Mueller Water Products Inc

NYSE:MWA

Earnings Call Analysis

Mueller Navigates Mixed Results Toward Growth

Mueller's Q4 net sales outperformed while overall volumes fell due to inventory destocking and slower construction, offset by margin gains from operational improvements, leading to the highest quarterly EBITDA margin since Q3 2021. The company is progressing on a $25 million cost savings plan for 2024, and free cash flow jumped by over $60 million in 2023. For the upcoming year, a 3-8% net sales decline is projected due to normalizing inventory levels and weaker demand, with expectations for improved margins in the latter half. The company grapples with macroeconomic uncertainties, including interest rates, project costs, and global supply chain challenges from the Israel-Hamas conflict, which affects one of its growth segments.

Strengthening Operational Performance Amidst Lower Sales Volumes

In their recent earnings call, the company divulged a noteworthy shift where adjusted operating income surged by 81.4%, amounting to $39.9 million, in stark contrast to the previous year. This leap was attributed to the combined effects of escalated pricing strategies, reduced Selling, General, and Administrative (SG&A) expenses, which were $9.4 million lower year-over-year, and manufacturing efficiencies. Interestingly, these positive outcomes managed to outweigh the impact of diminished sales volumes. Furthermore, Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) also experienced a significant 43.5% uptick for the quarter, culminating in an elevated adjusted EBITDA margin of 18.4% from a previous 11.6%.

Segment Specifics: Water Flow Solutions and Management Solutions Navigate Market Changes

Within their two key business segments, the company faced different challenges and successes. The Water Flow Solutions unit saw net sales decrease by 10% due to reduced volumes in iron gate valves, though this was somewhat mitigated by increased pricing. Notably, specialty brass products soared with double-digit net sales growth. Despite lower sales, the segment's adjusted operating income rose by 34.1% attributed to the aforementioned sweeping pricing strategies and manufacturing and SG&A efficiencies. Adjusted EBITDA for this sector climbed by 30.7% leading to an impressive adjusted EBITDA margin of 22.7%. On the flip side, net sales in Water Management Solutions dipped by 8%, driven primarily by deflated volumes in hydrants and water applications, but like its counterpart, it was buffered by heightened pricing. Repair products excelled with double-digit net sales growth, and this segment's adjusted operating income notably spiked by 58.7% for the quarter.

Aim for Improved Capital Efficiency

Looking ahead, the company emphasizes a strategic focus on improving capital efficiency. For fiscal year 2024, capital expenditures are projected to encircle 4% of net sales, estimated to be in the realm of $45 million to $50 million. They pin these expenditure levels on lingering costs associated with the new brass foundry and other investments aimed at boosting operational efficiency across their vertically integrated operations.

Anticipated SG&A Savings and Focus on Cybersecurity

The company has also taken proactive steps to curb SG&A expenses, predicting an annual savings of approximately $25 million. In the third and fourth quarters, close to 30% of these savings have already been realized, spawned largely by cuts in personnel-related expenses and third-party fees. The company anticipates reaping the remainder of these savings as fiscal year 2024 unfolds, which will play a key role in strategizing for their future operations, especially in reinforcing their cybersecurity infrastructure.

Preparing for a Softer Market with Proactive Inventory Management

In anticipation of a softer market, the company projects that fiscal 2024 will witness a 3% to 8% descent in consolidated net sales when compared to the previous year. Nonetheless, they posit that the seasonality of these sales should realign more closely with pre-pandemic patterns. With a backlog diminishing by about $400 million throughout the year, and ending around $326 million, the company expects this normalization to mainly affect short-cycle products like iron gate valves and hydrants, while a backlog for service brass products remains elevated. Even within this environment of expected lower demand, the company has not proffered specific profitability and margin guidance for the fiscal year at this time, highlighting the ongoing assessment of a recent cybersecurity incident's impacts.

Earnings Call Transcript 2023-Q4

[Operator]

Welcome and thank you for standing by. [Operator Instruction] I would like to inform all parties that today's conference is being recorded. If you have any objections you may disconnect at this time.I would now like to turn the conference over to Whit Kincaid. Thank you. You may begin.

