Mueller Water Products Inc (MWA) 2016 Q1 法說會逐字稿

Welcome, and thank you for standing by.

(Operator Instructions)

Today's call is being recorded. If you have any objections, you may disconnect at this point. I'll now turn the meeting over to Ms. Martie Zakas. Ma'am, you may begin.

Good morning, everyone. Welcome to Mueller Water Products' 2016 first-quarter conference call. We issued our press release reporting results of operations for the quarter ended December 31, 2015, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com.

Discussing the first 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 1-800-756-6991. 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. Thanks for joining us today as we discuss our results for the 2016 first quarter. I'll begin with a brief overview, followed by Evan's more detailed financial report. I will then provide additional color on the quarter's results and developments in our end markets as well as our outlook for the 2016 second quarter.

We saw strong growth in sales of Mueller Company's core products and continued improvement in its operating performance. Domestic net sales of Mueller Company's valves, hydrants and brass products increased 9.2% year over year in the first quarter. Mueller Company's adjusted operating income increased 17.1%, or 250 basis points, and its adjusted EBITDA margin improved to 22.4%.

Anvil's net sales for the first quarter decreased $17.5 million year over year to $79.6 million, primarily due to low shipment volumes to the oil and gas market as we expected. While the downturn in the oil and gas markets has not yet abated, we believe year-over-year comparisons should ease through the balance of 2016.

Net sales and adjusted operating income for Mueller Technologies were each slightly lower year over year. However, backlog and projects awarded at both Mueller Systems and Echologics are up substantially.

Mueller Technologies' focus remains on accelerating growth of its higher margin AMI and leak detection technologies and improving operating performance over the course of the year. We continue to expect growth in demand for our products in our addressed water markets in 2016, driven by both municipal and residential construction spending. Adjusted net income per share for the quarter was $0.04 versus $0.03 a year ago, and we believe we are on track to meet our expectations for the full year. With that, I'll turn the call over to Evan.

Thanks, Greg, and good morning, everyone. I'll first review our first-quarter consolidated financial results and then discuss segment performance. Net sales for the 2016 first quarter of $242.7 million decreased $19.1 million, or 7.3%, from 2015 first-quarter net sales of $261.8 million, due primarily to lower shipment volumes at Anvil, the divestiture of our Canadian municipal castings business in December 2014, and unfavorable Canadian currency exchange rates.

Gross profit was $68.7 million for the 2016 first quarter compared with $71.3 million for the 2015 first quarter. Gross margin increased 110 basis points to 28.3% in the 2016 first quarter from 27.2% in the 2015 first quarter.

Selling, general and administrative expenses were lower year over year due primarily to personnel-related expenses. Selling, general and administrative expenses were $53 million in the 2016 first quarter compared with $55 million in the 2015 first quarter. Adjusted operating income for the 2016 first quarter decreased $600,000 to $15.7 million as compared with $16.3 million for the 2015 first quarter.

Although Mueller Company improved its results by $3.5 million, or 17.1%, this improvement was more than offset by a decline of $3.5 million at Anvil and $400,000 at Mueller Technologies. Adjusted EBITDA for the 2016 first quarter decreased to $28.7 million compared with $30.6 million for the 2015 first quarter.

We again experienced lower interest expense this quarter, down $3.3 million from last year. We benefited this quarter due to lower interest rates and lower amounts of debt outstanding following the refinancing we completed in November 2014. Interest expense net for the 2016 first quarter declined to $6.1 million as compared with $9.4 million for the 2015 first quarter.

Income tax expense for the 2016 first quarter, of $2.6 million, was 29.5% of income before income taxes and included a benefit of $500,000 primarily related to research and development tax credits. For the 2015 first quarter, the effective income tax rate was 38%.

Adjusted net income per diluted share improved to $0.04 for the 2016 first quarter, compared with $0.03 in the 2015 first quarter. Net income per diluted share for the 2016 first quarter was $0.04, compared with a net loss per diluted share of $0.13 in the prior year, largely due to expenses associated with our debt refinancing.

