Q4 2025 Earnings Call Contradictions: Municipal Demand, Residential Growth, Tariff Impact, and Inventory Normalization

Date of Call: None provided

Financials Results

• Revenue: Q4 net sales $380.8M, up 9.4% YOY; FY net sales > $1.4B, up 8.7% YOY
• EPS: Adjusted net income per share $0.38 (Q4), up 73% YOY; FY adjusted net income per diluted share $1.31, up 36.5% YOY
• Gross Margin: 36.8% in Q4, up 500 bps YOY; FY gross margin 36.1%, up 120 bps YOY
• Operating Margin: Adjusted operating margin 20.7% in Q4, up 450 bps YOY; operating income $69.6M, up 145.1% YOY

Guidance:

• Consolidated net sales expected $1.45B–$1.47B (up ~1.4%–2.8% YOY)
• Adjusted EBITDA expected $345M–$350M (up ~5.8%–7.3% YOY); midpoint implies ~23.8% margin (~+100 bps YOY)
• Expect stronger second half EBITDA margin vs first half; Q3 highest seasonality, Q1 lowest; Q2 sequential increase
• Annualized tariff impact ~3% of cost of sales; actions taken to offset
• CapEx expected 4%–5% of net sales; free cash flow >85% of adjusted net income

Business Commentary:

* Record Financial Performance: - Mueller Water Products reported record net sales of $380.8 million for Q4 2025, reflecting 9.4% quarter-over-quarter growth, and 8.7% annual growth to over $1.4 billion. - The growth was driven by strong volume gains, improved price realization, and resilient end market demand.

• Margin and Efficiency Improvements:
• Consolidated gross margin increased by 500 basis points in Q4 2025, and the annual margin expansion was over 600 basis points.
• These improvements were primarily due to higher volumes, manufacturing efficiencies, and disciplined cost management.

• Operational and Capital Investments:
• Mueller completed the transition to a state-of-the-art brass foundry and expects further gross margin benefits from this transition in 2026.

• The company plans to continue capital investments in facilities and domestic capabilities, focusing on iron foundries to support future growth.

• Municipal Market Resilience:

• The municipal market remained resilient, with the company experiencing strong volume growth in water management solutions.
• This resilience was attributed to Mueller's focus on operational excellence, customer service, and product innovation to meet ongoing infrastructure demands.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management highlighted record Q4 and FY results (net sales, adjusted EBITDA, adjusted EPS), cited gross margin expansion of 500 bps in Q4 and 600+ bps over 2 years, and guided to modest revenue growth with higher adjusted EBITDA and continued margin expansion while outlining capital investments and strong liquidity.

Q&A:

• Question from Bryan Blair (Oppenheimer): How did muni and residential market sales shake out in fiscal '25 and what's contemplated by market in FY '26 revenue guidance of 1.4%–2.8%?
  Response: Guidance assumes slightly positive volumes: residential construction down high-single-digits, unit repair & replacement up low- to mid-single-digits, and project-based specialty valves mid- to high-single-digits, with repair/specialty expected to more than offset residential weakness.

• Question from Bryan Blair (Oppenheimer): Can you provide more detail on the planned initiatives/investments, anticipated benefits in fiscal '26 or beyond, and M&A thinking for fiscal '26?
  Response: Iron foundry investments are multi-year and won’t materially benefit margins in 2026 but will add future capacity and margin upside; company is actively evaluating acquisitions that deepen product portfolio or manufacturing capabilities and is well positioned to pursue targets given strong balance sheet.

• Question from Brian Lee (Goldman Sachs): How should we think about margin trajectory/cadence across the two segments in 2026 after 2025 improvement?
  Response: Expect margin expansion in both segments, larger improvement in second half; WFS to benefit from legacy brass foundry closure (first half), WFS gross margin higher and WMS EBITDA margin higher in 2026 versus 2025, with ~3% cost-of-sales tariff headwind.

• Question from Brian Lee (Goldman Sachs): Could new pricing add upside to the FY '26 revenue guidance?
  Response: Guidance excludes any new pricing; prior pricing implemented in FY25; incremental pricing would be upside to the current guidance if implemented.

• Question from Michael Halloran (Baird): What's the state of channel inventory and backlog—normalized or further adjustment needed?
  Response: Channel inventory is generally normalized across most product lines; they continue to monitor for any tariff-driven buy-ahead but see no material abnormality.

• Question from Michael Halloran (Baird): Does the plan assume the run rate entering/exiting FY25 continues or is there acceleration/deceleration expected?
  Response: Plan assumes typical seasonality (Q3 strongest, Q1 weakest) with no implied acceleration; municipal market remains resilient while residential is expected to be lower year-over-year.

