The investments we're going to make in our iron foundries, not just for capacity then, they're also for productivity and also the fact that we are a domestic manufacturer. Domestic foundry capacity is going to come constrained.
The ability that we have more capacity in our own facilities is very important. Continuing that customer experience then, either from a digital perspective or from a customer service from our operations, makes us well positioned to drive our market growth. I think the fact that we now are on this transformational journey to a Mueller business system and how we enhance that with a culture that's performance-driven underpins all of those activities, Mike. I think that's going to put us well positioned for not only from a top-line growth, but for further margin expansion.
Melissa, maybe just chime in. I mean, relatively new in your tenure. Your impressions and then maybe sync what you're focused on with Paul's comments as far as the next phase of the evolution of the organization.
Sure. With Paul's comments on the next phase of the evolution, there are things that I can do from a finance business partner perspective. There are operational improvements that Paul wants to drive. From a finance perspective, it's my team's opportunity to step up and be able to provide the right level of information, the right insights, types of information quickly so that we can make the appropriate business decisions as quickly as we need to drive the margin improvement and overall operational improvements that we want to drive within the business. As far as my first impressions, the company has certainly gone through transformation over the past couple of years. I'm excited to have gotten to be a part of that over the last seven-ish. Oh, I'm sorry, we round up. Martie says we round up over the last year.
It has been great to witness the team work together and be able to drive some of those efficiencies and improvements and seeing the passion that the employees have at wanting to be able to drive the overall company forward. It has been an exciting time.
Maybe back to some of Paul's comments. I mean, what do you see as the structural growth of the company from an algorithm perspective? I mean, a lot of the things you saw an opportunity in imply a better growth profile, maybe relative to history. I mean, obviously, it's going to be dependent on your end markets track, but it feels like you believe that there's maybe more outgrowth versus end markets on a forward basis than there was historically.
I can add to this. I think, you know, as Martie told you, the municipal markets are very strong. The need for investment in the water infrastructure is not slowing down. That is going to continue. Maybe we are in a period where we're going to see a little bit of choppiness in the residential part of the business. Again, from a macro perspective, the inventory of housing versus what's required is still upside down. Even though it might be a little bit slower right now, it is not going to slow down from a macro perspective. Where we see the opportunity as well is how do we continue to expand our portfolio to ensure we have the same market penetrations we do on some of our other product lines.
That's going to give us above-market growth, and that's kind of touching on what I said, the kind of key bigger programs to focus on going forward.
Yeah. No, that makes sense. I mean, maybe talk about some of the R&D initiatives and some of the things that you think are helping drive that penetration. Any tangible examples?
I'll hit one, hit a couple that I think are really exciting as we look against the backdrop that we talked about for the municipal piece. As we talk about the need for continued investment in water infrastructure due to the aging infrastructure, we want to figure out what are the ways that we can help our customers address the challenges that they have. With the need to invest in infrastructure and with the challenges of the dollars, one of the newer products that we've done a soft launch on that we introduced both at WEFTEC and as well as at the ACE Trade Show in Denver earlier this year is hydrant renewal. If you think about the hydrant, critical component within all of water infrastructure.
What we are going to be offering is the opportunity for a municipality to replace their fire hydrant, put in a new fire hydrant, get a new warranty just as they always do, but we're able to allow them to put in a new hydrant without some of the components of the underground infrastructure. Why that matters is because the cost from a labor and construction perspective of replacing a hydrant can be very costly. It can take days. It's going to take trucks. It's going to take cement. It's going to take a lot of disruption for that hydrant replacement. With the hydrant renewal, they're able to get, in essence, that same brand new hydrant, but instead of days, they're probably going to be down to a few hours. They're going to be down to probably only a couple of people that need to replace that hydrant.
When they look at their total cost of upgrading their infrastructure, they're going to have a much lower overall cost and still get the benefits of that new hydrant. When you look at what distinguishes Mueller with this as well, we have a leak detection capability through Echologics, which uses a non-invasive acoustic leak detection. What we are also doing to further differentiate us in the market is with the new hydrant renewal, we're also going to be offering leak detection as well. You're replacing an old hydrant. It's probably in an older system that could be an area where you're more likely to have leaks.
