Mueller Water Products Inc (MWA) 2015 Q2 法說會逐字稿

Welcome and thank you all for standing by.

(Operator Instructions)

This call is being recorded. If you have any objections, you may disconnect at this point. Now I would like to turn the call over to Ms. Martie Zakas. Thank you. Ma'am, you may begin.

Thank you, Ray, and good morning, everyone. Welcome to Mueller Water Products 2015 second-quarter conference call. We issued our press release, reporting results of operations, for the quarter ended March 31, 2015, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com.

Mueller Water Products had 160.8 million shares of common stock outstanding at March 31, 2015. Discussing the second quarter's 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 requirements.

At this time, please refer to slide 2. This slide identifies certain non-GAAP financial measures referenced in our press release, on our slides, and on this call, and discloses the reasons why we believe that 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 3 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 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. Our fiscal year ends on September 30. A replay of this morning's call will be available for 30 days after the call at 1-800-396-1242. 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'll now turn the call over to Greg.

Thanks, Martie. Thank you for joining us today as we discuss our results for the 2015 second quarter. I will begin with a brief overview of the quarter, 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 third quarter and the full year.

Our overall results in the second quarter came in about as we expected. We experienced strong net sales growth in our primary end markets, but were faced with harsh winter weather-related expenses, a continuing decline in the oil and gas market, and unfavorable Canadian currency exchange rates. Sales to our primary water markets continue to grow as Mueller Company's domestic net sales of valve, hydrants, and brass products increased approximately 12% this quarter compared with the prior year. We saw growth in demand for our products from both the residential construction and municipal markets.

Anvil's net sales declined 5.9% in second quarter compared with the prior year. We experienced growth of about 6% from sales into the non-residential construction market. However, this growth was more than offset by an approximately 40% decline in sales to the oil and gas market. With that, I will turn the call over to Evan.

Thanks, Greg, and good morning, everyone. I'll first review our second quarter's consolidated financial results and then discuss segment performance. Net sales for the 2015 second quarter of $290.3 million increased $2.2 million, about 1% for the 2014 second quarter's net sales of $288.1 million, due primarily to higher domestic shipments of valves, hydrants, and brass products, partially offset by reduced volumes of products sold to the oil and gas market and metering products. We were also unfavorably impacted by Canadian currency exchange rates.

Gross profit and gross margin were both essentially flat. Gross profit was 2015 second quarter was $82.1 million compared with $82.2 million in the 2014 second quarter. Gross margin for the 2015 second quarter was 28.3% compared with 28.5% in the 2014 second quarter. Adjusted operating income for the 2015 second quarter decreased 6.1% to $26.3 million, compared with $28 million for the 2014 second-quarter.

Gross profit and adjusted operating income benefited from higher domestic shipments volumes of valves, hydrants, and brass products, higher shipments of Anvil products into non-residential construction market, and higher sales pricing at Mueller Company and Anvil. This year's adjusted operating income was negatively impacted by Anvil's lower sales into the oil and gas market, approximately $1 million of higher costs associated with the unplanned plant closures at Mueller Company due to weather, and a $1.2 million unfavorable impact associated with Canadian currency exchange rates.

Selling, general, and administrative expenses were higher year-over-year, which included investment in our leak detection and pipe conditions assessment businesses. Selling, general, and administrative expenses $55.8 million in 2015's second quarter, or 19.2% of net sales. Adjusted operating margin decreased 60 basis points to 9.1% for the 2015 second quarter.

Adjusted EBITDA for the 2015 second quarter decreased to $40.7 million compared with $41.8 million in the 2014 second-quarter. Trailing 12-month adjusted EBITDA was $184.6 million. We also benefited from lower interest expense in the quarter due to lower interest rates and lower amounts of debt outstanding following the refinancing that we completed in the 2015 first quarter. Interest expense net for the 2015 second quarter declined $6.4 million to $6.1 million compared with $12.5 million for the 2014 second quarter. Income tax expense for 2015 second quarter of $7.2 million on income before income taxes of $19.5 million resulted in an effective income tax rate of 36.9%. This compares to an effective income tax rate of 24.2% for the 2014 second-quarter.

Net income per diluted share for the 2015 second quarter increased to $0.08 compared with $0.06 in the prior year, and adjusted net income per diluted share increased to $0.08 from $0.07. There was weighted average of 163.3 million shares of our common stock outstanding for the 2015 second quarter compared with 161.9 million shares outstanding for the 2014 second-quarter.

I'll now move on to segment performance and begin with Mueller Company. Net sales for the 2015 second quarter increased 4.1% to $199.2 million, compared with $191.3 million for the 2014 second quarter. Domestic net sales of valves, hydrants, and brass products increased about 12% due to growth in demand from both the residential construction and municipal markets. These higher sales were partially offset primarily by lower shipping volumes of Mueller products. Net sales were also negatively impacted by $1.7 million due to unfavorable Canadian currency exchange rates. Adjusted operating income of $27.8 million for the 2015 second quarter was flat with the 2014 second quarter.

In our base Mueller Company business, which excludes metering, leak detection, and pipe condition assessment technologies, adjusted operating income improved $3.7 million, largely due to higher shipment volumes of domestic valves, hydrants, and brass products. This improvement was offset by lower shipment volumes of metering products, harsh winter weather-related expenses of approximately $1 million, the unfavorable impact of Canadian currency exchange rates of about $1 million, and investments in technology and business development in our leak detection and pipe condition assessment business. The harsh weather-related issues resulted in two plants experiencing a total of six shutdown days. Although we were able to meet most of our deliveries, we incurred higher costs due to overtime and the unplanned shutdown.

