Mueller Water Products Inc (MWA) 2017 Q2 法說會逐字稿

Welcome, and thank you for standing by. (Operator Instructions) This call is being recorded. If you have any objections, you may disconnect at this time.

I'll be turning the call over to your speaker to Ms. Martie Zakas. You may begin.

Good morning, everyone. Welcome to Mueller Water Products 2017 Second Quarter Conference Call. We issued our press release reporting results of operations for the quarter ended March 31, 2017, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com.

Discussing the second quarter's results this morning are Scott Hall, our 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 non-GAAP disclosure requirements and forward-looking statements. 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 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. As a reminder, we sold Anvil in January, 2017. As a result, Anvil's operating results for all prior periods and the gain from its sale have been classified as discontinued operations. We filed a Form 8-K on February 21, which included the reclassified 2016 results by quarter.

During this call, all references to a specific year or quarter, unless specified otherwise, refer to our fiscal year, which ends on September 30. A replay of this morning's call will be available for 30 days at 1 (800) 867-1928. 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.

I'll now turn the call over to Scott.

Thanks, Martie, and good morning. Thanks for joining us today, as we discuss our results for the 2017 second quarter. On the last call, I had only been at Mueller for about a week. It has been a busy period since then. I have enjoyed meeting many of you at conferences, in meetings and by phone. It has also been an important time to meet the many talented people across Mueller.

I'll begin our discussion this morning of the quarter with a brief overview followed by Evan's more detailed financial report. I'll then provide additional color on the quarter's results and developments in our end markets as well as our outlook for the 2017 third quarter and full year.

Overall, consolidated second quarter net sales increased slightly due to strong growth at Mueller Technologies. We were pleased to see that the Mueller Technologies' team grew net sales 20.7% in the quarter. However, net sales performance at Mueller Co. was disappointing as net sales declined $600,000 this quarter year-over-year. This net sales decline was largely the result of lower international sales. As sales outside of North America were down about $3 million. Taking a closer look at our domestic water sales at Mueller Co., we also note that the adverse weather conditions in the western United States impacted sales in the quarter as well. Western region water sales were down about 13%. However, all other domestic water sales were up about 4%. Despite slightly lower net sales at Mueller Co., adjusted operating margins improved 40 basis points to 19.8%, the 19th consecutive quarter of margin expansion. The improvements in both adjusted operating margin and adjusted operating income from continuing operations were due to productivity improvements. The team at Mueller Technologies, again, delivered improved adjusted operating performance this quarter. This improvement was $1.1 million versus prior year, largely the result of the net sales growth. We recently became aware that in certain environments some of our radios produced between 2011 and 2014, were failing prematurely. During the quarter, we took a discrete $9.8 million charge to meet current and future warranty obligations associated with these products. Evan will speak in more detail about the accounting and handling of the charge. I will speak a little bit about the steps we took to ensure this isn't repeated in the future. In particular, we error-proofed the manufacturing process, so this particular failure mode won't repeat itself. And we instituted accelerated life cycle testing on all of our radios. I believe we have correctly scoped and addressed this problem and implemented the corrective steps to ensure that our products meet industry and Mueller standards for reliability.

As a reminder, we completed a number of strategic initiatives in the second quarter. We acquired Singer Valve in February, which added automatic control valves to our product portfolio. We initiated the repurchase of $50 million of shares under the accelerated share repurchase program. We increased our quarterly dividend 33% to $0.04 per share. We amended our term loan, which lowers our interest rate spread, and we completed the divestiture of Anvil in early January. We believe these initiatives demonstrate our ongoing commitment to create long-term value for our shareholders. We will discuss our outlook in more detail later, but we continue to expect year-over-year growth in 2017 from demand for our products in our addressed water markets. We believe that Mueller Water Products remains well positioned to deliver long-term value for our shareholders. And with that, I'll turn the call over to Evan.