[Whit Kincaid, executive]

Good morning, everyone. Thank you for joining us on Mueller Water Products Fourth Quarter and Fiscal 2023 Conference Call. Yesterday afternoon, we issued our press release reporting results of operations for the quarter and year ended September 30, 2023. A copy of the press release is available on our website muellerwaterproducts.com.I'm joined this morning by Martie Zakas, our Chief Executive Officer; and Steve Heinrichs, our Financial Officer and Chief Legal Officer. Following our prepared remarks, we will address questions related to the information covered on the call. As a reminder, please keep to one question and a follow-up and then return to the queue. This morning's call is being recorded and webcast live on the Internet. We have also posted slides on our website to accompany today's discussion. They also address forward-looking statements and our non-GAAP disclosure requirements.At this time, please refer to Slide 2. This slide identifies non-GAAP financial measures referenced in our press release on our slides and on this call. It discloses the reasons why we believe that these measures provide useful information to investors. Reconciliations between non-GAAP and GAAP financial measures are included in the supplemental information within our press release and on our website. Slide 3 addresses forward-looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward-looking statements. Please review Slides 2 and 3 in their entirety.During this call, all references to a specific year or quarter unless specified otherwise refer to our fiscal year, which ends 30th of September. A replay of this morning's call will be available for 30 days at 1-800-819-5743. The archived webcast and corresponding slides will be available for at least 90 days on the Investor Relations section of our website.I'll now turn the call over to Martie.

[Marietta Zakas, executive]

Thanks, Whit. Good morning, everyone. Thank you for joining us for our fourth quarter earnings call. I'll start with a brief overview of our fourth quarter and fiscal 2023 performance. We executed well to finish the year, despite a challenging external environment. While our fourth quarter net sales exceeded expectations, we experienced a mid-teens year-over-year decrease in volumes. As a reminder, this decrease was due to the ongoing channel and customer inventory destocking, reflecting normalized lead times mainly for iron gate valves and hydrants.Additionally, higher interest rates slowed new residential construction activity, especially land development. Continued benefits from price realization and improved execution by our operations and supply chain teams led to higher gross margins compared with the prior year. This includes strong margin improvements for both segments on lower volumes. Our supply chain team helped drive productivity improvements in the quarter, including reductions in outsourcing and freight costs. Water Flow Solutions' specialty valve operations had an outstanding quarter, reflecting the successful ramp-up of our new manufacturing facility in Kimball, Tennessee. Improved production for service brass products and better flow through for our iron gate valves also contributed.Water Management Solutions improved execution helped offset lower volumes and a warranty charge in the quarter. Lower SG&A spending, which includes benefits from our previously announced cost actions helped increase our adjusted EBITDA margin to 18.4% for the quarter. This EBITDA margin is the highest quarterly margin since the third quarter of 2021. We are on track to deliver the remaining portion of the $25 million cost savings program in 2024. Our free cash flow improved by more than $60 million in 2023, exceeding our expectations as inventories declined sequentially and we normalized our capital spending.I'll now provide an update on the cybersecurity incident announced on October 28th. We have made substantial progress in recovering from the incident. Team members across the organization have worked tirelessly to support our customers and restore operations. Our incident response teams quickly took action to implement response and containment protocols. With the help of leading third-party cybersecurity specialists, we have largely restored the impacted applications and systems. All of our facilities are operational and the unauthorized activity has been contained. The company's investigation and remediation efforts remain ongoing including the analysis of data access, exfiltrated or otherwise impacted.Our teams continue to focus on closing the gap on our ongoing business processes, while also addressing additional work associated with the incident. We continue to evaluate the business, financial and related impacts of the incident. We have worked closely with our customers, vendors and employees throughout this process and have been able to take orders and ship products. Therefore, we expect a minor impact on our consolidated net sales in the first quarter. We appreciate the patience and understanding of our customers and vendors as we have worked through the restoration process, and of course, that of the investment community, as we're having this call later than usual.As we enter the new year, we will continue to focus on delivering the benefits from our strategic capital investments in specialty and large gate valves and service brass products. These products are poised to benefit from the increased federal infrastructure funding beyond fiscal 2024. We believe our transformational state-of-the-art brass foundry with its sustainable lead-free alloy will set a new standard for utilities and the communities we serve.We continued to make progress on the ramp-up of the new brass foundry again this quarter. We expect to install the remaining foundry pouring equipment over the coming months, which will allow us to complete the new tooling, while ramping up the volume of finished parts. At the end of the year, we still had an elevated backlog for service brass products.With channel partners and end customers our highest priority, we will continue to utilize both brass foundries throughout the year. This will also allow us to improve lead time, maintain customer service and reduce our backlog, while ensuring we complete the ramp-up of the new foundry by the end of calendar 2024. As we move forward, we will focus on minimizing the impact of the duplicative cost of running 2 foundries. Following this transition, we believe that will be well positioned to increase gross margins beyond pre-pandemic levels.Looking ahead, we believe there remains a meaningful level of uncertainty in the macroeconomic environment with our end users, as they continue to adjust to higher interest rates and elevated project costs. We also anticipate that the Israel-Hamas war will create headwinds for the global supply chain. We have operations in Israel through our Krausz repair products business. While repair products account for slightly less than 10% of our consolidated sales, this is a headwind for one of our fastest growing product lines.Over the last several months, we have worked closely with our teams and experts to ensure first, the safety of our employees and to continue operations effectively. We have normally carried an elevated level of finished goods inventory for repair products. Due to the extent of the war, we have made incremental operational investments to continue to help ensure we meet customer demand. The cost of these investments will impact the company's first quarter results and are likely to continue for the foreseeable future.Before turning it over to Steve, I want to say how grateful I am for all of our team members around the world. Their dedication to and passion for the business is inspirational. I thank them for helping us to deliver results quarter-after-quarter, as we focus on continuing to improve our productivity and efficiency, while strengthening our customer relationships.On to you, Steve.