Adjusted operating margin of 14% for the 2015 second quarter declined slightly from 14.5% for the 2014 second quarter. Adjusted EBITDA for the 2015 second quarter increased to $38.5 million compared with $37.9 million for the 2014 second-quarter. Adjusted EBITDA margins for the quarter decreased 50 basis points to 19.3%.

I'll now turn to Anvil. Net sales for the 2015 second quarter decreased 5.9% to $91.1 million, compared with $96.8 million for the 2014 second quarter. During the quarter, we saw mixed results from Anvil. We believe we saw growth of approximately 6% into the non-residential construction market this quarter. However, this growth was more than offset by an approximately 40% decline in net sales to the oil and gas market. As a reminder, in FY14, net sales to Anvil's addressed oil and gas market were about 20% of Anvil's net sales and less than 7% of Mueller Water Products' consolidated net sales.

Adjusted operating income for the 2015 second quarter was $7.4 million compared with $8.6 million for the 2014 second quarter. Adjusted operating margin decreased to 8.1% from 8.9% for the 2014 second quarter. The decrease in adjusted operating income and adjusted operating margin resulted from this quarter's product, as previously discussed. Adjusted EBITDA for the 2015 second quarter was $11 million compared with $12.2 million for the 2014 second-quarter. Adjusted EBITDA margin for the 2015 second quarter was 12.1% compared with 12.6% for the 2014 second quarter. Corporate expenses for the 2015 second quarter were $8.9 million compared with $8.4 million for the 2014 second quarter.

Turning now to our discussion of our liquidity. Free cash flow, which is a cash flows from operating activities less capital expenditures, was negative $21.6 million for the 2015 second quarter compared to positive $600,000 for the 2014 second quarter. The year-over-year change was driven primarily by an increase in inventory, due mostly to an effort to spread production more evenly between periods in anticipation of the upcoming construction season at Mueller Company, and in the 2015 second quarter, net sales were weighted more towards the end of quarter, which impacted the timing of receipts.

We continue to focus on working capital management and efficiency by lower the level of working capital needed for sales. The quarter-ending average of accounts receivable, inventories, and accounts payable compared with net sales over the past four quarters declined by about 70 basis points compared with a year ago. At March 31, 2015, total debt was comprised of a $496.4 million senior secured term loan due 2021, $15 million outstanding under our ABL agreement, and $2.1 million of other. The term loan accrues interest at a floating rate equal to LIBOR, subject to a floor of 75 basis points, plus 325 basis points.

In April, we entered into a forward-starting interest rate swap arrangement to effectively fix the interest rate on $150 million of term loan borrowings at about 5.6% beginning September 30, 2016 and ending on September 30, 2021. Net debt leverage was 2.6 times at March 31, 2015. Using March 31, 2015 data, we had $172.8 million of excess availability under the ABL agreement. I will now turn the call back to Greg.

Thanks, Evan. During the second quarter, we were very pleased and encouraged by the pull forward of orders that we saw at Mueller Company in relation to the valve and hydrant price increase we implemented in mid-February. We estimate that orders our distributors placed ahead of the effective price increase date were up 18% year-over-year, and up 11% for the quarter. This activity supports our belief that our distributors expect to see strong growth in the second half this year. As we mentioned earlier, even though Mueller Company's plans were closed for a total of six days in the quarter due to weather, we were able to maintain our delivery promises.

Also during the quarter, three major cities elected to install our fixed leak detection technology as part of the program of the National Institute of Standards and Technology, or NIST, that is designed to promote smart cities. Water loss and energy are key focus areas of this program. Participant in this program include AT&T, IBM, among others. Echologics' fixed leak detection technology was selected to be utilized for this program.

Two of these cities, including Las Vegas, have begun piloting our fixed leak detection technology, and one city is scheduled to begin its pilot shortly. We are pleased to be participating in this smart cities program, and to start demonstrating more broadly, the effectiveness of our fixed leak detection technology. We continue to see long-term potential with leak detection and pipe condition assessment, especially outside of the United States. As mentioned before, we are investing in technology and business development to better pursue these opportunities.

Also during the quarter, as we mentioned earlier, we continued to see growth in sales of Anvil's products that go into the non-residential construction market. It looks as if the rebound in this market is taking hold. We saw further deterioration of Anvil's sales into the oil and gas market. We estimate sales of these products were down approximately 40% in the second quarter. During our last earnings call, we noted that we experienced a 25% reduction in demand for these products from mid-December to the end of January.

Rig counts are now down 50% year-over-year, which indicates we may see further deterioration in sales into these markets. For Mueller Systems, we continue to have outstanding quotations on several large AMI projects, and we expect to win some of these projects. However, these utilities have extended their timeline for awarding these projects.

I will now provide additional color on our second-quarter performance. Net sales at Mueller Co's base business, which excludes meter, leak detection, and pipe condition assessment technologies, were up about 7%. This increase was driven in large part by domestic shipment of valves, hydrants, and brass products, which increased 12%. We also saw strong growth in sales of our water treatment valves. Additionally, we saw growth in valves and hydrant shipments in Canada, although we were affected by unfavorable Canadian currency exchange rates. For our metering products and systems, as expected, year-over-year net sales declined in the second quarter, largely due to the tough comparison we had relative to the timing of a large project last year.