• Question from Deane Dray (RBC Capital Markets): Any impact from the government shutdown on your business?
  Response: No noticeable direct impact observed; most spending is municipal and federal funding rollout is slow so shutdown effects have not materially affected their business yet aside from general sentiment uncertainty.

• Question from Deane Dray (RBC Capital Markets): Can you provide color on the warranty charge—what product line and any reserve changes?
  Response: Warranty charge relates to metering products in the WMS segment; accruals are reviewed annually with third-party analysis given long industry warranty periods.

• Question from Christopher Glynn (TD Cowen): How are leak detection initiatives translating into commercial opportunities and any recent wins or rollouts for 2026?
  Response: Echologics leak-detection solutions are being integrated into products (e.g., a hydrant renewal introduced at ACE that includes Echologics monitoring); currently in pilot/field trials with broader rollout planned in 2026.

• Question from Walter Liptak (Seaport Research): With 600 bps gross margin improvement to date, is there more margin upside or is this mainly maintenance plus CapEx-driven gains?
  Response: Management sees continued long-term margin expansion potential driven by commercial and operational investments and capacity/upgrades, though tariffs present headwinds mitigated by pricing and supply-chain actions.

• Question from Walter Liptak (Seaport Research): As CEO, what are your top priorities—are CapEx programs the focus?
  Response: Top priorities include reinvesting in core iron foundries (CapEx) plus commercial and operational investments and talent, all aimed at driving long-term top-line growth and margin expansion.

• Question from Walter Liptak (Seaport Research): What was the special/operational charge referenced (not warranty)?
  Response: The charge was for strategic reorganization and other charges related to leadership transition and some transaction-related expenses.

Contradiction Point 1

Municipal Repair and Replacement Market Demand

It involves discrepancies in the expectations and assessment of the municipal repair and replacement market, which is a crucial segment for the company's growth and revenue.

What are the margin trends and timing for the two segments in 2026? - Brian Lee(Goldman Sachs)

20251107-2025 Q4: Municipal repair and replacement market is strong, with robust funding for infrastructure projects despite higher interest rates. - Paul McAndrew(COO)

What are your observations in the utility and residential markets? - Michael Patrick Halloran(Robert W. Baird & Co. Incorporated)

2025Q3: We continue to see very strong demand in the municipal repair and replacement market, with robust funding for infrastructure projects. - Paul McAndrew(COO)

Contradiction Point 2

Residential Market Sales and Growth Expectations

It involves differing expectations regarding the residential market sales and growth, which are crucial for the company's revenue projections and strategic planning.

How did municipal and residential market sales perform in fiscal 2025, and how are each reflected in FY 2026 revenue guidance? - Bryan Blair (Oppenheimer)

20251107-2025 Q4: In FY '26, we expect slightly positive volumes, with residential construction expected to decline in the high single-digit range, - Marietta Zakas(CEO)

Are there any customer projects delayed or postponed due to tariffs? - Nick Giovanni (Goldman Sachs)

2025Q2: We expect residential construction to decline in the single-digit range, - Marietta Zakas(CEO)

Contradiction Point 3

Tariff Impact and Pricing Actions

It highlights differing perspectives on the impact of tariffs and the company's pricing actions to mitigate these impacts, which are critical for financial planning and profitability.

What will the margin trends and timing be for the two segments in 2026? - Brian Lee (Goldman Sachs)

20251107-2025 Q4: The full-year revenue impact of our pricing actions is estimated to offset $24 million of the remaining $30 million tariff cost for the year. - Marietta Zakas(CEO)

Are you implying pricing actions will completely offset the tariff impacts? - Unidentified Analyst (Baird)

2025Q2: Price increases are targeted to mitigate, not fully cover, tariff impacts. - Martie Zakas(CEO)

Contradiction Point 4

Inventory Levels and Channel Inventory Normalization

It involves the assessment and expectations regarding inventory levels and channel inventory normalization, which are crucial for operational planning and demand forecasting.

How should we think about channel inventory and backlog? - Michael Halloran(Baird)

20251107-2025 Q4: We believe channel inventory is normalized, with no significant changes expected. We're monitoring for any buy-ahead due to tariffs but observe typical seasonality. - Paul McAndrew(COO)

Has the backlog normalized, and can you provide more visibility? - Deane Michael Dray(RBC Capital Markets, Research Division)

2025Q3: We believe our channel inventory is normalized, and we're monitoring for any buy-ahead due to tariffs but we are not seeing an uptick in this behavior. - Paul McAndrew(COO)