Mueller Water Products Inc (MWA) 2014 Q4 法說會逐字稿

Welcome and thank you for standing by.

(Operator Instructions)

This call is being recorded. If anyone has any objections you may disconnect at this time. I would now like to turn the call over to Martie Zakas. You may begin.

Good morning and thank you, Kathy. Welcome to Mueller Water Products 2014 third quarter conference call. We issued our press release reporting results about the operations for the quarter ended September 30, 2014 yesterday afternoon. A copy of it is available on our website muellerwaterproducts.com.

Mueller Water Products had 159.8 million shares of common stock outstanding at September 30, 2014. Discussing the fourth quarter results this morning are Greg Hyland, our Chairman, President and CEO and Evan Hart, our CFO.

This morning's call is being recorded and webcast live on the Internet. We have also posted slides on our website to help illustrate the quarter's results as well as to address forward-looking statements and our non-GAAP disclosure requirement.

At this time please refer to slide two. This slide identifies certain non-GAAP financial measures referenced on our press release, on our slides and on this call, and discloses the reasons why we believe these measures provide useful information to investors. Reconciliations between GAAP and non-GAAP financial measures are included in the supplemental information within our press release and on our website.

Slide three addresses our 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, as well as specific examples of forward-looking statements. Please review slides two and three in their entirety.

During this call all references to a specific year or quarter, unless specified otherwise, refer to our fiscal year. Our fiscal year ends on September 30. All operating results discussed in these prepared remarks are from continuing operations unless specified otherwise.

A replay of this morning's call will be available for 30 days after the call at 1 (866) 418-8386. The archived webcast and corresponding slides will be available for at least 90 days in the investor relations section of our website. In addition we will furnish a copy of our prepared remarks on form 8-K later this morning.

After the prepared remarks we will open the call to questions. I will now to the call over to Greg.

Thanks, Marty. Thank you for joining us today as we discuss our results for the 2014 fourth quarter and full year.

I will begin with a brief overview of the quarter and full year, followed by Evan's detailed financial report. I will then provide additional comments on the quarter's results and developments in our end markets as well as our outlook for the 2015 first quarter and full year.

We had a strong fourth quarter with net sales up 9.4%, adjusted operating income up 29% and adjusted EBITDA up 18.9%. In the fourth quarter Mueller Company's 11.5% increase in net sales, 27.2% increase in adjusted operating income and 220 basis points improvement in adjusted operating margin to 18%, were primarily attributable to growth in its domestic end markets and improved operating leverage.

Anvil had its strongest year-over-year net sales growth in 2014, with fourth-quarter net sales increasing 5.4%. 2014 was another strong year for Mueller Water Products, as evidenced by net sales growth of 5.7% and adjusted operating income growth of 28.7%. Additionally, Mueller Water Products generated free cash flow of $110.7 million, an increase of $33.1 million, or 43% year over year, and reduced net debt leverage almost a full turn to 2.1 times, compared to 3 times at the end of 2013.

Adjusted EBITDA grew 16.4% and adjusted EBITDA margin for 2014 was 15.5%. Adjusted EBITDA margin in Mueller Company was 21.3% and Anvil was 14.1% for 2014.

We are also pleased with the progress we made in 2014 in expanding our portfolio of leak detection technologies including, commercially launching 24/7 fixed leak detection monitoring, for both transmission and distribution mains. While these solutions were only recently introduced we are excited about their long-term growth potential.

Our 2014 performance reflects the ongoing operating improvements we have made over the past several years as well as the increase in volume we have realized as our end markets have improved.

With that, I will turn the call over to Evan for a detailed discussion of our financial results for the quarter.

Thanks, Greg. And good morning everyone. I will first review our fourth quarter consolidated financial results and then discuss segment performance. Net sales for the 2014 fourth quarter of $320.7 million increased $27.5 million or 9.4% from the 2013 fourth quarter net sales of $293.2 million due primarily to higher shipment volumes at both Mueller Company and Anvil.

Gross profit increased 14.1% to $101.3 million for the 2014 fourth quarter, compared to $88.8 million for the 2013 fourth quarter. This improvement was driven primarily by higher shipment volumes and higher sales prices.

Gross profit margin of 31.6% in the 2014 fourth quarter increased 130 basis points from 30.3% in the 2013 fourth quarter. Selling, general, and administrative expenses were $58.2 million in the 2014 fourth quarter or 18.1% of net sales. Adjusted operating income for the 2014 fourth quarter increased 29% to $43.1 million, as compared to $33.4 million for the 2013 fourth quarter. This increase was due primarily to higher shipment volumes.

Adjusted operating margin also improved 200 basis points to 13.4%. Adjusted EBITDA for the 2014 fourth quarter increased 18.9% to $57.3 million, as compared with $48.2 million for the 2013 fourth quarter. Adjusted EBITDA for 2014 was $183.9 million, our highest year since 2008.

Interest expense net for the 2014 fourth quarter declined $700,000 to $12 million, as compared with $12.7 million for the 2013 fourth quarter. During the 2014 fourth quarter income tax expense was $3.8 million on income before income taxes of $30 million, resulting in effective income tax rate of 12.7%. The 2014 fourth quarter tax expense was reduced by $8 million due to releasing almost all of the deferred tax valuation allowance based on our expectation of future taxable income.

Excluding this adjustment, the effective income tax rate for the 2014 fourth quarter was 39.3%. Reported net income per diluted share for the 2014 fourth quarter was $0.16 and included the tax benefit I just mentioned. Adjusted net income per diluted share for the 2014 fourth quarter improved to $0.12 from $0.08 in the 2013 fourth quarter.