Mueller Company's adjusted operating income was flat year-over-year, and adjusted operating margin declined 50 basis points. However, Mueller Company's base business, which again, excludes metering, leak detection, and pipe condition assessment technologies, showed a 13.5% improvement in adjusted operating income, and adjusted operating margins improved 100 basis points to 18.1%. This strong growth in the base business was driven by domestic shipments of valves, hydrants, and brass products, although partially offset by the impact of our unplanned plant shutdowns and foreign currency exchange rates, as Evan described. The outlook for our macro drivers supports our expectation that we will continue to see growth in our key water end markets.

Forecast for growth in housing starts in calendar 2015 now average about 14%. This growth rate is slightly lower than what was forecast several months ago, but still much higher than the 8.7% growth in calendar 2014. It is also important to note improved housing construction also helps bolster the health of municipalities and water systems, as local governments benefit from increased property taxes, as well as connection fees and other ancillary fees associated with residential and non-residential construction. State and local seasonally adjusted tax receipts continue to increase, and the CPI for water and sewage rates increased 3.9% over the 12 months ended March of 2015.

Turning now to our outlook for the 2015 third quarter. I will start with Mueller Company. For our base business, which excludes metering, leak detection, and pipe condition assessment technologies, we expect net sales percentage growth to be comparable to what we achieved in the second quarter. This growth is expected to be driven primarily by domestic demand for our valve, hydrants, and brass products from both the residential construction and municipal markets. We expect Mueller Systems' net sales to be roughly flat year-over-year. In total, we expect Mueller Company's net sales percentage growth to be in the mid-single-digits with sales of valves, hydrants, and brass products growing at a higher rate.

When looking at adjusted operating income for Mueller Company in total, we expect adjusted operating income to increase, driven by higher sales of valves, hydrants, and brass products. We expect this increase to be offset in part by additional investments in technology and business development activity related to leak detection and pipe condition assessment, and continued adverse impacts of unfavorable Canadian currency exchange rates. In total, we expect adjusted operating margin could be flat year-over-year.

Moving to Anvil, while we expect Anvil's sales into the non-residential construction market to continue to grow, we expect Anvil's total net sales to decline year-over-year, as previously discussed. We expect Anvil's adjusted operating income to be down in the third quarter year-over-year, due in part to negative impacts from product mix. Anvil's oil and gas products are domestically manufactured, so we tend to realize higher margins from sales of those products. Although we expect adjusted operating income to be down in the third quarter, margins should be up slightly. For Mueller Water Products, as a whole in the third quarter, we expect net sales will be up only slightly due to declines at Anvil. Adjusted operating income and adjusted operating margin should increase year-over-year due to improved performance at Mueller Company. Additionally, we will also benefit from lower interest expense year-over-year.

I will now provide an update on our outlook for 2015. We expect that our consolidated performance for the full year will be comparable to what we outlined on our last earnings call. However, based on developments since our last earnings call, we think we may see a further drop off in net sales and operating income at Anvil, as well as a possible drop at Mueller systems, although we believe that any of these declines will be offset by improved performance at our Mueller base business.

At our Mueller base business, we continue to expect year-over-year net sales to increase in a range comparable to the 7.3% growth we saw in 2014. However, we expect domestic net sales of valves, hydrants, and brass products to grow at a higher rate, driven by demand from the residential construction and municipal markets. However, total net sales growth at Mueller Company could be slightly less than the growth we saw last year due to potential delays in the awarding of project orders for Mueller Systems.

We expect Mueller Company's adjusted operating income and adjusted operating margin to increase in 2015 compared with 2014, as we expect to benefit from a favorable mix of our higher-margin valves, hydrants, and brass products. We expect Anvil's net sales to be lower in 2015 on a year-over-year basis. We also expect adjusted operating income and adjusted operating margin will be lower in 2015, excluding the non-recurring $2.5 million gain we recorded in the fourth quarter of 2014. As we look at the full year, we expect that the growth in non-residential construction will not be sufficient to offset the decline in the oil and gas markets.

For Mueller Water Products as a whole in 2015, we expect net sales growth in the low single-digits, with stronger growth at Mueller Company offset by a decline at Anvil. On a year-over-year basis, we expect higher growth in adjusted operating income and adjusted operating margin compared to 2014 due to a more favorable product mix. So again, in total, we expect full-year profit performance to be consistent with the outlook we presented last quarter. We believe any potential deterioration at Anvil and Mueller Systems will be offset by a stronger mix at Mueller Company.

I will now highlight other 2015 key variables. Corporate expenses are expected to be $34 million to $36 million. Depreciation and amortization are expected to be $58 million to $60 million. Interest expense is expected to be about $27 million to $28 million. Our adjusted effective income tax rate is expected to be 37% to 39%. Capital expenditures are expected to be $36 million to $38 million. For 2015, we expect free cash flow to be driven primarily by improved operating results and lower interest payments, offset by cash income tax payments, as we have substantially exhausted our federal NOLs. We expect 2015 income tax payments to approximate our reported income tax expense for the year. We also expect to make only minimal cash contributions to our pension plans in 2015. Our expectation is for free cash flow to exceed adjusted net income.