I'll now move on to segment performance, addressing each of our three reporting segments, beginning with Mueller Company. Net sales for the 2016 first quarter was essentially flat year over year. We saw a nice improvement with domestic net sales of valves, hydrants and brass products, increasing 9.2%, which was offset by $4.1 million of lower sales of Henry Pratt's water treatment valves and $3.7 million related to the divestiture of our Canadian municipal castings business and unfavorable Canadian currency exchange rates.

However, net sales from our ongoing Canadian operations were up about 10% in local currency. We experienced strong improvement in adjusted operating income, largely due to product mix. Adjusted operating income for the 2016 first quarter increased 17.1% to $24 million as compared with $20.5 million for the 2015 first quarter.

Adjusted operating margin for the 2016 first quarter improved 250 basis points to 16.6% as compared with 14.1% for the 2015 first quarter. Adjusted EBITDA for the 2016 first quarter increased to $32.4 million, compared with $30.2 million for the 2015 first quarter. And adjusted EBITDA margin for the quarter increased 160 basis points to 22.4% from 20.8% last year.

I'll now turn to Anvil. Net sales for the 2016 first quarter decreased 18% to $79.6 million as compared with $97.1 million for the 2015 first quarter. This decrease resulted from lower shipment volumes, primarily into the oil and gas markets.

Adjusted operating income for the 2016 first quarter was $3.7 million as compared with $7.2 million for the 2015 first quarter. This decline reflects lower net sales and an unfavorable shift in product mix.

I'll now conclude with Mueller Technologies. Net sales for the 2016 first quarter decreased 6.1% to $18.4 million as compared with $19.6 million for the 2015 first quarter. This decrease resulted primarily from lower shipment volumes as we transition to a greater focus on growing our higher-margin AMR and AMI product lines.

In fact, during the quarter, sales at Mueller systems declined 12.1%, but margins improved, driven by higher AMI shipments. We feel confident that Mueller Technologies' financial performance will improve meaningfully this year. Adjusted operating loss for the 2016 first quarter was $3.3 million as compared with $2.9 million for the 2015 first quarter.

Turning now to a discussion of our liquidity. Free cash flow, which is cash flows from operating activities less capital expenditures, was negative $3.8 million for the 2016 first quarter, a $30.5 million increase compared with the 2015 first quarter. Greg will discuss free cash flow for the full year, and we expect that free cash flow generation will improve year over year.

At December 31, 2015, total debt was comprised of a $485.7 million senior-secured term loan, due November 2021, and $2.3 million of other. The term loan accrues interest at a floating rate equal to LIBOR, subject to a floor of 75 basis points, plus a margin of 325 basis points. Net debt leverage was 2 times at December 31, 2015. Our excess availability under the ABL agreement was about $144 million.

I'll now turn the call back to Greg.

Thanks, Evan. I'll now provide summary comments on our 2016 first-quarter results and end markets, and provide an overview of our expectations and outlook for the second quarter and full year. I'll begin with Mueller Company. We were pleased with the 9.2% growth in domestic sales of valves, hydrants and brass products, which was driven by both residential construction and municipal spending.

As we noted, net sales of Henry Pratt's water treatment valves declined in the quarter. A substantial portion of this business can be choppy depending on the timing of projects in its backlog. As you may recall, we pointed out on our last call that sales of Henry Pratt's water treatment valves were very strong into 2015 fourth quarter and we expected to see a drop-off, both sequentially and year over year, in the 2016 first quarter.

Mueller Company's net sales, during the first quarter, were also impacted by unfavorable changes in Canadian currency exchange rates. We will also remind you that starting with our 2016 second quarter, we will no longer have a negative comparison due to the divestiture of our Canadian municipal castings business, since that transaction closed in December 2014.

Mueller Company again delivered impressive operating performance. Higher shipment volumes, a favorable mix of higher-margin products, lower raw material costs, and improved operating efficiencies helped drive a 250 basis-points improvement in adjusted operating margin. Looking at our last 12 months, Mueller Company's adjusted EBITDA margin was 26.5%, 190 basis-points improvement from the prior trailing 12-month period.