The 2014 fourth quarter adjusted results exclude the differed tax valuation balance benefit of $8 million and after-tax loss on early extinguishment of debt of $600,000 and after-tax restructuring expenses of $100,000. The 2013 adjusted fourth-quarter results exclude a deferred tax valuation allowance benefit of $4.4 million and after-tax restructuring expenses of $100,000.

There was a weighted average of 162.6 million diluted shares of our common stock outstanding for the 2014 fourth quarter, compared to a weighted average of 161.2 million diluted shares outstanding for the 2013 fourth quarter.

I'll now move on to segment performance and begin with Mueller Company. Net sales for the 2014 fourth quarter increased 11.5% to $213 million, as compared with $191 million for the 2013 fourth quarter. This increase was due primarily to higher shipment volumes across most business and product lines.

Adjusted operating income for the 2014 fourth quarter improved 27.2% to $38.3 million, as compared to $30.1 for the 2013 fourth quarter. Operating adjusted income improved $8.2 million due primarily to higher shipment volumes. Adjusted operating margin for the 2014 fourth quarter improved 220 basis points to 18% as compared with15.8% in the 2013 fourth quarter.

Adjusted EBITDA up for the 2014 fourth quarter increased to $48.8 million, as compared with $41.2 million for the 2013 fourth quarter. Adjusted EBITDA margin for the quarter increased 130 basis points to 22.9%.

I'll now turn to Anvil. Net sales for the 2014 fourth quarter increased 5.4% to $107.7 million, as compared to $102.2 million for the 2013 fourth quarter. The increase resulted provide nearly from higher shipment volumes to its key end markets, oil and gas, commercial and industrial, as well as higher prices.

Adjusted operating income for the 2014 fourth quarter improved 30.2% to $16.8 million, as compared with $12.9 million for the 2013 fourth quarter. Anvil's adjusted operating margin increased to 15.6% from 12.6% for the 2013 fourth quarter. The increase in adjusted operating income and adjusted operating margin resulted primarily from higher shipment volumes and a gain on the sale of assets of $2.5 million which Greg will discuss in some detail.

Excluding this gain Anvil's adjusted operating income grew 11% and adjusted operating margin expanded over last year. Adjusted EBITDA for the 2014 fourth quarter increased to $20.4 million, as compared with $16.5 million for the 2013 fourth quarter. Adjusted EBITDA margin for the quarter was 18.9%. Corporate expenses for the 2014 fourth quarter were $12 million compared with $9.6 million for the 2013 fourth quarter.

Most of this increase was attributable to the performance units of our stock-based compensation program based on the year-over-year improvement in return on net assets. This improvement applied to awards granted in both 2013 and 2014.

Turning now to a discussion of our liquidity. Free cash flow, which is cash flows from operating activities less capital expenditures, was $75.2 million for the 2014 fourth quarter, compared to $58.7 million for the 2013 fourth quarter. Additionally, we improved a measure of working capital efficiency by 100 basis points year over year, as evaluated by trailing fourth quarter, average accounts receivable, inventory, and accounts payable as a percent of net sales.

At September 30, 2014 total debt was $545.6 million and included $365 million of 7 3/8% senior subordinated notes due 2017, $178.3 million of 8 3/4% senior unsecured notes due 2020 and $2.3 million of other. During the fourth quarter we redeemed $55 million of our 7 3/8% senior subordinated notes due 2017.

Net debt leverage was down to 2.1 times at September 30, 2014. Using September 30, 2014 data we had $158.3 million of excess availability under our asset based credit agreement.

I'll now turn the call back to Greg.

Thanks Evan. I'll now elaborate on our 2014 fourth quarter results and end markets and provide an outlook for the 2015 first quarter and a general overview of our expectations for 2015.

I'll begin with Mueller Company. Mueller Company had another quarter with strong net sales growth. Overall net sales were up 11.5% year over year. We saw net sales growth in all of our product lines, with the exception of export shipments, which declined about $3 million year over year. Our international business tends to be project based and can fluctuate from quarter to quarter.

Domestic net sales of our valves, hydrants, and brass products grew 17% in the quarter year over year. We believe this strong growth again came from both our residential and municipal end markets. In addition, distributor inventories during the quarter declined both sequentially and year over year. For the full year 2014 domestic net sales of our valves, hydrants and brass products also grew 17% year over year.

We saw 14% net sales growth in Canada, excluding the impact of unfavorable currency exchange rates. In addition net sales grew 30% at our Mueller Systems Business although it was an easier comparison. Mueller Company's overall adjusted operating income grew 27.2% in the fourth quarter year over year. This strong growth was attributable to volume increases across all our product lines.

Now let's look at Mueller Systems performance. Mueller Systems adjusted operating income improved about $3.4 million in the fourth quarter year over year due to a favorable mix and lower costs.

For the full year as well, Mueller Systems saw a mix improvement with an increase in AMI shipments. For the year net sales grew 7.2%, operating performance improved about $5 million due to cost savings and the favorable mix, making it break even for the year. Mueller Company posted an adjusted EBITDA margin of 21.3% for 2014, an improvement of 250 basis points.

The base business reported an EBITDA margin of 24.3%, an improvement of 240 basis points year over year largely driven by strong growth of our domestic core valve, hydrants, and brass products throughout the year. For 2014, Mueller Company's incremental adjusted operating income as a percent of incremental sales was 59%.

Anvil's net sales during the quarter grew year over year with improvement across both the mechanical and fire protection markets driven by non-residential construction spending. This is the first quarter in 2014 that we saw increased demand from both the mechanical and fire protection markets. The energy market also continued to remain strong with net sales up 14%.

Anvil's adjusted operating income improved 30% year over year primarily due to a gain on the sale of assets. During the fourth quarter Anvil closed on the sale of its Bloomington, Minnesota facility which resulted in the gain of $2.5 million. Anvil decided it could better serve its customers and grow its business by using independent sprinkler pipe fabricators rather than doing it in-house.