Subsequent to the end of the quarter, we announced an increase in our quarterly dividend. We also announced yesterday that our Board of Directors has authorized a share repurchase program for up to $50 million of our outstanding common stock. The stock repurchase program is part of a disciplined capital allocation strategy that seeks to enhance the value delivered to our shareholders by investing in both organic and external growth opportunities, as well as returning cash to stockholders through dividends, and with this program, repurchasing outstanding shares. This program reflects confidence in our strong financial position, long-term business strategy, and growth prospects.

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

(Operator Instructions)

Mike Wood.

Good job managing to several headwinds this quarter. First, just would like your thoughts in terms of how Mueller's business might be impacted by the drought in California and other states. I understand there's a bill in the Senate there that requires the municipalities to conduct annual water loss audits and reduce leaks; so, wondering if you're seeing any of that opportunity come yet?

Mike, good morning. Right now, we think that California could affect us in a couple of ways. We think, in the long term, probably more positive than negative. In the very short term, we are seeing more and more talk about -- it would be very difficult for builders to get permits to build new housing, so as not to deplete the water supply any further. But as we think longer term, we do think there's probably more opportunity.

Interestingly, in the last quarter we have had two major cities in California sign contracts to do pilots for our fixed-leak detection. I think that this certainly ties in to -- they're possibly getting prepared to be able to perform these water audits, and to be able to report -- I think that also part of that is obviously to report on what they are losing -- what they are potentially losing.

So, I think that when we look at where our technology is evolving on the leak detection, both from a fixed standpoint, as well as pipeline condition assessment, and the other fieldwork that we do, we think that there is -- we think that this represents the real opportunity. As I said, in the last 90 days we had two major cities sign contracts with pilot technology, and we have appointments from several other cities in California that want to come in and talk specifically about our leak detection.

So, when you look at the -- over the $7 billion that was approved in November, I think by a vote of 2 to 1, by the voters in California to have money available to spend to upgrade water infrastructure, we think that our suite of products that we have, and the technology, that this will be a benefit for us; probably not something that we would be able to point to substantially in 2015. As I've said, I think that the technology that may be most applicable to the situation out there -- we're going into the pilot phase, but it's very encouraging that we now have these major cities wanting to do these pilots.

Great. And then, have you seen yet or entered into that rush of projects coming to bid on the advanced metering side -- any early indications of success, particularly on the large city projects there?

As we said in our prepared comments, when we go back about nine months ago, we had, I'd say, a nice uptick in the number of large projects for AMI that we quoted, some of those including fixed-leak detection, and of course, that's where we've been spending a fair amount of our R&D money.

Unfortunately, none of those have been decided. And quite frankly, we are past the point where, four or five months ago, we thought they would have made a decision. So, from our perspective, we haven't lost any of those -- little disappointed that the process is taking as long as it is. But we still are optimistic that we will win some of those, but nothing specific that we can report as of now.

Thanks. And final question for me: The buyback authorization -- any indication how quickly you might use that? And is this part of an ongoing capital return strategy, even after this authorization is complete?

Mike, I think it is part of an ongoing program. Certainly, when we look at it, initially, we think the repurchase of stock could be used to offset any dilution from our stock compensation program. At this juncture, we don't anticipate implementing a formulaic repurchasing plan.

We will approach it on a quarter-by-quarter basis, as we consider all capital allocation options. But given the confidence that we feel with our balance sheet, given the confidence that we feel relative where the direction and demand is going for our end markets, our Board authorized us -- we said that, to look at repurchasing stock as, again, an option for our capital allocation -- how we allocate capital. And we will obviously disclose any activity in this program in our quarterly reports to the SEC.

Great, thank you.

Thanks, Mike.

Noah Kaye.

Thanks so much, and nice job on the quarter. If we could first touch on the pull-forward that you mentioned in the base business for valves and hydrants? Is your expectation now -- it probably is implied by the guidance -- but is your expectation now that any drag after the price increase, as distributors have stocked up in advanced, has that been worked through now? Do we expect to see, for this next quarter and for the rest of the year, a normalized growth rate? Maybe you could just touch on that a bit?

Yes, Noah, in fact, when we look at our distributor inventory, as we exited this quarter for our Mueller business, inventories were up at our distributors year over year. They typically will hold between 30 and 45 days; and we think a number of them were approaching 60 days -- a combination of that.

Some of our distributors, obviously, in the northeast saw delays in construction due to the weather. But I do think that we believe it is indicative of -- as we said in our prepared remarks -- that our distributors are pretty bullish about the activity they expect to see in the next couple of quarters.

So, we would expect, in the April time period, that some of this inventory would have to move out before we start seeing replacement orders. Our orders in April -- when we look at valves and hydrants -- actually are up slightly year over year. So, we think that that is positive, especially since they went into the quarter with additional -- with higher inventory levels.

We will have to see how it plays out. It could have an impact, depending on how quickly they move it. But right now, we think it will smooth out during the quarter, and we should not see a disruption to our orders and shipments.

Okay, great. The next question: In the past quarters, you've commented on where capacity utilization is at, in your core product lines -- valves and hydrants. Can you give us an update where that was this quarter?

In the second quarter, in our Mueller business, we were about 70%. Anvil probably slightly under 65%. There may have been even a slight drop in our capacity utilization because of the slowdown in our plants that -- the manufactured products that go into the oil and gas market.

So, when we look, on a year-over-year basis, we used more of our capacity in the second quarter of this year at Mueller than we did last year. And, as I said, about 70%, and we think slightly under 65% at Anvil.