[Steven Heinrichs, executive]

Thanks, Martie, and good morning, everyone. It's great to be with you this morning from my first earnings call as Mueller's CFO. Although this is my first earnings call as CFO, I've been with Mueller for over 5 years and I'm confident that our future is bright. Mueller has a leading array of products and brands, coupled with deep industry knowledge, strong channel presence, durable customer relationships and dedicated and passionate team members.I'll now turn to our fourth quarter and full year results. For the quarter, our consolidated net sales decreased 9.1% to $301.4 million compared to the prior year. Lower volumes, mainly in iron gate valves and hydrants were partially offset by higher pricing across most of our product lines. For the full year, our consolidated net sales increased to 2.3%, driven by higher pricing, partially offset by lower volumes, mainly in iron gate valves and service brass products.In the fourth quarter gross profit of $88.4 million increased 3.3% compared with the prior year. Gross margin of 29.3% increased 350 basis points compared with the prior year. Benefits from higher pricing improved manufacturing performance and lower freight costs more than offset lower volumes and warranty obligations.As part of a regular assessment of our warranty obligations, which includes an assessment of our warranty experience and replacement costs, we increased our warranty accrual by $5.7 million in the quarter. Excluding this charge, gross margin was 31.2% with a 540 basis point expansion versus the fourth quarter of 2022. We were pleased to see improvements in gross margins for both segments despite lower volumes. The benefits from price realization were sequentially lower in the quarter, as we lapped price increases from the prior year. However, inflationary pressures lessened relative to the third quarter, especially compared to the increases we experienced over the last 12 months. The level of total material cost inflation improved relative to our prior quarters and was nearly flat compared with the prior year.Our supply chain team helped to drive improvements in the quarter, including lowering our outsourcing costs. For the quarter SG&A expenses of $54.2 million were $9.4 million lower than the prior year, and were $6.4 million lower than the previous quarter. The decrease compared with the prior year was primarily driven by lower personnel-related expenses and incentive costs, favorable foreign currency exchange expense, and reduced third-party fees, partially offset by inflationary pressures.Operating income of $24.9 million increased 114.7% in the quarter compared with the prior year. Operating income includes strategic reorganization and other charges of $9.3 million, which primarily consisted of expenses associated with the leadership transition and restructuring costs related to severance. Operating income also includes a $5.7 million warranty charge of Water Management Solutions. These items have been excluded from adjusted results.Turning now to our consolidated non-GAAP results for the quarter. Adjusted operating income of $39.9 million increased 81.4% compared with the prior year. This increase was primarily is a result of benefits from higher pricing, lower SG&A expenses and favorable manufacturing performance, which more than offset lower volumes. Adjusted EBITDA of $55.4 million increased 43.5% in the quarter, leading to an adjusted EBITDA margin of 18.4% compared with 11.6% in the prior year. As a reminder, this includes $900,000 of pension expense other than service compared with the benefit of $1 million in the prior year quarter.For fiscal 2023, adjusted EBITDA increased $7.6 million or 3.9% to $202.1 million. Our adjusted EBITDA margin improved 20 basis points to 15.8% for the year. Net interest expense for the quarter declined $600,000 to $3.3 million compared with the prior year, primarily as a result of higher interest income. For fiscal 2023, our effective tax rate was 21.6% as compared with 22.3% for the prior year. This decrease was primarily due to higher benefits from R&D tax credits and lower effective state tax rates due to state apportionment changes. For the quarter, we increased adjusted net income per share by 90% to $0.19 compared with the prior year. For the full year, we increased adjusted net income per share by 8.6% to $0.63 compared with the prior year.Turning now to quarterly segment performance, starting with Water Flow Solutions. Net sales decreased 10% compared with the prior year. This decrease was primarily due to lower volumes in iron gate valves, partially offset by higher pricing across most of the segment's product lines. Specialty brass products saw a double-digit increase in net sales compared with the prior year. Net sales for iron gate valves were down double-digits compared with the prior year, primarily due to channel and customer inventory destocking, reflecting normalized lead times and lower end-market demand. Iron gate valves sales