It ceased operations at this facility and sold associated production equipment and inventory. This move also enabled us to withdraw from the Company's only multi-employer pension plan.

I'll now discuss our expectations for the full year 2015 beginning with Mueller Company. We expect continued growth in net sales at Mueller Company driven primarily by both the residential construction and municipal end markets. With regard to residential construction, while housing starts are expected to grow about 10% in calendar 2014, we believe we saw stronger growth largely due to the rate of raw land development.

As you know, development of raw land for residential construction is the key driver of demand for our products. According to recent surveys by Ivy Zelman and Associates, growth in land development activity reached record highs for their survey during the quarter, with the strongest activity in the central region of the country, which includes Texas.

We expect that some of this activity will drive demand for our products in FY15. Blue Chip consensus for growth in housing starts in calendar 2015 is about 18%, and Ivy Zelman and HIS are forecasting between 15% and 20%.

On the municipal front, state and local seasonally adjusted tax receipts continue to increase and hit new highs. Municipalities, overall, are in better fiscal shape than they have been over the last several years. We saw strong growth in our municipal business in 2014, and based on discussions with our customers and distributors, we expect to continue to see growth in demand for repair and replacement of water infrastructure at the municipal level in 2015.

The CPI for water and sewage maintenance increased around 4% for the last 12 months ended August 2014. Rising water rates are a significant source of funds for municipalities to drive capital projects. Water rate increases have far outpaced those of other utilities over the last several years.

Overall for the Mueller Company based business, which excludes our metering and leak detection products and services, we expect year-over-year net sales to increase in 2015, in a range comparable to the 7.3% growth we saw in the base business in 2014. Mueller Systems is entering 2015 with a lower backlog than it had last year. We expect a number of larger AMI projects to be decided in 2015. In fact we have outstanding quotations on some of these projects today.

We expect to be successful in winning a portion of these projects based on our historical win rate for AMI projects but we do not think meaningful shipments from these projects will occur until 2016. Consequently today our expectations are for Mueller Systems net sales in 2015 to be flat.

Even with flat net sales, based on our current backlog and project pipeline, we expect Mueller systems to again improve its adjusted operating income on a year-over-year basis. We believe this improved performance will come from our cost saving initiatives as well as from an improved mix.

For our leak detection and pipe condition assessment business we continue to gain traction in both the domestic and international marketplace. As with the introduction of other new technologies into the water industry, we find that we often start with pilot projects to enable water systems to test the technology and prove the value before broader scale adoption.

During 2014 we introduced 24/7 fixed leak detection monitoring and in 2015 we expect to complete the full commercial rollout of this technology. We are also concentrating on building our international sales and distribution capabilities. As we have mentioned there is a significant market opportunity for leak detection outside of the United States. For example we most recently established independent distribution in Germany.

While we expect to see strong growth in net sales in total, we believe that the investments we need to make in our technologies and to expand our geographic presence and grow our distribution, will result in a negative net impact of around $5 million in 2015. We believe that these initiatives and investments are necessary to achieve meaningful sales growth in the future. Overall for Mueller Company, based on the current outlook for housing and municipal spending, we expect year-over-year net sales growth in 2015 in a range comparable to the 7.4% growth we saw for total Mueller Company in 2014.

On the production side we expect to continue to see the benefits of lean manufacturing and other productivity improvements. We do not expect any significant changes in our average raw material in purchase parts costs for 2015 compared to 2014.

With increased production in shipment volumes we should benefit from stronger operating leverage and see year-over-year margin expansion. Overall, we expect Mueller Company's adjusted operating income and adjusted operating margin to again increase in 2015.

Now I'll turn to Anvil. We expect Anvil to see slightly higher shipment volumes in 2015. The architectural billing index was above 50 for most of 2014 and has had strong readings from May forward, which should drive an increase in construction spending in 2015.

Most economic forecasts call for growth in 2015 for non-residential construction spending. We saw improvement in our fourth quarter non-residential construction end market and believe this level of activity will carry over into 2015.

Spending in the oil and gas markets is impacted by oil and gas prices which have been falling recently. Most forecasts have rig counts flat to slightly up in 2015 but that could change with fluctuations in oil and gas prices. Anvil sales to the oil and gas markets grew about 7% in 2014. Based on current market conditions we expect that growth could be flat or increase slightly in 2015.

We expect the benefits of lean manufacturing and other productivity improvements at Anvil to at least offset inflationary increases in production cost. Overall for Anvil year-over-year net sales are expected to grow in the low- to mid-single-digit range and adjusted operating income should grow at a greater rate.

For Mueller Water Products in 2015 we expect net sales growth in the mid- to upper-single-digits. Additionally, with increased production and shipment volumes we also expect the benefits of continued operating leverage, resulting in adjusted operating income growth and adjusted operating margin expansion. Other 2015 key variables include corporate expenses, which are expected to be $34 million to $36 million. Depreciation and amortization is expected to be $58 million to $60 million and interest expense is expected to be about $46 million.

We expect our adjusted effective income tax rate to be near 40%. Capital expenditures are expected to be $40 million to $42 million. For 2015 we expect free cash flow to be driven primarily by improved operating results.

We have substantially exhausted our federal NOLs and expect to return to being a cash taxpayer in 2015. We also expect to make only minimal cash contributions to our pension plan in 2015. As a reminder our target is for free cash flow to exceed adjusted net income.

Turning now to our outlook for the 2015 first quarter. I'll start with Mueller Company. Overall, for the first quarter we expect to continue to see growth at base Mueller Company driven primarily by demand from both residential construction and municipal spending. Recently momentum in the growth of the housing market recovery has slowed. However we still believe that, with land lot development, we are benefiting from growth in residential construction.