What that municipality is now going to have is not only a brand new hydrant that costs them less from an installation perspective, but they are also going to have the capabilities of leak detection within that radius that can help them understand what is going on underground to overall better manage their systems. We think when we look at what that total offering is, it is a wonderful way of really bringing together. As we talk about where intelligence meets infrastructure, it is a great way of really pulling that together. It is helping our customers address what the challenges they have in the market with limited dollars and the need for replacement. Importantly, it is another way of introducing them to the benefits of leak detection to help them better manage their systems more cost-efficiently.
I'd characterize that as one of the soft launch products that we're excited about. Probably the other one that I think where we've had actually a lot of capital investment is in and around our specialty valves. We have enhanced our manufacturing capabilities. We are looking to bring in more domestic capabilities with that. When we look at where those needs are for the larger valves in the water and wastewater distribution systems, we think the investment that we've made there, when you compare that with what the long-term needs are, it's been, I think, it's another example of a newer product that we're launching, but with more of the domestic components to meet the BABA Build America Buy America provisions.
I think that's been evident in the growth that we've seen in the plant and project work this year from those valves. That's one area of the market that's certainly not slowing down.
Yeah. No, that makes sense. Maybe transition just to the facility changes that you've made. Just level set people on what you've done over the last few years, where we are now, and then more importantly, focus on the efficiencies you're gaining and what this gives you on a forward basis?
I'll kick off on sort of some of the recent changes that we've done and then turn it over to Paul for where we think the additional opportunities are. If you look over the last few years, we did have some meaningful capital investments. It was, I will say, one largely focused, talked about specialty valves. What we did is we took five different manufacturing sites that we had of different sizes, largely across the U.S., and we consolidated them into one new manufacturing facility in Kimball, Tennessee. Important, number one, new facility, concentrated a lot of the work there, brought in a lot of new machinery and equipment, and also from a location perspective, very close to our nearby Chattanooga facility as well as our Albertville facility.
I think the investment there, very timely as we talk about that growing need for these specialty valves and the growth that we have seen there. Brass foundry. We were founded in Decatur, Illinois. We had a probably far too old brass foundry in Decatur, Illinois. And several years back, made the decision, it was, do we renovate the existing brass foundry or do we need to build a new one? You know, to short circuit everything, we built a brand new brass foundry, which has been opening up. The good news is we closed the old brass foundry back in January of 2025. With our new brass foundry, it gives us additional capacity, which is very important. We started pouring a new, more sustainable brass, eco-brass. It is a silica rather than bismuth-based brass.
Importance because as you hear the challenges with some of the rare elements and access to them, silica is much more readily available. Additionally, it is a more lead-free, if you will, brass that we're now pouring there. Very pleased with the sustainability attributes that that brings. I mentioned that most of our manufacturing capabilities are domestic, and we continue to see the opportunities for further investment. We'll turn it over to Paul.
Yeah. On top of that, now looking forward, we have two iron foundries, which make up just over half of the sales for the organization in terms of the fire hydrants and the gate valves. Both those foundries have some aged equipment that we're going to replace and modernize. That is also going to give us not just the next generation of the next 20-25 years from those foundries, but more importantly, it's also going to put us in a position where we can drive more capacity and more productivity. From a capacity perspective, it's important to align with our growth plans.
If you think about the macro environment where more and more domestic manufacturing of castings has become important on the backdrop of many years of foundries outsourcing their work outside North America, it puts us in a much stronger position than to control our destiny. Having those foundries in our own portfolio, having that domestic manufacturing capability, and having that capacity on what may be a constrained market going forward as more and more companies look to nearshore their castings.