Does that -- as you look in relation to your forecast for Anvil for the rest of the year, does that continue to be the case? Obviously, rig counts are where they are. Do you think you maintain that utilization level throughout the rest of the year, or do you see that ticking up?

As I look at it, I think that there is a chance that, in aggregate, our capacity utilization may go up at Anvil because we do expect to continue to see growth in demand from the non-res construction. But I would say, right now, looking at it, it probably will be around that capacity utilization rate for the rest of the year. It could be up slightly, but pretty difficult to tell right now.

Okay. And finally, I think I ask this every other quarter or so, but where are you seeing opportunities right now, from a technology addition or a lateral addition, on the water technology front? What areas are really getting your focus right now?

I would say that we're getting -- as Mike asked in the initial -- in the very first question -- we're seeing more and more cities -- we're having discussions with more and more cities, and seeing a greater interest in piloting our fixed-leak detection technology. Most of this right now has been driven on the transmission line side, but we're also moving into distribution.

Our first big order from American Water in West Virginia on the distribution side -- we're just about finished installing that. And so I think when we look at the -- California especially -- we've seen much more interest, but across the country, too. We're also focused outside -- increased our focus outside the US. Part of the higher SG&A costs that Evan referenced are due to some of the sales resources and business development resources we've added outside the United States.

We are particularly very bullish about the opportunities that we could have in the UK. As we've said on previous calls, the UK seems to be much further along in monitoring leak detection. And in fact, applying penalties to water systems whose leakage rates start to increase, and they set certain targets -- having more and more discussion in France.

And in fact, we just received some initial results from a nice project that we were awarded in Malaysia. The good news, for us, is that we started finding some leaks that they were unaware of, and that is good news for them, though I'm sure they're disappointed they had those leaks. So, I would say we're seeing more and more interest in fixed-leak detection, both domestically -- and I would say that, as compared to six months ago, we are having more discussions and getting more interest internationally.

Okay, thanks so much. Nice job on the quarter.

Thank you.

Ryan Connors.

Great, thank you for taking my question. First, Greg, just wanted to ask you about the California situation. You mentioned the longer-term aspects of this, and how it will obviously spur some investment and opportunity. But in the near term, is this -- you talked last quarter about some headwinds in the southwest on the residential side.

I wonder whether that's -- in the short term, this isn't as much of a headwind as a tailwind, given the negative impact it could have on new home construction. There's been some talk about lack of water availability and tough problems getting zoning for new water resources for new development, things like that. Can you talk about the shorter-term ramifications of that situation?

Sure, the best I can, Ryan. Just to put last quarter in perspective, we still saw growth in our west region last year. It was -- though the growth was less than what we had forecasted.

Actually, in this quarter, we saw our greatest growth for our valves, hydrants and brass shipment dollars, of any of our regions in the US. It was up 20% year over year. So, that was back to more of a rate that we expected to see last quarter, but we came in, I think, around 5%, 6%.

As I mentioned earlier, our hypothesis is: In the very short term, it could be a bit of a -- we could see a bit of a slowdown in the growth rate we have been seeing in the west if, in fact, we start seeing a cutback in housing developments due to water availability. We don't have enough visibility to say: Hey, in the next six months, how much of an impact this may be.

I'm not familiar enough to know if land that's already under development, where they have gotten the permitting, and haven't put our equipment in yet, if that is going through, and it could be an impact maybe three or four quarters down the road. But I think that there is that possibility in California that we could see, in the very short term, a little bit of a cutback in land development for residential developments. But I think that we're still in a wait-and-see mode.

I know that the builders are countering, saying that the homes that they are building today are so much more water efficient, and it would be a mistake not to add. That may be a good argument. We'll see how successful it is. But I think in the short term, and probably not in the next six months I don't think, but it could be a bit of a negative if the builders don't get permits to put in new housing developments.

Great; those are some good points.

Over on the Anvil side, this oil and gas issue, I just wonder if you can expand on it, just because I'm trying to understand what has happened in the last few months. I know you talked about a 25% decline rate in orders on the last conference call. And if I recall correctly, part of what you were saying was that some of that was due to inventory destocking, and so that it might have actually overstated the decline in end-user demand.

So, we were a little taken aback by the sticker shock on the 40% decline. If you could give us any color you can on what happened -- how much of that is destocking versus end-user demand, and at what point we might see stabilization there?

Just to go back, what we said -- on our call -- last earnings call, we talked about the 25% decline. Specifically, we said that from mid-December through the end of January, we saw a 25% decline in our shipments from Anvil into oil and gas. And we said if that continues, here's the kind of impact it would have on us. I'm sorry if that was taken as a forecast because, at that point, we sure were not in a position, and we are not in a position now to forecast what's going to happen in the oil and gas business in general, and I'm not sure that many are, that are in a position to forecast what's going to happen in oil and gas.

But what happened is -- if we look at the last quarter, rig counts dropped -- they are down now about 50% to 55% on a year-over-year basis. We correlate -- or demand for our products correlate reasonably well with rig counts -- and because when they are putting in the new wells and start production, that is when demand for our products -- that's what drives demand for our products. So, in fact, the 40% we saw for the quarter -- if we look at our March orders and our March shipments and month-to-date in April, we're down about that 50% range. So, we are correlating with the rig counts.

Okay, great. That is helpful.