Turning now to Anvil. As expected, sales into the oil and gas markets declined approximately 65% in the first quarter. Anvil sales into these markets have generally correlated with rig counts, which were also down approximately 65% year over year in the first quarter.

Overall, Anvil's net sales outside of the oil and gas markets were down, although results varied by end market. Sales into fire protection were up, but this increase was offset by lower industrial sales. Anvil's adjusted operating income declined $3.5 million in the first quarter. The impact of lower shipment volumes was partially offset by cost reductions and lower raw material costs.

At Mueller Technologies, first-quarter net sales declined primarily due to lower shipments. Shipments at Mueller Systems declined $2.1 million during the quarter, primarily due to a decline in shipments of our visual read and AMR meters. AMI shipments grew $2.6 million, an increase of more than 50%. Our strategy is to focus on the AMI segment of meter-systems market, and we are encouraged with our progress.

Mueller Systems is beginning to benefit from its recent introduction of new longer-range radio capabilities, which, among other things, lower the cost of investment for end users. Echologics' net sales increased over 20% compared to the prior year as our fixed-leak detection technology continues to gain traction in the market.

Mueller Technologies' adjusted operating loss of $3.3 million for the first quarter was $400,000 higher from the prior year, primarily due to higher spending at Echologics associated with investments in business development. Higher margins at Mueller systems, from increased AMI shipments, partially offset the higher spending at Echologics.

Turning now to our outlook for the 2016 second quarter, I'll begin with Mueller Company. Mueller Company has announced valve and hydrant price increase for both the US and Canadian markets. A 7% price increase in the US is effective as of February 12, and a 10% increase in Canada was effective February 1.

We saw a significant pull forward of orders last year, ahead of the effective date of the price increase, a large number of which shipped in the second quarter. We anticipate a pull forward of order dollars similar to last year. With this in mind, we expect low- to mid-single digit percentage growth in domestic shipments of valves, hydrants and brass products in the second quarter on a year-over-year basis.

This growth is expected to be partially offset by lower shipment of water treatment valves and unfavorable Canadian currency exchange rates. Overall, Mueller Company's net sales for the second quarter are expected to increase only slightly compared to the prior year. We also expect Mueller Company's adjusted operating income for the second quarter to slightly improve compared to the prior year.

Turning now to Anvil. Net sales for the second quarter are expected to be essentially flat compared to the prior year. While we expect a 40% decline in shipments into the oil and gas markets, we expect this decline will be offset by higher shipments to other markets. The expected decline in shipments into the oil and gas market is less than the declines we have seen in the past several quarters.

We expect Anvil's adjusted operating income for the second quarter will be essentially flat compared to the prior year. Anvil should benefit from cost reductions it has implemented and from lower raw material costs, but these benefits should [be] offset by any unfavorable product mix.

At Mueller Technologies, net sales for the second quarter should be slightly lower compared to the prior year. However, we expect to continue to see year-over-year growth of our AMI systems. We expect Mueller Technologies' adjusted operating loss will improve slightly in the second quarter, as it should benefit from a more favorable product mix. Mueller Systems began the second quarter with higher year-over-year AMI backlog and projects awarded, and Echologics has a greater number of projects under contract compared to the prior year.

For the 2016 full year, key variables include corporate expenses, which are expected to be $36 million to $38 million; depreciation and amortization, which is expected to be $55 million to $57 million; and interest expense, which is expected to be $23 million to $25 million. We expect our adjusted effective income tax rate to be 36% to 38% and capital expenditures to be $38 million to $40 million.

We expect 2016 free cash flow to be driven by improved operating results and an improvement in working capital. We also expect to make only minimal cash contributions to our pension plans. Our target is for free cash flow to exceed adjusted net income, and we expect free cash flow to be higher than in 2015.