We also believe that we will see growth in the municipal market which held up well throughout 2014. We believe Mueller Company's net sales growth in the first quarter will be in the mid- to upper-single-digits.

We expect both Mueller Company's adjusted operating income to improve and for adjusted operating margin to expand in the first quarter year over year. We believe this improvement will primarily be driven by an increase in domestic shipments we expect for our core products.

We anticipate that Anvil's first-quarter net sales percentage growth will be up in the mid-single-digits year over year, as we expect the momentum we saw in a non-residential construction market in the fourth quarter to continue in the first order of 2015. We expect Anvil's adjusted operating income to be slightly up on a year-over-year basis and we expect adjusted operating margin to expand.

For Mueller Water Products as a whole, we believe the 2015 first quarter net sales percentage growth, will increase in the mid- to upper-single-digits year over year driven by performance at both Mueller Company and Anvil. We expect solid increases in our 2015 first quarter adjusted operating income as well as expansion in adjusted operating margin year over year.

Reflecting on 2014 we are certainly pleased with our net sales growth, conversion margin and improvement in adjusted income per diluted share to $0.30 from $0.18. Our free cash flow generation of $110.7 million enabled us to reduce our total debt outstanding and lower our net debt leverage to 2.1 times.

Additionally, in 2014 we continue to focus on enhancing value for our customers and expanding our intelligent water technology offerings with the introduction of several new products including our lead free fire hydrant; next generation gate valve, which is rated for pressures of 40% higher than competitive valves, remote pressure monitoring; and 24/7 fixed leak monitoring for both transmission and distribution mains.

We are certainly pleased with the progress that we have made and appreciate the recognition of our innovations when we received the 2014 Best Smart Water Products Solution award at the inaugural Smart Water Summit in September. We received the award for our suite of intelligent water technology solutions, which enables our 24/7 continuous leak monitoring for both distribution and transmission mains, our AMI system, including the remote disconnect meter, and our remote pressure monitoring offering. This award was voted on by water utility executives representing some of the most progressive water utilities in North America.

We appreciate that we need to continue to demonstrate traction with our newer technology products and services and generate net sales growth. However, as we continue to assess the marketplace demand for solutions that offer improved operational efficiency, enhanced customer service and value-added information; we are increasingly convinced that we are building the right suite of solutions.

As we just discussed, we believe that the outlook for our key end markets, new water infrastructure driven by residential construction, repair and replacement of existing water infrastructure for municipalities and non-residential construction, remains positive. As our capacity utilization increases we believe that we will continue to demonstrate operating leverage which leads to expanding margins and improved returns for our stockholders.

With that, operator, I will open up this call for questions.

(Operator Instructions)

Mike Wood, your line is open.

Hello, thank you. Provided a lot of detail on the prepared remarks so far. On your Mueller base business, your incremental margins, just based on the quick math and the numbers that you gave, looked like they were about 26%. It's a solid number but it's far below where it's been running. Can you give some color in terms of what impacted the incremental margin in that base business?

Sure, Mike, and good morning. As we said, including this quarter, our conversion margins for Mueller Company for the full year were 59%, so well above the 35% we typically expect. We had several factors impacting conversion margin this quarter as compared with the previous three quarters this year. First, while we saw strong growth in our domestic valves, hydrants and brass products this quarter, as I discussed 17%, that's less than what we saw last quarter at 28%. So we had a slight mix impact.

Secondly, given the increase in demand that we have seen for our hydrant product line, we were required to add a partial second shift at our Albertville hydrant manufacturing facility in the quarter. We just couldn't handle the work anymore by working additional overtime. When we're in that situation, we're just less efficient with a partial shift than we would have been if we had enough work to staff a full shift. So while the additional volume contributed to overall greater profits, the inefficiencies of a partial second shift did impact margin conversion.

Finally we had higher costs at our Echologics business as we began staffing for a number of projects that will now begin in the first quarter of FY15. We had expected some of these to begin in the fourth quarter but last year Echologics' backlog entering the year was about $1 million. This year's backlog is $5 million.

When we look at just the fourth quarter, the additional cost related to staffing and work did impact the Mueller Company's performance in the fourth quarter. Still when we look at our full year and we look at Mueller Co. with a conversion margin of 59%, certainly higher than we expect our conversion margin to be on average over time. If we look at our base business, our base business at Mueller Co. had a conversion margin of 37% and that certainly was brought down by the additional cost that I just referenced at Echologics in the quarter.

Understood, thank you. I also believe I noticed a $10 million acquisition of a business in the quarter? Can you describe what that is?

Yes. On July 1 we completed the acquisition of certain assets of Line Valve Company, it's a privately held company. We integrated it and are in the process -- it'll be integrated in our Pratt product line. The acquisition was about $10 million. Line Valve, if you look at calendar year 2013, had sales of slightly under $11 million. We think that this was a pretty nifty acquisition for us because it expands Pratt's product offering when going to water treatment facilities.

We think when we bring this product line into Pratt's distribution network that, one, we have the opportunity to grow it; but, two, it just makes us we think more competitive when bidding on water treatment plant opportunities by having a more complete line. So it was a relatively small acquisition but we think as we look at it year or two out that when we fully integrate it, bring it into Pratt distribution -- and again, as we mentioned on previous calls, we're beginning to see more and more flotation activity on the water treatment side that it's good timing and it's going to put us in a much stronger competitive position.

Okay, thank you.

Thanks, Mike.

Ryan Connors, your line is open.

Great, thank you. A few questions for me. Greg, you mentioned in your prepared remarks that distributor inventories declined in the fourth quarter both sequentially and on a year-over-year basis. What do you attribute that to and what's your read on that in terms of an indicator of underlying market strike?