Yeah, that makes sense. Maybe just tie that into what the margin opportunity looks like for you over time, right? Guidance assumes about 100 basis points of year-over-year expansion at the midpoint after what has been a very healthy normalization curve after some of those COVID-plus facility buildout challenges in the middle there. How should we think about what the sustainable margin improvement can look like in a normal growth environment with all of the things you're mentioning, both some of those earlier comments, Paul, but also some of the things we just talked about here?
You know, I'll say, you know, first of all, and I think this is built into the guidance we just gave for 2026, we still do expect to benefit from some of the elimination of the duplicative costs that we had when we were running two brass foundries. That is certainly sort of one, I would say, identifiable carryover that we have going into 2026. As we think about margin possibilities, you know, I think certainly volume and volume growth and mix are clearly two important determinants of what we can see overall in terms of margin expansion, and they'll certainly have an effect. I think a lot of it goes to sort of the culture and what we're driving, you know, at the facilities, what we're driving with our supply chain and sourcing teams, and continuing to look for those ways that we can identify potential cost savings.
Really just having that being really part of our DNA to always looking for those opportunities, importantly to identify cost savings, but I think as you're also hearing, having the right level of investment because you do not want to starve the business because it's looking for that continued long-term growth. It is how do we identify those cost savings, taking a portion of them to then reinvest in the business for the additional opportunities.
Yeah, Mike, that's one of my key focuses going to be in my early tenure is how we drive the complexity out of the business and look at those investments that we have planned to be able to articulate what that longer-term margin growth opportunity is going to be.
Fair to say that your incremental margin is what, 35-40% plus, depending?
Mix, it is.
Mix.
It does depend on mix as well. That has to be a component of what we say.
The idea is that we get volumes, we get really healthy pull-through, and then a lot of these initiatives can give you a little something extra on top of that, and it will just be how much over time depending on execution and all these things. Fair?
Fair.
You can get a bit of a step change too. You know, it's not always perfectly, you know, based on when you have to bring in additional shifts or various things. It can be sometimes a step change or along the way.
Absolutely. I don't think you've ever been in kind of a net neutral cash position in my 15+ years covering the stock. It's a different position to be in, and you're through a lot of the really heavy CapEx as well. What's the plan on the capital deployment side, and how should I think about what needs to happen internally versus buybacks, M&A, just run the spectrum and prioritization and the opportunity?
I'll kick us off and then turn it over. I think capital allocation, I think we sort of called ourselves balanced and disciplined. We have paid a dividend since we became a publicly traded company. We have increased our dividend, I think, in each of the last 11 years. We have been in the market with share repurchases. I think as of the end of September, we had about $65 million remaining and repurchased about $15 million in stock and put that in 2025. That sort of falls in that bucket of return to shareholders. Capital expenditures, I think looking for those right opportunities for the investment we need in the business as well as identifying the opportunities for growth. Acquisitions, I would say, is very high on our list. Capital structure, we think we've got the capital structure, the flexibility, the capacity.
I think importantly, having gotten through and demonstrated the performance capabilities, gotten through the transformation, I think as a management team, we're in a better position and are putting additional resources around identifying, looking for those right opportunities that we think can provide us further growth that can further deepen or broaden the relationship that we have with our distribution partners and/or the end users of our product. Could be gives us some additional manufacturing capabilities, capacity, expertise along the way. Much easier to identify those opportunities sometime than to have the actionability at the time that we're looking for it. I just think as an organization, and certainly I think when you look at the background for Paul, background for Melissa, I think we are in a good position and place that as an area of importance.
Not much to add on that. However, we are taking a disciplined approach in ensuring that we're balancing between returning profits to shareholders and also investing in the business. With the increased capital expenditures, we do expect that we're going to get some increased capacity and operational efficiencies out of those investments that we're putting in place this year and over the next couple of years. Between the two, we are certainly looking for the most prudent approach at managing cash and returning capital.
I think I just underscored it, Mike. Look, we are on this transformational journey, but really I think it's further opportunity to drive a lot more value from this organization. It could come from many different pieces.
Really appreciate it. Please join me in thanking Martie, Paul. For a breakout session, please come join us if you have any more questions. Thank you.
Thank you.