in the prior year quarter had benefited from serving an elevated backlog and improved production levels.Despite lower net sales, adjusted operating income of $27.5 million increased 34.1%. Benefits from higher pricing, favorable manufacturing performance and lower SG&A expense more than offset lower volumes. Adjusted EBITDA of $36.6 million increased 30.7% leading to an adjusted EBITDA margin of 22.7% compared with 15.6% last year. For fiscal 2023, adjusted EBITDA margins decreased 400 basis points to 17.7%.Turning now to quarterly results for Water Management Solutions. Net sales of $139.9 million decreased 8% as compared with the prior year. The decrease was primarily due to lower volumes in hydrants and water applications, which were partially offset by higher pricing across the segment's product lines. Repair products saw a double-digit increase in net sales compared with the prior year. For hydrants, however, net sales were down double-digits compared with the prior year, primarily due to channel and customer inventory destocking, reflecting normalized lead times and lower end market demand.Hydrant sales in the prior year quarter benefited from serving an elevated backlog and improved production levels. Despite lower net sales, adjusted operating income of $21.9 million increased 58.7% in the quarter. Benefits from higher pricing, lower SG&A expense and lower freight costs more than offset lower volumes. Adjusted EBITDA of $29.1 million increased 32.9% in the quarter, leading to an adjusted EBITDA margin of 20.8% compared with 14.4% last year. For fiscal 2023, adjusted EBITDA margin improved by 660 basis points to 22.3%.Moving on to cash flow. Net cash provided by operating activities for the full year of $109 million increased $56.7 million compared with the prior year. The increase was primarily driven by improvements in working capital compared with the prior year, including a sequential decrease in inventories during the fourth quarter. During the year, we invested $47.6 million in capital expenditures compared with $54.7 million in the prior year.Free cash flow for the year of $61.4 million increased $63.8 million compared with the prior year, and was 62.7% of adjusted net income, which exceeded our expectations. During the fourth quarter, we repurchased $10 million in common stock and as of September 30th, we had $90 million remaining under our share repurchase authorization.At September 30, 2023, we had total debt outstanding of $447.4 million and cash and cash equivalents of $160.3 million. At the end of the fourth quarter, our net debt leverage ratio improved to 1.4x. We did not have any borrowings under our ABL Agreement at year end, nor did we borrow any amounts under our ABL during the year. As a reminder, we currently have no maturities on our debt financing before June 2029. With $322.7 million of total liquidity at the end of the year, we continue to have ample liquidity and capacity to support our strategic priorities, including acquisitions.I will now review our outlook for fiscal 2024. We anticipate that channel and customer inventory levels will be substantially normalized by the end of the first quarter of fiscal 2024. Our consolidated backlog declined about $400 million during the year and was approximately $326 million at the end of fiscal 2023. This decline was primarily due to our short-cycle products, mainly iron gate valves and hydrants.Backlogs for iron gate valves and hydrants have normalized, while the backlog for service brass products remains elevated. We are now emerging from the significantly elevated backlog levels of prior years and we expect a softer macro environment going forward. In light of our backlog and expectation of a lower demand environment in fiscal 2024, we anticipate that consolidated net sales will decrease between 3% and 8% in fiscal 2024 as compared with the prior year.For fiscal 2024, consolidated net sales seasonality is expected to be closer to pre-pandemic patterns. For example, net sales for the first half of the fiscal year for the 5 year period from 2015 to 2019 had an annual average of approximately 45% of consolidated net sales. For the first quarter of fiscal 2024, we anticipate consolidated net sales to range between $245 million and $255 million, which is in line with our expectation that we will return to historical seasonality levels.As Martie mentioned, we continue to evaluate the business, financial, and related impacts of the cybersecurity incident. At this time, the full cost of the incident have not yet been determined. However, we anticipate the incident will negatively impact our results. Due to the ongoing evaluation of the impacts of the incident, we are not providing profitability and margin guidance for the fiscal year at this time. However, we currently expect margins to improve in the second half of the year, primarily due to continued operational and supply chain productivity improvements.With that, I'll turn it back to Martie for closing comments.