Yes, good morning, Ryan. We just look at that as good news. We didn't see a concentrated effort, our distributors saying, boy, we need to bring down inventory. We typically do see it come down this time of year because we're getting ready to get into the nonconstruction -- I mean, the weather-related, maybe reduced construction activity across the US.

We interpret it as very positive because if you recall that the inventories -- that our shipments in the third quarter, inventories were up in our distribution network. The fact that our sales of our domestic valves in the hydrants and brass products still grew 17%, and distributors' inventories came down, that's just further indication to us that we're seeing a strong end-market activity.

That's good news. I wanted to also talk a little bit about this asset sale in Anvil, the Minnesota asset being divested. I know you've talked in the past, Greg, about low-cost region imports being both a risk and an opportunity for Anvil, given that you do in-source some of your own product from your overseas operations. Are we to read that as -- and you mentioned in your remarks that they're going to be sourcing elsewhere for some of what was produced in Minnesota. Are we to read that as you're shifting more of your sourcing in Anvil from low-cost regions, parts of your complex, or is that a separate issue altogether?

No, Ryan, that's separate. And thanks. Maybe our prepared remarks weren't quite as clear. This was actually a fabrication business. So it was a regional fabrication business where we would take sprinkler pipe and bend it and get it ready for a job site.

We just looked at it and said that's outside our core, it was a legacy business, we had been up in that territory for some time. We went to one of our distributors that's also a fabricator and just said we think you're probably better off doing this business, rather than us competing with our distributor. And then sold the business to our distributor.

So really it had nothing to do on the manufacturing side. It was almost an isolated operation for us where we did fabrication of bending and all of sprinkler pipe and just moved it to a distributor. Which we think in the long run might even increase demand for our products since we're no longer competing with our distributor.

Okay. That helps clarify that. While we're on the topic of low-cost region sourcing, you said in the past that that part of your business in Anvil is growing faster than domestic-sourced product. Is that still the case and what is the update there?

Yes, Ryan. When we look at it -- and it moves very -- it's a very slow movement. But I think when we look at the trend, that we certainly can come to the conclusion that, as you just mentioned, that we can see that growing at a faster rate than domestic produced. We actually -- that was happening before the downturn in the 2009-2010 timeframe. That started to leveled off. I think it levels off because a lot of times our distributors will carry an offshore- produced product and a domestic-produced product, because we have, and as we mentioned in the past, there will be locations or there will be some contractors that will only install a domestic produced. So that gives our distributors the flexibility.

Generally when we see when the market downturns, they'll manage their inventories a little more closely. If they carry only domestic produced, that gives them a little more flexibility obviously because they can sell that to either when domestic produced is required or to any application.

So to us it's an indication that if our distributors are now starting to carry a domestic produced and offshore produced, it's an indication to us that they are seeing the market pick up. But it's also -- we do think that more likely that that's a trend that we may be seeing over the next couple of years. But we don't think it's a dramatic shift but just a slow steady shift.

Got it. And then if I could sneak one in for Evan. Evan, we're well inside of a year now when the senior note is going to be callable next year in September. I just want to get your early read on the potential for cash deployment beyond that point. Obviously that's assuming that the restricted payments provisions get lifted then. Would a buyback be something that the Company would consider as one of the things that it would look at a year from now?

Good morning, Ryan. Certainly, as you know, we're limited a bit related to our senior indentures with respect to the share buyback and additional debt reduction. That has been our primary focus. But we do believe, however, we are in an opportunistic position to consider refinancing as we move closer to that first-call date of our senior notes. Breakage costs have come down, less than what they were several months ago, which contributes to some compelling economics.

Despite some recent volatility in the markets, we are hopeful that there will be a market window where we may have the ability to reduce interest expense, improve overall cash flow and gain some flexibility through a refinancing. Obviously terms of any potential refinancing remain to be seen and any transaction would be subject to favorable market conditions, among other things. We'll, of course, keep you posted of any developments in this regard

Okay, great. But just to be clear, once that's refinanced, presumably you will have more flexibility to do something like a buyback, is that not correct?

Certainly with the refinancing efforts there will be additional flexibility compared to what we have today.

Okay, super. Thanks for your time.

Thanks, Ryan.

Jerry Revich, your line is open.

Hello, good morning.

Hello, Jerry.

Can you just talk about the assumption of flat material costs next year? Are you assuming steel costs pick up in the back half of the year? I guess I would think given as steel price moves that might be a tailwind for your business at least in the first half?

Yes, Jerry. When we look at 2015 and trying to read the tea leaves and talk to our suppliers and so on, we could see some movement throughout the year. But I think generally that our conclusions are that we will see -- that we are expecting flat material costs. I would say that when we look at -- in our fourth quarter year-over-year, our scrap purchases were up 2% as a cost -- on an average price per ton; sequentially that was down. So we keep seeing some movement.

For instance, in our second-quarter they were down, flat year-over-year. So we're seeing it moving up and down. I would say that when we look at it in the fourth quarter, it was a help for us. I would expect that when we look at -- back to your point, for the first half of the year, it will be more of a help than a negative and if we see any negative it may be in the second half of the year. But overall when we look at what we see the first half of the year versus the second half of the year, right now we think it looks pretty flat

Okay, thank you for the color. And then from a pricing standpoint, can you just calibrate us on what you expect to realize compared to the list prices that are out there? I know you have had some product transitions recently as well. Can you calibrate how you're thinking about pricing for 2015 for Mueller Co.?

Yes, when we look at pricing for 2015, the price increase for valves and hydrants that we implemented in February this year, we've been realizing about [60]% of that price increase. We'll get the carry-over impact for our first -- probably our first five to six months of this year. Again, when we get in the January, February timeframe, our Mueller team will assess our cost position and the strength of the market and so on and we'll make an evaluation then relative to pricing for 2015.