And then just one last one for me, if I could? On the leak detection business, taking that global -- I think it makes a lot of sense, and it's strategically compelling. Can you give us any more granularity on that program and that investment program -- what exactly those investments entail? Is it sales, distribution? What exactly those investments are, and what specific regions you're targeting, and maybe the magnitude of the dollar spend on those things?

Yes, when you look that we are targeting, and at a point where, if we look at both -- in North America, Europe and Asia, we're looking to double the size of our sales force for business development people. And to put that in perspective, we are looking to increase from 12 full-time dedicated people to 25. A lot of that spending has -- we've already hired a number of those people, and we're now seeing the expense of those people hitting us on a year-over-year basis. But we think that we are locating them in markets that have, we think, a real need and a positive disposition to using the latest leak detection. The UK was one that I referenced a little earlier.

On technology development, we look like we are spending probably in the range of $1.5 million to possibly $2 million more this year. Most of this is focused on our fixed-leak detection technology for both domestic and international markets. A lot of that is on the -- in addition to, I'd say, the core technology on the acoustical technology, but probably more on how we communicate that data and extend battery life and be able to operate on frequencies around the world.

It's really -- adding our number of salespeople will help us across the board, from our field pipe leak -- our leak detection that we do in the field -- from our field pipe condition assessment, and also promoting our fixed-leak detection. And more on the development side, R&D -- it's more on further developing our fixed-leak detection -- taking what we're learning from these initial pilots, and incorporating what we learn to that into the technology. And as we've said, we think that, in total, that will impact us by about $5 million year over year.

Okay, great. That's exciting stuff. We look forward to hearing more about it in the future. Thanks for your time.

Thanks, Ryan.

David Rose.

Good morning. Thank you for taking my call. A couple of questions -- one is just housekeeping: What was the net earnings drag from the Anvil LNG decline? Would you ballpark it?

If we look at our Anvil business on a year-over-year basis, our operating income declined by about $1.2 million, and that was about $2.4 million down from volume. We saw a 6% increase in non-residential construction, which is roughly about 80% of Anvil revenues. And then for the other 20%, which is oil- and gas-related, we saw a decline of about 40%.

I will say that the margin difference between our non-res, and oil and gas, business is about 800 basis points. For the non-residential business, we manufacture domestically, as well as source from offshore. But our oil and gas business -- it's all domestically manufactured product, and so we do experience a higher margin of about 800 basis points.

Okay. I will back into the number then, but that is helpful.

And then, how many production days would you estimate that you lost last year due to weather?

Actually, we did not lose any production days last year. Our production that we lost this year was in the southeast -- actually, five in Chattanooga, Tennessee; one in Albertville, Alabama. We thought that was a pretty valid year-over-year comparison.

We didn't make an attempt to try to determine how much revenue we may have lost year-over-year because certainly we know that there was a revenue impact last year also. And we think that this year -- that the weather impact from a revenue standpoint probably impacted Mueller Systems and Echologics more than it did Mueller, because Mueller did make shipments to our distributors.

Okay. That is helpful.

And then lastly, if we can go over to Echologics again, can you maybe just touch upon maybe the significance of the relationship with the Las Vegas Water Center of Excellence?

Yes. We're very excited about that relationship because, as we look around the country, Las Vegas seems to be -- would say one of those early technology adopters. They certainly -- they have tested, we think, a number of leak detection technologies. They tested our technology for some time before they made the commitment that they did.

Plus, we think that Las Vegas -- the water authority there and the water people are very proactive, and looked at as leaders. So, we think that what they do can influence not only other utilities in the United States, but also water systems outside the US. It's been a longer-term relationship. They have been one of the first to test a number of our leak detection technologies, both from our fieldwork and the fixed-leak detection. And we're pretty excited because, again, I think they are generally viewed as being much more proactive in addressing and applying new technologies into managing their system.

Do you have any other clients similar to Las Vegas that we might be seeing soon?

Yes, as we mentioned in our prepared remarks about the National Institute of Technology's smart city program, Las Vegas was one of those cities that are participating with our leak detection. There were two other major cities that -- one, we have already installed the pilot; the other, I think, is being installed this week. A lot of those results are expected to be made public in June. So, I think that we will be able to talk specifically about what those cities are doing. And as I said that we are getting more and more inquiries about the fixed-leak detection, and hopefully we will be able to -- we will have permission to share with everyone what those cities are doing.

Okay, great. Thank you, Greg.

Thank you.

Kevin Bennett.

Good morning, everybody. Greg, I wanted to dig in on metering a little bit, if I could? Can you potentially quantify the decline in sales in the second quarter?

Yes, Kevin. On a year-over-year basis, sales were approximately down about $4 million -- somewhere between $3.5 million and $4 million. A lot of that was due certainly to, as you'll recall, the big projects that we had in Mississippi. We were in full shipment mode in the second quarter of last year to that project; and as we sit here today, we don't have a project of that size to replace it, though we have several quotations outstanding for projects larger than that one.

Got you. Then, are we still -- I think last quarter you talked about -- you were looking for 20% growth in the back half of this year. Is that still a good number, or is it probably a little bit lower than that?

I would say right now that's cloudy. Our 20% -- when we were on our earnings call three months ago, we knew what projects, what quotations we had outstanding. And at that time, based on the best information we had, we had an estimate as what time that those projects would have been awarded. On some of those, or at least one of those large ones, we expected it to be awarded during this last quarter. It was not; so, that is being stretched somewhat. So, our shipments, the second half of this year -- to get any real growth in our shipments, we will have to be awarded and be able to start shipping those.