Domestic sales of Mueller Company's valves, hydrants and brass products grew over 9% in the first quarter, and we remain confident in our full-year expectation that we will continue to see growth in demand from our addressed residential construction and municipal markets. In addition, we believe sales of Mueller Company's domestic valves, hydrants and brass products will grow in the high-single digits in the second half of the year, due to growth in end-market demand.

Additionally, Mueller Company should have easier comparisons for these products in the second half of the year, in light of the excessive rain certain parts of the country experienced in May and June of 2015, which negatively impacted construction activity. Also, as we mentioned, the backlog and projects awarded at Mueller Technologies are up nicely as we shift to a higher-margin mix of AMI orders. Most of that backlog remains on schedule to ship in the second half of the year.

We expect Mueller Technologies to show year-over-year net sales growth of about 10% to 15% and for its adjusted operating income to improve about $7 million to $10 million. Finally, we believe Anvil will see easier comparisons in the second half of the year for sales into the oil and gas markets. Consequently, our outlook for Mueller Water Products for the full year remains unchanged.

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

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

And our first question comes from the line of Mike Wood from Macquarie Security Group.

Hi, good morning. Just hoping you can confirm what you said about that price increase in February. Was that, the 7% and 12% price increase, is that for 2016 and are you implying that the pre buy would be a negative impact because it will be less than the pre buy that occurred last year?

Yes, Mike, 7% on valves and hydrants effective February, 12th, and 10% in Canada effective February 1. Actually, what we're implying, is we think that we'll probably see about the same order dollar value that we saw last year. Our expectation is that the distributors will generally not want to, at least knowingly, carry higher inventory levels than they did at the end of the second quarter last year entering the construction season.

As we said in our prepared remarks, we saw a significant year-over-year increase in the bookings ahead of our price increase last year. So when we look at it, we think it's probably unreasonable for us to expect that they would even bring in sales or bring in valves and hydrants that would give them a higher level of inventory. We think what they had last year probably is what the max that they want to have entering the construction season.

So that's why we said that when we look at valves and hydrants for our shipments, for the second quarter domestically, we're seeing that into the low- to mid-single digits. But as we also said, we believe, that in our outlook that we believe our distributors will be able to -- will turn that inventory a lot quicker this year, because last year a number of them were impacted by the heavy rains in May and June. That certainly curtailed construction activity.

Okay. And just the guidance for the next quarter of up slightly, Mueller Co., that's less than what you had said for the full year, mid-single digits. I'm just trying to understand what causes the quarter to be at a lower run rate than your full year?

What causes the lower run rate certainly is, we think that we're not going to ship a whole lot more in the second quarter this year than what we did last year because of the significant pull forward that we saw last year. We expect a similar pull forward this year.

However, when we get to the second half of the year, one, we think there's stronger market growth than we had last year. Two, if you take into account the impact of the rain, as I mentioned, and the curtailment of construction activity, that inventory is going to turn a lot quicker and we're going to replace that inventory in the third and fourth quarter.

So in essence, we're saying that, hey, if you look at what we shipped last year and we're shipping, in the second quarter, we're shipping this going into inventory, because in most parts of the country, there's just not a lot of construction activity. We're shipping probably just about a max that distributors will want to carry going into the construction period. We just think that's going to turn a whole lot quicker this year than it did last year.

Okay. You'll have the favorable comps against the destock as well, I guess.

That's what we think, yes.

The other question, now it looks like you're on a forward basis. You're under two times net leverage. I've got to imagine, just given your muni more stable business exposure you can add at least another turn of debt, maybe $200 million or more. I'm just curious what your views are in terms of your urgency of deploying that capital, how ripe is your pipeline and if you're more likely to invest in technology businesses or more traditional businesses?

Great question. As you point out, our net debt leverage is down to two times plus given our outlook and our expectations for the business, we expect to see greater cash flow generation this year than what we did last year. I think if we see an acquisition that's a good strategic fit, we would certainly evaluate it. We are particularly interested in expanding in water infrastructure, both I think in terms of the breadth and depth of products and services and we would look at emerging technologies also.