But as we sit here today, we're pretty confident that we'll continue to see that 60% conversion margin on the -- conversion, sorry, realization on the price increase we implemented in February. And we probably don't start shipping at the new price until April. So that would give us six months of FY15 to get the wraparound or carryover pricing. And then our Mueller team will make the evaluation, we're probably in the process now, of starting to make the evaluation of what needs -- of what they should be doing on pricing for 2015.

Okay, thank you. In terms of the contracts that you're evaluating in Mueller Systems, or the bids that you are submitting, I should say, can you talk about just the magnitude of the opportunity if you deliver the historical win rate that you highlighted in the prepared remarks? What would that mean for book-to-bill this year or revenue growth next year for Mueller Systems? Can you frame that for us at all?

Yes, we were talking that we were seeing this year -- we're in a period for the last couple months and expect for the next several months, to see four or five major cities, and they have -- start issuing request for proposals. Much bigger cities than what we have seen the last several years. These quotations can range anywhere from $30 million to $80 million. So we're talking about significantly bigger projects, the bigger cities.

It's interesting that most of the inquiries that we've seen have included requirements beyond meter reading as part of their AMI system and we're seeing more and more requests to include leak detection in the AMI system. Of course, I don't know if any of you had the opportunity yet but we issued a press release this morning where we received an order from American Water West Virginia for our 24/7 fixed-leak detection and that will be communicated over our AMI system. This is our first order moving from the pilot stage into an actual order.

As you know, we've been talking the last several years that we've been focusing our R&D on leak detection as part of an AMI system. We think it can certainly further differentiate us in the marketplace. We believe that we have the right strategy, the right suite of products and services. We're seeing that coming through for proposal requests.

I think that, back to your point, as we progress in 2015 and expect to grow our AMI business with wins on some of these projects, that will be the validation of our strategy. So as we look at them today, that we think decisions will be made on most of these projects that were currently out for proposal or that have been quoted. But we don't believe that there will be much, if anything, shipped in 2015 and that will move into 2016.

When we look at 2015 for Mueller Systems, we look at it as a very important year in terms of what we believe order activity to be. From that activity, though, we think that most of the shipments will be in 2016 for those that win those orders.

Thank you. And can you just clarify what's been your historical win rate on these types of bids?

Well, I can tell you on these types of bids, this is the first time that we've seen, in the last couple of years, the bids to the very large systems. If we look at our win rate on AMI systems that we have quoted over the last several years, it's in the 35% to 40% range.

Thank you.

Noah Kaye, your line is open.

Thank you and congrats on a strong quarter. As you look at that guidance of about 7.5% growth in Mueller Co., I guess for next year, can you talk about the contribution you're baking in for residential construction to drive demand versus the replacement market? And how it compares to what you're seeing now?

Yes. We'll look at this year, and these are our best estimates and we've said a number of times, we get our information from our distributors, our field sales force, and so on. But we think for Mueller Co., our residential sales, or sales driven by the residential market, grew about 20% for us. And from the municipal market, about 6% for the full year.

When we look next year, we actually think that we may see little higher growth coming from municipal markets and just slightly less coming from the residential construction market. But it would still be relatively strong growth in the double-digit range. Again as we said in our prepared remarks, that based on land development activity that has been reported in the June, July, August timeframe, we think we we'll get some benefit from carryover of that activity and should drive some of our expectation for growth in demand.

So when you look at it, we're saying that we should see the same range in 2015 that we saw in 2014. We still think more of that growth will come from residential construction but we think probably a little less this year from residential construction, a little more from municipal spending

Just to be super clear, and I really appreciate the commentary, so you have 7.5%, so approximately what of the 7.5% would be ballpark residential construction?

You know, when I look at it, I'm going to say anywhere from two-thirds residential construction and maybe one-third of the growth coming from municipal spending in year-over-year growth. Of course, municipal will still be a much higher percent of Mueller's overall sales.

Sure. Absolutely, absolutely. Second, the AMI discussion, which, very interesting and appreciate all the detail. Can you talk a little bit about the existing kind of metering infrastructure in the cities where you're seeing the bids? Specifically if there's gas and electric metering? What requirements are you seeing for interoperability? How do you think you are to set up there, because I would imagine that would be a part of the consideration for some of these cities is having all of their infrastructure on the same network?

You know, that is a good question. I will tell you that the projects that I refer to are water only. That it's being run by the water utility; they have formed their own committees. They have spent quite a bit of time in getting prepared for their proposal. We're very impressed with the homework they did in what they're asking for.

We're clearly seeing that they're not only looking for meter reading today, they're looking at this system to be able to still be a valuable system six, seven years down the road and be capable of having increased functionality. So the ones I'm referring to that we are seeing are water only. We do, from time to time, see a combination of water and electric. And in the past we have partnered with an electric meter manufacturer to go after those and will depend on the particular relationship or so on with AMI system. But typically we've been going on some of the smaller water and electric systems that we've been quoting our AMI systems and we have been putting in our radios and sourcing the electric meter.

We have not yet seen a big trend of interoperability at different cities. Certainly in a lot of cases, when you go to a city, the gas utility, the electric utility could be investor owned while the city runs the water utility and the water system. We haven't seen a lot of that yet. The quotations I referenced are right now strictly water. But we have, as I said on occasion, when there's water and electric going together, we have partnered with a meter manufacturer.

Right; that's incredibly helpful. Last quick question. I think the last quarter you said for your core products, capacity utilization was around 75%. Can you tell us about where it was this past quarter?

Yes, when we look at this quarter, as I referenced, our hydro plant had to put on a second shift, although it wasn't a complete second shift, that bumped up their capacity utilization. And with our valves -- we were still, I think, in that 75% to 78% range when we look at it, especially at our valve operation.

For the full year we still think we were down slightly under 70% at Mueller Co., 65 at Anvil. And now we expect that past utilization as we enter the non-construction season to come back down.