So, our outlook right now is for our full-year shipments to be flat, as I said, for the full year; though we would still expect to see greater shipments in the second half -- shipment growth second half year over year, while on the first half of this year we had a decline. But the 20% growth, I think, it depends on our being awarded these to be able to start shipping. And I think that if we don't get -- if these aren't awarded in the next six to eight weeks, then we probably won't have time to be able to ship them this year.

Sure, that makes sense.

And then, Greg, can you remind us about the big contract you have with American Water for meters? When does that come up for renewal? And then, how is that business going? Last quarter, we talked about how they were potentially pushing out some of the meters, but just an update on that?

That project -- that arrangement runs through the end of this calendar year. At this point, we don't know if it will just be extended, or how they will handle that. I think the push-out we saw, I would say, this time last year, we believe, based on the order pattern that we've seen, now that we are in the construction season, so far in April and March, that they are back to procuring or releasing what they have historically.

So, we think that that business should play out as we expect for the rest of the year. And some time between now and we think the end of this calendar year, we will have a handle on whether or not the current contract or the current arrangement will be extended, or how they will handle that. But the arrangement runs through the end of this calendar year.

Great, thanks for that.

Then, last question for me, moving to Anvil, and more specifically the non-res piece, you said we had 6% growth in the quarter. I was wondering if you could elaborate on that a bit, maybe talking about different verticals or different geographies that you're seeing strength in, or is it a broad-based recovery, or still spotty?

I would say that we didn't see anything that would suggest one region is stronger than the other. But when we look at it, our fire protection shipments were up over 9%, and our mechanical just slightly under 5%. So, that fire protection goes through, obviously, a number of verticals, from warehouses to high-rise buildings. I would say that what we can interpret it is that we probably saw more of the traditional non-residential construction, and less industrial construction, because we tend to see a bigger spike in our demand for our mechanical product when it is driven by industrial spending versus, I'd say, the more traditional non-residential.

So, Kevin, I'm not sure if that gives much help -- tough for us to say anything regionally. But we saw even a greater increase in our fire protection product than we did on the mechanical side.

No, that is great. That's all I had. Thank you.

Thank you.

Thank you.

Joe Giordano.

Hi, guys. Thanks for taking the question. Quick, on Mueller Co., when you talked about the 12% in hydrants and valves and brass products -- can you maybe parse that out price versus volume? And I was wondering what kind of impacts you're seeing on the cost side -- lower raw materials?

Yes, Joe. On the volume side, it was -- and again, it was probably in the volume side in the 8%, 9%; and the rest of that would have been pricing.

And then, when you take a look at raw materials, we are seeing lower purchase prices for scrap steel and brass ingot. However, we are seeing our purchase component cost being slightly higher. So, overall, net for raw material and purchase components, which account for about 50% of cost of goods sold for Mueller Company, I would say, in looking at it from a full-year perspective, maybe a slight tailwind. But the significant tailwind from scrap steel and brass ingot a little bit eroded due to the purchase component cost being higher.

Okay, that makes sense.

Then just a question on California, just to build on what we've been talking about: The decline that you are looking at potentially in new residential construction -- how much of that do you think can be offset by increased spending at the municipality level to combat some of this?

Just to put it in perspective -- right now, when we look at our next couple of quarter or our outlook here, we don't think we'll see a decline. We think that there is certainly more and more discussion that could creep into the six months, but it's a little more speculation right now.

And that's a good question -- when you look at the $7 billion that was approved by the voters, a lot of that obviously going to -- maybe some new infrastructure, but a lot of it is to repair and replace the existing infrastructure. But looking at it right now, we could say, if it plays out this way and builders are unable to get permits to put in new developments, we're pretty confident, given the money that has been approved, and the need and the focus on reducing leakage rates and upgrading the existing infrastructure, that demand for those products could, in fact, offset it. But right now, it would be premature for us to, I would say, make that specific comment, because we're still learning on what is happening out there.

Great. Thanks a lot, guys.

Thank you.

Walter Liptak.

Hi. Thank you. Wanted to ask about the Anvil business with exposure to oil and gas, and specifically, I think you've addressed the volume part of it pretty well, but I think a lot of these companies that they sell to are also trying to get prices down. I wonder what your view is of price; and if there's more deterioration, what's the breakdown of price versus [volume]?

I would say we really have not seen price deterioration yet, but it would be reasonable to expect that we could. Right now, we're not forecasting it. We have not seen it. But I think certainly, when you get into markets like this, those types of -- you start seeing some negative movement on pricing.

Okay, got it. Thank you.

And then, just a follow-up on the weather issue during the quarter. I'm not 100% sure on how we should be taking the six days where you had unplanned shutdown. It sounds like you maintained deliveries, so you didn't lose revenue; or is there some revenue that pushed out into this quarter?

No, I think that that is right. I think that we really didn't lose revenue, because we wanted to make sure -- as I said, we made our delivery promises, so distributors had it in inventory entering the construction season. I think the impact we saw was in the -- we earned less margin in the second quarter than what we would have expected on that revenue because of the unabsorbed overhead when the plants were shut down, as well as the overtime that we had to work in order to make those shipments. So, while we don't think that that impact flows into -- any way into Q3 -- we think that we saw the impact in Q2, and it impacted somewhat on our margins.

Okay, thank you.

Thank you.

Seth Weber.

Thanks, good morning, and thanks for extending the call.