[Marietta Zakas, executive]

Thanks, Steve. Before we open it up for Q&A, I want to share some final thoughts. Since taking on the CEO position, I have spent substantial time with our employees, channel partners and customers. I have visited most of our facilities and spoken with many team members to better understand the opportunities for the business moving forward. It is very clear to me that we have a strong foundation built on our talented and committed employees, industry-leading brands and deep distribution channel, and end customer relationships. Our broad portfolio of products and solutions allows us to play a critical role in addressing the challenges and opportunities facing the water infrastructure industry. We believe we are at an inflection point with our strategic investments and operational improvements. Despite the current external headwinds we are facing, we are well-positioned to deliver long-term sustainable organic growth and margin improvements.The municipal water end market is poised to benefit from the increased attention and investment towards the aging water infrastructure, while water utilities face a growing set of challenges requiring trusted partners. We believe we have the products and solutions that are positioned to benefit from the infrastructure bill once funds begin to flow. Additionally, our strong balance sheet, liquidity, and cash flow allow us to continue to deliver shareholder value by reinvesting in our operations and returning cash to shareholders. This year, we allocated $48.1 million to shareholders through share repurchases and our quarterly dividend, which was recently increased for the eighth time since 2014. We are confident that the actions we are taking to execute our strategy will further strengthen Mueller for the long-term.That concludes my comments. Operator, please open this call for questions.

[Operator]

[Operator Instructions] Our first question comes from Bryan Blair from Oppenheimer.

[Bryan Blair, analyst]

I appreciate the guidance on revenue cadence through the year. I was hoping you could offer a little more color on expectations for resi land development and repair and replace demand, respectively. And along those lines, what factors may drive upside or downside relative to the assumptions you have baked into your guide?

[Marietta Zakas, executive]

Certainly. So as we are looking out to our 2024 sales, I think overall, the volume expectations are certainly one of the drivers as we look at it from a year-over-year. We do think that the end markets are generally healthy, specifically, looking at the muni repair and replacement market, we think it was overall pretty resilient in '23. We think that, that could still have some low single-digit growth in 2024. But as we've said, sort of the benefits that will ultimately come from the infrastructure bill, we really don't expect to start seeing them either until late in our fiscal '24 or thereafter.With respect to residential construction, we saw that single-family starts were down in our fiscal '23, about 16%. And we expect that the -- some of the lower-end market volumes that we're looking at are primarily going to be reflective of the slowdown with residential construction activity. And large reason for that has been the higher interest rate environment that we have been in, and importantly, the associated mortgage rate. So, as we think about this a little bit more, we believe that these higher interest rates have impacted some of the land development and that's typically where we come into play, is when that horizontal infrastructure begins [ rebuilt. ] But overall, there are pockets of growth that we see across the U.S.But certainly with the decision and commentary from the Fed yesterday, where they have indicated that they may slow down, didn't have a rate increase, and even highlighted that there could be some rate cuts looking into 2024, I think certainly seeing where interest rates go, but importantly, how that impacts mortgage rates could affect the residential construction market. But right now, as we're looking at it, we continue to expect a more modest slowdown in the resi construction market and sort of maintenance in and around the municipal repair and replacements market.