Thank you so much. Congrats again.

Brent Thielman, your line is open.

Good morning.

Good morning, Brent.

Greg, as you're speaking with end users, what's your sense the priorities are for municipalities and particularly capital investments for utilities headed into calendar 2015? And then there's a second part to that. Is there any discussion yet in the industry about lower fuel prices, what that could mean for budgets or any of your own thoughts there?

Yes. We haven't heard -- I'll address your second part of your question first. We haven't heard any specifics -- we haven't had any specific discussion of what lower energy costs might mean for the municipalities. But certainly it has to be a plus when you think -- I think when we look at the whole state of California, I remember seeing one time a figure that said the largest use of energy in California was moving water, transporting water. So if those energy costs come down, you would think that would certainly free up their budgets somewhat.

Relative to our discussions, and I can't say that we've seen any specific trends in our discussions, other than that our field sales force reports that our municipal customers still feel very comfortable that, with their level of spending and, as I said, it gives us a confidence that we think we'll see greater demand in 2015 from the municipal market. I will say -- and this is not enough for us to make any far-reaching conclusions, but on a year-over-year basis, for instance, in our Mueller Company in our, quotes, public quotation activity, our number of quotes were up 30% year-over-year but on a dollar value it was up less than 5%.

That tells us that perhaps the utilities are now looking at some of those smaller projects that they been putting off for a while and are now finally getting to do even some of those smaller projects. But I would hasten to add that that's one quarter and that's pretty difficult for us to come to that conclusion with any certainty. But we thought it was a pretty interesting development as we looked at it in the fourth quarter on a year-over-year basis.

Thank you for that color and good luck.

Thanks, Brent.

David Rose, your line is open.

Good morning. I have a couple, hope I can dig them out quickly. First, on the incremental margins, can you provide a little bit more color on your expectations for the incrementals now that you have this second shift? And then on Anvil, if I understand it, after we strip out about the $2.5 million, your incrementals were about 28%. Are those the type of incrementals we should expect out of Anvil? And then on Mueller, what should we see?

You know, David, we are phasing out of that second shift at Mueller Co. In October as we entered our first quarter fiscal year, we were still running it but we expect to be out of that probably any day, and we think we can cover everything we need there with overtime. You know, for us we are so mix dependent and, as we've said, it can fluctuate from quarter to quarter.

We have historically said that on the Mueller Company we would expect a 35% conversion margin; at Anvil a 25% conversion margin. Certainly as we see a big shift in mix and the kind of growth rates, for instance, we saw in the third quarter at Mueller, where our domestic valves, hydrants and brass projects -- and our domestic valves and hydrants are our most profitable product -- we're going to see a higher conversion rate.

As we go into 2015, for instance, and we think we're going to see some growth in water treatment and wastewater activity, that may mean we'll see a greater growth at our Pratt business which has lower margins than our valves and hydrants and certainly can impact it. We're very impacted by mix. We feel very comfortable in a 35% conversion margin at Mueller Co. Again can point out though that with mix, as we demonstrated the last couple of quarters, it can be higher than that. And in the Anvil, the 28% to run net 25, I think we'll see it at times, it could be 18%, at times it can be 28% or 29%. But again we feel comfortable on our expectations of about a 25% conversion margin there.

Okay, thank you. On a high-level, what's your rationale for keeping Anvil?

Anvil is -- we've done a lot of work in that business. We've taken out costs. We continue to grow the margins. We've improved generally productivity, though we had a very tough second quarter this year. And we think we are at the very early stages of seeing a nice rebound in the non-construction market.

It provides very positive cash flow. That being said, I think we've always been consistent in saying that if we have opportunities to expand strategically on the water business, if we have the opportunity to get a nice international position, we can always look at where Anvil fits in our portfolio. But as we look at it today, we think that we are at the beginning of a nice rebound in its primary market and we've taken out costs out of that business. So we expect it to be a very nice performer for the next couple years.

Okay. That's helpful. Then one last one and I will get back in the queue. On Echologics, you have a lot of activity. One of your competitors just announced that Baltimore win, I'm assuming you will participate in that as well, as perhaps a subcontractor, you have -- I believe WSSC has announced that you have won that as well. I see a lot of activity. What's your bandwidth to manage that and how much of that business can you manage?

Great question. David, we think as we're -- and I referenced -- and WSSC is a great example, that we thought that project would start to begin in the fourth quarter. It's now beginning. We've started adding the staffing for that business in the third quarter. So I think we have the ability to flex our capability relative to the fieldwork and we have been adding, the last year, I would say our fixed technical people that we expect will move from project to project.

So when we look out for the next 12 months, we certainly have the capability to handle and grow that business. And we can flex our field employees and we have, we think, enough of the technical people, the engineering people in-house today. I think, though, as we start growing and expect to grow internationally, we are going to have to add more people. And some of that is in our forecast that I gave in the outlook for 2015 where I said, on a net-net basis, given that we expect to see growth in our sales at Echologics and that turning into -- giving us more profit. We're going to offset that, though, with investments in our sales infrastructure and some R&D, primarily, a lot of that focused on the international market.

So when I look at the projects that we have in the pipeline and those that we think we can win, when I look at 2015 and maybe even going into 2016, I think we have the right complement of technical people. We will be able to flex our field people. But when I look at our growth expectations on the international market, we have to add people and that's actually reflected in the outlook that I gave for 2015.

Okay. Thank you very much, I appreciate it.

Thank you.

Walter Liptak, your line is open.

Hello. Thanks for taking my question. I wanted to ask about the guidance that you gave. I think for the first quarter mid- to high-single-digit Mueller Co. and single-digit Anvil looks fine to us. I wondered what you're thinking about for the rest of the year in terms of -- second quarter should be an easy comp. I think I'd expect high single-digit, mid-single-digit again. But then on the back half, especially in Anvil it sounds like, there is more of a deceleration that you're expecting from the first half?