Sure; morning, Seth.

I just wanted to go back to the Systems and Echologics business. The path to profitability -- it seems like it was not EBITDA-positive this quarter. Is that correct? And are you still expecting that to be EBITDA-positive this year?

And then, bigger picture, as you make a lot of these investments, can you just talk about how we should think about the trajectory of the margin for that business going forward? It sounds like maybe the cost and the investment is a little bit higher than where I was thinking it would be 6 or 12 months ago. Does that change the ramp on the margin that you see ultimately getting to?

Yes. I have to break down the answer by Systems and Echologics. Let me talk about -- because the investment that we pointed out going into this year is really all on the Echologics side. We did a lot of work on looking at the leak detection market -- the global leak detection market about a year ago. And looking at outside sources -- they sized this market around the world somewhere around $1 billion, $1.1 billion. I think that we have some debate, but -- if that is the exact number -- but anyhow, it's pretty big, given that we had $10 million to $12 million in sales last year. So, we think there is a lot of upside.

As we look at the leak detection market -- in the leak detection market, we've seen no clear leader. In fact, we've seen no technology taking a clear lead. Some are putting meters at two different points, and they are measuring what the water loss between those points, but then they have no idea where they're losing that.

So, Seth, from that trajectory, I'm going to say that, right now, that we're certainly in the investment phase in 2015. We think when we get in 2016, that we're going to generate more revenue. We think a lot of those investments will be behind us.

But I would expect right now that Echologics could be breakeven to slightly positive in 2016. And it is beyond that, that I would expect to see this business really ramping as we make the inroads in international markets, as well as domestic markets. And what gives us confidence that we do see this ramping up is the pilots that, for instance, on the two major cities in California in the last several weeks that have signed contracts to do the pilots.

Mueller Systems, I think we are in a different place. Mueller Systems, we have developed [a lot of the technology that invested], so we're not really investing that much in the R&D and business development on Mueller Systems. I think at Mueller Systems where we are is we need additional volume and we need the additional volume on the AMI because that is our higher-margin product. And if you look at -- we said, if we look nine months ago, we've seen a nice pick-up in our quotation activity, and we are bullish about winning several of those large projects.

I think that as what we said earlier on our call, 90 days ago we would've thought we would have been at least awarded one of those, and start shipping those in 2015. I think right now that that is cloudy, and we may not. For us to be profitable at the operating income line for Mueller Systems this year, we will need to win at least one of those. We will know in the next six to eight weeks whether or not we have a chance of doing that.

On Mueller Systems, again, when we look at beyond 2015, that we expect these projects to be awarded, and we will start seeing some pretty significant upturn in the performance of that business. We're still, as we've said the last couple of years, that we think in three or five years that business can be anywhere between $130 million and $160 million in revenue. Last year, we were about $95 million in revenue. And when we get to that $130 million to $160 million, we think that we can be in the 20% EBITDA margin for that business.

That was a long-winded answer. This year, for us to be EBITDA-positive on these combined businesses, will be based on what happens, we think, in the next six months on these major projects. Relative when we look out at the next several years, we think that both of them should provide some very nice growth for us.

Okay, that was actually very helpful. Thank you.

And then, just going back to the three pilot cities that you have going -- are those single sourced, and can you just -- what is the expectation on timing? I'm just trying to get some more color. I think you mentioned maybe June there would be some feedback to you. Is the expectation then it goes out to another RFP, or is that basically just revert back to you to get a contract going forward?

Let me go back. We have more than three cities right now doing pilots. What we referred to in our prepared remarks is that this is a program that's being spearheaded by the National Institute of Standards and Technologies out of Washington, DC. IBM, AT&T -- I think GE Lighting was selected to participate on the energy side. We were selected to participate on the water loss side.

So, this is a very specific pilot where a number of cities are participating. All of them are participating on leak detection; some are doing it on the lighting, some are doing it on leak detection. And then there will be a report out by the National Institute -- by NIST -- on what they found on smart cities.

So, that is -- I will say that is one group of pilots. I would suspect, since those pilots at that time will have only been going on for about three or four months with these cities, that they will continue to run those pilots for a few more months before they make a decision on what they want to -- on how they want to move forward.

I don't want any confusion. The one we referenced on those three cities was part of a much bigger program -- a smart city program -- and our technology was selected to be part of that. As I said, we are running other pilots.

I can put it in perspective that, for instance, at American Water, we received our first big order for distribution leak detection in October of 2014. We had been running the pilot there for six, seven months.

So, I would say that when we look at our pilots that we have installed, that it will probably -- those pilots will run through the end of our fiscal year. And then I would suspect that we would start seeing that some cities -- it will vary -- some cities may go out for an RFP. Some cities will say: Okay, here's what I want to monitor; what is the cost to do that?

Right now, I would say it is a little more speculative. But what I can say is that the feedback that we've received from our pilots is those that are participating are pretty impressed with the technology, and we're finding leaks that they were unaware of. But it's going to be a -- I would say, as I said earlier in my answer, that I don't think this is a big growth for us that we are going to see in 2016, but we sure think we are putting in the foundation. We will see growth in 2016, and we would expect we'd start seeing much greater growth in 2017 and beyond.

Okay. That is terrific. Thank you very much.

Thanks, Seth.

Thank you. At this time, there are no further questions.

That concludes today's call. Thank you for your interest in Mueller Water Products and for joining us this morning.

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.