[Bryan Blair, analyst]

Understood. And those dynamics make sense. And if you're willing to provide the number, what was the expense related to outsourcing and other inefficiencies with the foundry transition in the fourth quarter? And remind us where that peaked and how you're thinking about those one-time-ish kind of inefficiencies phasing through your fiscal '24?

[Marietta Zakas, executive]

So, let me try to hit that. So I think overall we have identified some of the outsourcing costs that we have had and how that's impacted us due to the period of ramp-up with our new brass foundries. I would say a couple of things. We -- our outsourcing costs have improved on a year-over-year basis and they improved sequentially. I think this was in large part due to some of the -- with our supply-chain teams overall and looking at the outsourcing cost, as well as what we've been able to do with our other purchasing as well. We expect to continue to see some improvements with that as well as overall freight.Additionally, some of the -- what we're seeing is, we're adjusting to the different volume levels as we have brought down some of the backlogs, particularly with our hydrants and iron gate valves. So although we do think that we'll have a lower level of outsourcing and we'll continue to see that improve throughout 2024.With respect to the brass foundry, we did talk specifically that we're continuing to see improvements as we ramp up our new brass foundry, and with the existing brass foundry that we have, we do expect to continue that to be operational through calendar 2024. It does cause us to have some duplicative costs with both of those foundries, but importantly, as we look out with the higher backlog levels that we still have with our service brass products, we think it's important to work to continue to lower that level of backlog.Additionally, when we look at the infrastructure bill and specifically where we expect some of the earlier spending could be, it's certainly associated with the initiatives and allocations around lead service line replacement. And I'll remind you, with the lead service line replacement, that's where a lot of our service brass products can go. So our focus is on continuing to keep the improvements going with our new brass foundry, working to bring down that service brass backlog and to be prepared as well for where we think that will be one of the benefits with the infrastructure bill.

[Steven Heinrichs, executive]

Yes. The IIJA has a fair bit in it for replacing lead service lines, and we're going to expect you to see that at the end of the year. So it's not coming in the immediate term. And so, we hope to see the benefit of that and the benefit of the reduction in operations at our old salary to improve our results.

[Operator]

Our next question comes from Joe Giordano from TD Cowen.

[Michael Anastasiou, analyst]

This is Michael on for Joe. So last quarter you mentioned you were around [Technical Difficulty] through the tooling of your highest volume products to the new foundry operations, and we're beginning to focus on the production side. Can you dive into just the remaining time line of capital projects and the areas of the portfolio you still need to ramp on the production side?

[Marietta Zakas, executive]

Yes. So I want to make sure your question is really around sort of the CapEx spending going forward.

[Michael Anastasiou, analyst]

Yes. On the CapEx side of the foundry operations.

[Marietta Zakas, executive]

Okay. Yes. So, overall, with respect to our capital guidance, we are seeing, I think we have indicated overall that once we got through the 3 major capital projects, we did expect to see our capital expenditure levels falling below 4% of our net sales. As we look at 2024, specifically, we still do have some capital expenditures associated with the new brass foundry. We referenced some of the additional machining that would be coming online in 2024. Some of that, as I say, as we've seen some of the extended supply chains, that has certainly extended to some of the machinery that we purchased.So that's part of what we've got encompassed in our 2024. And then with -- other than that, I would say we continue to have investments with our other operations. Some would be along the maintenance line, as we are largely vertically integrated and operate foundries both on the iron and on the brass side. And additionally, we'll look to make some investments in our facilities that will just overall enhance our operational efficiency.

[Steven Heinrichs, executive]

Yes. And as we said, our expectations for capital spending in '24 is around 4% of net sales or between $45 million and $50 million. And as we were concluding these major capital projects that we've embarked on over the prior years, we expect it to decrease a bit from there.

[Michael Anastasiou, analyst]

Great. That's helpful. And just one more, if I may. You mentioned last quarter restructuring of the sales and marketing organization. Can you just give some color on the nature of those changes and how far along you have been through and how much has been realized?