When we look at it, as we have said, for the full year we do think that Mueller Co. will be in the range of what we saw this year, 7.4%. And on the Anvil, we're looking -- this is our first quarter, as I pointed out, that we had both our mechanical and fire protection product lines growing year-over-year. And I would say that we think we're going to see a stronger non-res construction spending market. But we also temper that a little bit with some of the uncertainty right now that's going on in the oil and gas market with the recent drop in prices. So I think right now that we are comfortable in pegging the overall Mueller Company's net sales growth for the year to average 7.4%. And looking at Anvil, probably the mid-single-digit range.

Okay, that's fair. Can you refresh us on the oil and gas? My recollection is that is 10% to 15% of Anvil?

It's 10% of total Mueller Water Products; 20% of Anvil. So over the last couple of years that's grown nicely and, as I referenced in the prepared remarks, demand was up 7% in the oil and gas market for Anvil this year. So that's about 20% of overall revenues for Anvil.

We've been sitting -- at this time giving our outlook for the last couple of years, I think when we look at nonresidential construction, we always reference the forecast that we're calling for growth in non-res construction spending. And when we got into the middle of the year, we talked about how that didn't materialize. Again we're sitting there with the forecast of growth for non-residential construction spending.

I would say today it feels a little more solid than what it has in the past couple years. But I would say that we probably right now are sitting less confident on what's going to happen in the oil and gas market.

Okay, that sounds great. And I wanted to ask about the larger city orders that you referenced and how that would impact 2016 growth? Are you suggesting that we would see a continuation of this high- single-digit growth rate in 2016 or could we see an acceleration because of these orders?

Well, yes. We're confident, but not confident enough to call them orders yet. We're still in the quotation stage and to be decided this year. Several of these are of the magnitude that it certainly would have a material impact on year-over-year growth rate.

At this point, as I said, they're in the quotation stage and as we go through 2015, they're going to be decided. So once we have better insight there, I'll be better able to comment on 2016.

Great, thank you.

Thank you.

Seth Weber, your line is open.

Good morning; thanks for keeping the call going here. Just a couple quick tack-on questions. The $5 million negative impact that you highlighted, is that going to be front-end loaded or how should we think about that kind of flowing through the year is my first question?

Seth, that's difficult right now to be able to -- a lot of it will depend on how quickly we can hire some of the people and fill the positions that we're looking at. As we're sitting here today, I would say it may be more towards -- we might start seeing more towards the middle of the year and then working through the end. But it depends on how quickly we are able to move.

Okay, thanks. The CapEx guidance for the year of $40 million to $42 million, that would be the highest level I think it's been since 2007, 2008, something like that. Is there anything that you would call out, you're not adding any brick-and-mortar, I assume, but is there anything specifically you would call out that you haven't addressed on the call yet that we should be thinking about?

I will ask that Evan address that.

Good morning, Seth. For 2014 the capital spending was around $37 million and we did say $40 million to $42 million for 2015 is our expectation. It is higher than 2014 because we have identified two projects which improved our productivity. They have a payback of about 1 1/2 years. And so they are certainly contributing to higher capital spending. We believe the return metrics are very attractive.

Additionally, in our leak detection, as we look to expand our international offerings, capital spending will be a bit higher as well there. As a reminder, our maintenance capital spending needs were about $26 million to $27 million and the spending above that is for these projects, either cost-saving related, efficiency or new product development.

And which business categories do the two projects that you've identified fall under, the cost savings?

They fall under Mueller Company.

Mueller Co. Great, thank you, Evan. Last quarter you talked about a hiccup in the Pratt business as sort of impacting third-quarter numbers, did that get reconciled here in the fourth quarter or did that continue?

We're seeing Pratt shipments picking up. Certainly when we look at -- their backlog is up about $10 million year-over-year. They tend to -- the water treatment market tends to lag, what we see on the distribution side. Seth, we mentioned about the quotation activity being up Pratt even though sales were down. The orders coming in -- there was really no impact on the negative side from Pratt on this quarter. And we are encouraged because their backlog is up, as I said, about $10 million on a year-over-year basis.

Okay, great. Sorry, one last one. Just some clarification on your comments about the energy outlook with the Anvil business. Have you actually seen or heard a change in customer behavior around the lower oil prices or you're just sort of trying to handicap what you think may happen going forward and that's why you're being conservative -- that relates to your outcome?

It's more handicapping. We saw it actually grew 14% for Anvil in our fourth quarter and haven't seen a slowdown yet. But we're sitting here saying, gee, you would think it would have to catch up at some point. But we have not seen it from the market yet.

Terrific. That's very helpful. Thank you, guys.

Thanks, Seth.

Joe Giordano, your line is open.

Hello, guys. Apologize if this was asked already, I've kind of been bouncing around. On Anvil for the growth rate in the quarter, I just wanted to parse out how much of that was attributable to oil and gas and how much was non-res?

Yes. Joe, when we look at, on a year-over-year basis, the energy, still oil and gas, was still the largest single market, grew the greatest any of our single markets. On a year-over-year basis, it was almost 14% as I mentioned. When we look at our non-res construction, it probably was about in the 5% range so both our mechanical and fire protection grew. And as we said, that was the first time we saw demand for both of these grow on a year-over-year basis. In this quarter -- I mean in this year.

Okay, great. That does it for me. Thanks, guys.

Thank you.

David Rose, your line is open.

I can follow-up afterwards and keep the call short. Thank you.

Thank you.

And at this time I'm showing no further questions.

Again, thank you very much for your interest and looking forward to seeing you all soon.

This now concludes today's conference. Thank you for your participation. You may now disconnect.