So right now I couldn't say, hey, we would rather do it in more traditional products, we would rather do it in our emerging technologies. It all depends on the opportunity. We said it's probably unlikely that we could add to our gate valve and our hydrant product line, but if we have the opportunity to add to our valve product line to give us a broader product line going into water treatment, we think that, that's certainly an opportunity. On the other hand, if we see an opportunity that makes sense on leak detection and/or on our AMI technology, I think that, that would be something that we would consider, take a very close look at.

And then we have other options. We've always said in the past calls that our first alternative is to find ways to grow the business. If we find that acquisitions, that we don't have acquisition opportunities that are value enhancing for our shareholders, then we'll look at other options for the cash that we're generating. But certainly, with our current net debt leverage, and given the cash flow that we expect to generate in this fiscal year, we have a lot more flexibility.

Thank you.

Thank you, Mike.

Our next question comes from the line of Kevin Maczka from BB&T Capital Markets.

Thanks, good morning.

Good morning, Kevin.

Greg, a couple questions on tech. I guess with the news the other day that the American water contract went to a competitor, can you just address that? I think that may have been an AMR product that you were de-emphasizing anyway. It's lower margin than your AMI. I'm just wondering, was that all contemplated in your initial guidance? Was that a surprise or was that an intentional de-emphasizing of a product?

Thanks, Kevin. As you pointed out, over the past three years Mueller systems has provided meters and what we refer to, and American Water refers to, as meter interface units or radios. Over the last two years, that's been, on average, about $26 million in revenue for Mueller systems. That breaks down roughly about 55% of those revenues were in meters, about 45% of those in radios.

Since August of 2015, American water has been engaged in a new RFP process for the next 3 years. This is our understanding of the status of the RFP based on information we've received directly from American Water. First, American Water informed us that it is -- its intent to no longer purchase integrated meters and radio units.

It appears that American Water is positioning itself and it's positioning its metering and infrastructure so it has the ability to migrate over time from lower functionality AMR or drive-by radio communication to true two-way AMI functionality in the most cost-effective manner. Second, we understand American Water has awarded the meter portion of the new RFP. We understand several meter manufacturers will provide meters to American Water going forward. But we will not be providing American Water with meters going forward, other than our remote disconnect meters.

We decided not to chase the meter portion of the new contract. As we've discussed on previous calls and, as you've pointed out, we are focusing on growing our meter interface business primarily our more profitable AMI business. We've seen a clear uptick in our AMI business over the past few months and, given a limited production capacity, we want to focus on the portfolio of products that is most important to the future of the industry.

Which brings me to the third point. Our best information is that the meter interface or radio portion of the new American Water contract has not been awarded. We're in contract negotiations with American Water. We are optimistic we will continue to have a relationship with American Water for metering systems that is beneficial to both companies. Given that we are in negotiations, we won't be able to comment further on this until there's a definitive update.

In the meantime, our AMR and AMR radios continue to be approved by American Water for purchase among its utilities as well as our remote disconnect meters.

In fact, several American Water utilities are utilizing our remote disconnect meters with both AMR and AMI radios. American Water also utilizes our fixed-leak detection system where our AMI radio technology is a key component. This is our long range two-way communication system that enables leak detection and other monitoring and meter data to be communicated over the same AMI network.

On the radio side, working with American Water, we understand the challenges a large water utility faces, both from a business case and implementation perspective in migrating from AMR to AMI. With input from large utilities, we have developed a unique AMI solution that addresses these challenges which we will plan to introduce on a larger scale within the next six months.

The full-year outlook we provided on our last call, and reconfirmed on this call, takes into account our transition with American Water. As I said, American Water started the RFP process for its next 3-year meter agreement in August of 2015. During this process, our sales of meters and radios to American Water were $300,000 in the first quarter, compared to about $6.5 million last year. We were able to offset about half of this difference through higher AMI sales.

As we look to the second half of the year, given our backlog of AMI projects and their scheduled delivery dates, we expect to see improved financial performance at Mueller Technologies. As you pointed out, and you put in your question, we have been preparing for this transition. We began taking out overhead costs last quarter.