[Marietta Zakas, executive]

Yes. So overall, in terms of the SG&A, and there were a couple of areas across our selling general and administrative expenses, we did have some reductions. We identified that we expect to have about $25 million in annual savings from that. We have realized some of those savings in our third quarter as well as in our fourth quarter, and have realized almost 30% of those savings in our fiscal '23. A lot of those savings are really coming from lower personnel-related expenses as well as third-party fees associated with that.As we move into '24, we do still expect to realize the balance of those identified savings. Some of those savings will be offset by looking at some additional investments in personnel, importantly some inflation, as well as some of the additional investments we'll make in and around cyberstructure-related infrastructure costs. Also in '24, we do expect it to be offset. When I said personnel, what I really meant was some of the incentive costs that we will have in '24 relative to '23 in terms of projections.

[Operator]

Our next question comes from Deane Dray from RBC Capital Markets.

[Jeffrey Reive, analyst]

This is Jeff Reive on for Deane. My first question is kind of regarding the cybersecurity incident. I think it's great to see that it's mostly contained and limited impact to the fiscal first quarter. But firstly just, can you confirm that you're not really expecting any lost or deferred sales at all from this? Also, will there be a free cash flow impact in the first quarter, like any delayed billings leading to delayed collections on accounts receivable? And regarding the cost associated with remediation, do you have any business disruption insurance in place to kind of recoup some of that?

[Marietta Zakas, executive]

All right, so let me go through and make sure we hit all of your questions on this, and if we didn't, certainly come back and please ask them again. So, let me just sort of start off with bigger picture and then we'll get into some of the more specifics. So for the cyber incident that we announced on October 28, very quickly after that, we implemented our response and containment protocols.We also engaged in third-party cybersecurity specialists to help support us. We were focused on containment, but importantly also how to continue to run the business and servicing our customers. Although most of our facilities were impacted to a certain degree, we were able very quickly to -- with most of our facilities to maintain our operations and to continue to take orders and ship products to our customers during this time.I would say we have learned a lot through this event. Unfortunately, we're seeing across the U.S., and I say overall even more concentration in the manufacturer industry, that these attacks are increasing, which is certainly regrettable. But I know we referenced in our prepared remarks, but certainly the team [Technical Difficulty] [ cybersecurity ] specialists that we engaged, really worked very quickly and effectively to not only address the incident but to continue to service our customers. We adjusted our processes where we needed to, but I think importantly, that allowed us to largely be operational in servicing them. So I think hitting some of your other specific questions in and around insurance and free cash flow, I'll turn that over to Steve.

[Steven Heinrichs, executive]

Yes, we do have cyber and business community insurance, but as we mentioned in our prepared remarks, the full cost of the incident have not yet been determined, and we're assessing and still working on our position with respect to that right now. We anticipate that the incident had some negative impact on us, but it would have been relatively modest for the first quarter of '24. And that's kind of where we stand with respect to the estimation of the cost of the cyber incident.

[Marietta Zakas, executive]

Yes. And with respect to free cash flow, I would say we don't expect any meaningful impact in our first quarter.

[Jeffrey Reive, analyst]

Okay. That's great. And then just maybe a broader question, but do you think there needs to be a larger internal investment into some of your software systems? I don't know if maybe some of these systems were old and this could be part of it, but is there any plans to kind of upgrade your systems internally?

[Marietta Zakas, executive]

So what I would say with respect to that is maybe taking a different -- I think -- and this is one of the comments in and around our SG&A and our outlook for 2024. I do expect that we will be making more investments in and around cybersecurity. So I do expect that we will have more investments in our 2024.

[Operator]

[Operator Instructions]

[Marietta Zakas, executive]

All right. Well, look, thank you all for being on the call this morning. When I stepped into this role as President and CEO and joined the Mueller Water Products Board of Directors, I did so with a commitment and conviction that I would lead Mueller on a path to continue increasing margins, improving its operational performance and enhancing our positions with our customers, suppliers, and employees. We have made progress and we continue to execute on our strategic plan and initiatives.Our challenges over the last few months have only highlighted what a terrific, dedicated group of employees we have, as they most recently showed their agility, focus and determination to service our customers and run our business as we navigated these challenges. We play a critical role in helping to improve our aging infrastructure, and I am privileged and honored to lead this team. Our employees make a positive difference each and every day to serve the water infrastructure industry. We are seeing operational improvements across the business, and I am confident in our future opportunities for growth and margin expansion. Thank you all.

[Operator]

That concludes today's conference. Thank you for participating.