On a year-over-year basis, headcount at Mueller Systems is down 20%. We've begun to reconfigure our manufacturing operations. We have more to do, but we expect to realize more of the benefits of these actions in the second half of the year. So as we sit here today, especially in the context of the American water contract, we feel pretty confident that we can make up for the loss of any American Water business with increased AMI sales.

Got it. I appreciate all that additional detail. A couple of follow-ups on what you just said, Greg. The first half in Mueller Tech, sales are going to be down, but you still feel like you have good visibility with your backlog and shipment timing such that the full year can be plus 10% to 15%. Because, again, after a negative first half, it seems like a pretty high bar.

As we sit here today, at Mueller Systems, our backlog's up about 58% on our AMIs. And, as we said today, that given the schedules of those projects and we've mentioned on a number of times on our previous calls that they can flip. They can flip a couple months, we can move it from one quarter to the next quarter or from one fiscal year to the next fiscal year.

But as we look at that backlog today, the schedule of that backlog, that gives us our confidence on being able to see the 10% to 15% uptick, the increase that we recognize. And that's what the mix really drives the $7 million to $10 million operating-income improvement. We recognize the hurdle that it potentially creates, but as we look at our backlog, the projects that we continue to quote, as we sit here today, that we think we can offset, not only offset the loss of the meter portion of American Water, but also grow our overall revenue.

Got it. Just one last one from me on this topic. First, you said 58% increase in your backlog? And second, you just addressed, you mentioned introducing the longer-range radios.

Yes.

Where are you in your product development effort there on the AMI side? Are you to the point where you feel like you have a best-in-class product offering? Is that why you're winning more business and showing this big backlog growth? We do. We think the utility has -- they'll have a decision, whether or not that, based on their topography and so on, if they go to we'll say a fixed network that is where it's, the receivers, the radios are perhaps mounted on towers or on communication towers or water towers. In that case, there's other technology we think is better than ours. However, in a number of applications that we think the mesh technology is the better choice. Today, we think we are -- we have the best choice both for large and small utilities.

What's important is, some of our wins recently have come from smaller utilities where our previous technology was just too costly. The infrastructure was too complex. We needed much larger infrastructure than what we do today. So, yes, we introduced that in June last year, and I think that's what's contributed in the July, August and September time frame to our winning of orders and our building of backlog.

So we think, as we sit here today, we do have a technology that puts us in a much stronger competitive position in the AMI market. We've also worked on this technology and, what I referenced in our prepared remarks is, we see utilities that maybe are not quite ready to make the full scale investment in AMI but are looking to position themselves to make an easier transition. And we're calling that an almost AMI-light type of radio that would act, that in the short term, that would have the same functionality as an AMR radio, but then could be moved to AMI.

So, yes, we think that over the last couple years as we've learned more about technology, we've made some investments in the R&D side. We've talked in the last, on our last call or last several calls, the LoRa technology has made this available, made this possible. And we think we're a lot better positioned today than we were certainly at this time a year ago.

Great. Thanks for all detail.

Thank you, Kevin.

Our next question comes from the line of Seth Weber from RBC Capital Markets.

Good morning, everybody.

Hi, Seth, good morning.

First question is a big picture question, Greg. I'm wondering if you heard anything on the municipal front, as far as fallout related to the Flint, Michigan situation, whether you've heard anything about municipalities either delaying projects, reallocating CapEx or if there's anything that you've been hearing through your checks.

Thanks, Seth, good question. We'll look at it both in the short term and intermediate term. On the short term, we haven't heard too much of having a material impact on utility plans. That being said, we think some utilities could switch, maybe some projects that were planned to other projects.

Generally, in our discussions with our end users in the water utility, once they have their budget approved, and they're in the middle of that cycle right now, they want to spend that money. So we do expect that they could in some cases decide hey, until they learn a little more, they may postpone one project; but we expect that they'll put that money into another project in upgrading their infrastructure.

On a more intermediate term, that we think that in situations like the one in Flint, it just gets the media attention and it gives greater visibility to the deteriorating condition of water infrastructure around the country. We've quoted in the past that the EPA estimates that $384 billion of additional investment in drinking water infrastructure is needed through 2030. So we believe these types of events are catalysts for increased spending as the public becomes more aware of the issues.

In fact, when we talk more specifically about Flint, about six months ago they contacted our Echologics group to come in and do a -- perform a condition assessment on certain pipe in their system. So I think, relative in the short term, we don't expect to see a material impact as we've had discussions with others.

That's not to say that you may see a project here or there that's delayed. And again, I think that most of the response has been, hey, our budgets are approved. We may shift it from one project to the next as they learn a little more. So in the short term, we think very little in the long term, we think just making the issues aware to the public is going to make, I think, funding that much more readily available.

That makes sense. Thank you. And then I guess just more specifically on the business, on Anvil in particular, you reaffirmed the outlook for the year. You're starting in a pretty deep hole here. I'm just wondering what you see. It sounds like you're kind of expecting a pretty big hockey stick here in the back half of the year. I recognize comps get easier on the oil and gas side, but are you expecting the fire protection business or industrial or maybe just give us some color where you think the strength comes from you outside of oil and gas.

When we look at the second quarter, we've always -- as we talk about our business, about 10% of our business, historically, has come from a product area of engineered, we call it our engineered pipe supports or engineered hangers. We were awarded, last year, a nuclear plant that's being built in Thailand. We were awarded those engineered pipe supports. We'll be shipping that in the second quarter. So that certainly helps us make up a little bit of what we saw in the downfall in oil and gas.

Secondly, when we looked at the first quarter, our fire protection orders or revenue was up about 5% year over year. I said Thailand. It's Taiwan, sorry. But as I said, our fire protection revenues were up about 5% year over year. However, we were disappointed because we saw our mechanical actually down and some of that, or most of that, was because we saw a falloff in the industrial segment which we think was affected still by oil and gas, that we think general industry in the US, that those pegs will go deep on the oil and gas market and it does impact manufacturing in a lot of areas and we saw a downturn in industrial spending.

When we look at the second quarter and the impact the rest of the of half, certainly we think the project in Taiwan helps make up some of that downfall. We do see positive momentum on the fire protection side. I would say right here, as we sit here today, still some questions on how much impact on the mechanical side.

When we look at those, all those factors right now, we feel comfortable. And I think a big help will be when we get to the second half of the year, the comparisons do become easier, and we don't expect to see anywhere near the drop-off in the oil and gas.

When we look at the full year, the forecast for Anvil, what could change that, our expectations or the guidance we gave is, are we going to see a continued falloff on our industrial side or our mechanical business? Right now, I think that's a question mark.

Thank you. If I could just ask one other quick one. On the Technology's business, it sounds like you should end the year at about a low $30 million run rate for revenue, maybe a little higher. Would you expect to be profitable at that revenue level?

I'm sorry, Seth, would you repeat that? You're talking about for the quarter, $30 million?

Yes, your run rate coming out of the fourth quarter for the Technology's business is --

Yes, obviously, it will always be lumpy depending on what percent of our revenue comes from AMI. But at a $30 million level, especially with what we expect in AMI, that business would be profitable.

Okay. Terrific. Thank you very much.

Thank you.

Our next question comes from the line of Brent Thielman from D.A. Davidson.

Good morning.

Good morning.

I've just got a quick question here. On the treatment of valve products, really, how do we think about the impact to margins from lower sales this quarter? Did it really help you guys out in the margin front?

I'm sorry, I wonder if you could maybe just speak a little louder and repeat the question.

Basically did lower sales numbers help you out on the margin front, on segment margins?

For Mueller Co?

Yes.

Actually, what helped us out there is we had our Pratt, as we talked about our Pratt business, which is our treatment valve, it was down year over year. That certainly is a lower margin product than our valves and hydrants, and our valves and hydrants had nice 9% growth. So that is a much richer mix for us.

We'll have much higher conversion margins when we have a stronger mix of our valves and hydrants. So that certainly was one of the drivers for our improved year-over-year performance, as well as just some of our efficiencies and our manufacturing improvements that we always focus on, as well as overall lower raw material costs.

All right. And also, just one quick one here. Really for Mueller Co., what portion of the product portfolio are you seeing favorable price-cost tailwinds?

Well, we're seeing, we're certainly seeing favorable price cost tailwinds on our valves and hydrants and our brass products. And, I would I say, that certainly when we look at our water treatment products, those sometimes can be large projects that go out for quotation and the pricing can vary project by project. We're seeing positives there in that business, also, from lower raw material costs. But depending on the project, may not see as much benefit from pricing.

All right. Thank you.

Thank you.

Our next question comes from the line of Walter Liptak from Seaport global.

Hi, thanks, guys.

Good morning, Walt.

Good morning. I wanted to ask about the oil and gas business now that you got more than a year of declines under your belt. If you could size the business for us, how much is it down now on a 12-month basis and maybe talk about cost reduction, too. Is it a very high breakeven level for it, et cetera.

Yes, Walt. Let me go into a little bit of history. If we look back in 2014, it was about 7% total Mueller Water product sales or about $80 million. We look at our FY15, that's down to 4% of our sales or about $50 million. We saw about a $30 million decline in 2015 over 2014.

Certainly we talked about the decline we saw at Anvil this year -- I mean this quarter, sorry, it was over about $12 million. I'm rounding that around $12 million. And we expect another further decline at Anvil in the fourth quarter. So, if you look at 2014, when that market was stable and where it's running today, it's down from probably about on an annual basis. $80 million to about $35 million. So it's obviously down substantially.

If this market is, at least on a year-over-year basis stable, for the second half of the year, we should be around that level of sales on an annualized basis. But we have been taking cost reductions throughout the last several quarters. Our headcount in Anvil, in total, is down over 11% from a year ago, but most of that headcount has come out of our oil and gas-related businesses, about 50% to 60% head headcount in our manufacturing facilities, in those facilities that manufacture oil and gas-related products.

When we look at SG&A, especially on the selling side, we have a very small sales force that focuses on this product. I'd say four or five salespeople. We really don't want to touch those. We still think it's important to maintain relationships, because history has told us when this market comes back, it comes back very quickly. And we want to maintain those relationships.

I would say any further manufacturing activity, let me say any reduction in cost on the manufacturing side would be, we would have to close or combine factories. And right now, and I think I said this on one of our previous calls, the only option for us right now would be move that factory, those factories from Texas up to the Northeast. And that doesn't make sense to manufacture oil and gas products in the Northeast. But I'd say right now that we've probably taken most of the cost reduction actions that we can.

Okay. Good. I appreciate the answer. Thank you.

Thank you.

Our next question comes from the line of Joe Giordano from Cowen and Company.

This is Tristan for Joe this morning.

Hi.

Hi. I believe this is the second quarter in a row that we don't see any buybacks. Is there any reason for this?

You point out that we did not purchase shares. We still have remaining Board authorization for about $45 million of share repurchases. At this point, we have not implemented a formulaic repurchasing plan. Rather, we are approaching it quarter by quarter as we consider all capital allocation options. But we are evaluating if we should put in place a 10B51 plan. If we do so, we will disclose that when we do so.

Perfect. Thank you, guys.

Thank you.

And our next question comes from the line of Seth Weber from RBC Capital Markets.

Hi. Sorry. Just a quick follow-up for Evan. Is it possible to give us the impact from currency to both revenue and operating income?

Yes. Seth, it's really related to Canadian currency and on the revenue side, it's roughly about $2 million in the quarter and just a little over $0.5 million on the operating income side.

Perfect. Thank you, Eric. Thanks very much.

Thanks, Seth. Well, I think we've gone about an hour, so we will end the call. We are available in our office, as always, for any additional questions. So, again, thanks for your interest in Mueller Water Products.

Thank you, speakers. And that concludes today's conference. Thank you all for participating, and you may now disconnect.