Thanks, Scott, and good morning, everyone. I'll first review our second quarter consolidated financial results and then discuss segment performance. As a reminder, I will only be discussing our results from continuing operations. Mueller Technologies drove the 1.3% increase in consolidated net sales in the 2017 second quarter. Consolidated net sales increased $2.5 million to $199.7 million as compared with $197.2 million for the 2016 second quarter. Adjusted gross profit improved at both Mueller Co. and Mueller Technologies and was $62.2 million for the 2017 second quarter compared with $59.3 million last year. Adjusted gross margin increased 100 basis points to 31.1% in the 2017 second quarter from 30.1% in the 2016 second quarter. Selling, general and administrative expenses were $39 million in the 2017 second quarter compared with $37.4 million last year. The $1.6 million increase was due primarily to personnel-related expenses, including our planned increased investment in product development. SG&A expenses as a percent of net sales were 19.5%, slightly higher compared with 19% of net sales in the prior year. Both Mueller Co. and Mueller Technologies contributed to the $1.3 million increase in adjusted operating income from continuing operations for the 2017 second quarter, which was $23.2 million as compared with $21.9 million for the 2016 second quarter. Adjusted EBITDA for the 2017 second quarter increased to $33.8 million compared with $31.8 million for the 2016 second quarter. For the trailing 12 months, adjusted EBITDA was $161.9 million or 20.1% of net sales. We amended our term loan credit agreement on February 21, 2017. Through this amendment, we reduced the applicable interest rate spread by 75 basis points. Interest expense net for the 2017 second quarter decreased to $5.5 million as compared with $5.9 million for the 2016 second quarter. For the 2017 second quarter, income tax expense of $700,000 was 13% of income before income taxes. We recognized net discrete tax benefits of $1.2 million in the quarter, primarily excess tax benefits related to stock-based compensation. We grew adjusted earnings per diluted share year-over-year to $0.09 from $0.07.

I'll now move on to segment performance, beginning with Mueller Co. Net sales for the 2017 second quarter decreased $600,000 to $181.6 million as compared with $182.2 million for the 2016 second quarter. Mueller Co. increased adjusted operating income and adjusted operating margin in the second quarter due to productivity improvements. Adjusted operating income for the 2017 second quarter grew 1.7% to $35.9 million as compared with $35.3 million for the 2016 second quarter. And adjusted operating margin grew 40 basis points, despite slightly lower net sales. Adjusted EBITDA for the 2017 second quarter increased to $45 million compared with $43.9 million for the 2016 second quarter, and adjusted EBITDA margin for the quarter increased 70 basis points to 24.8% from 24.1% last year.

And now, Mueller Technologies. Net sales in the 2017 second quarter increased 20.7% to $18.1 million as compared with $15 million for the 2016 second quarter. As Scott mentioned, we recently became aware that in certain environments, some radio products produced between 2011 and 2014 were failing at a higher-than-expected rate. Consequently, we refined our estimates and increased the warranty reserve. We have taken a discrete warranty charge of $9.8 million in the quarter to meet current and future obligations, of which, $8.4 million is now reserved for future obligations.

Turning now to a discussion of Mueller Water Products' liquidity. Free cash flow, which is cash flows from operating activities of continuing operations less capital expenditures, was negative $6.3 million for the 2017 second quarter compared with negative $4 million for the 2016 second quarter. At March 31, 2017, total debt was comprised of a $480.5 million senior secured term loan due November 2021 and $1.3 million of other. The term loan accrues interest at a floating rate equal to LIBOR, plus a spread of 250 basis points. At March 31, net debt leverage was 0.9x and our excess availability under the ABL credit agreement was about $125 million. I'll now turn the call back to Scott.

Thanks, Evan. As we analyze Mueller Technologies' second quarter, the overall 21% net sales growth was primarily driven by a 40% increase in AMI shipments at Mueller Systems. This was the sixth consecutive quarter of year-over-year double-digit growth in our AMI product line. At the end of the second quarter, Mueller Systems' AMI backlog was up about 12% from the prior year and Echologics added $2.5 million of projects under contract.

Mueller Technologies' adjusted operating loss of $3.8 million for the second quarter was an improvement of $1.1 million from the prior year due to higher shipment volumes. This is the fourth consecutive quarter where Mueller Technologies has improved its adjusted operating performance year-over-year.

Turning to Mueller Co. We, again, delivered solid adjusted operating performance in the quarter, with our 19th consecutive quarter of adjusted operating margin expansion. Productivity improvements exceeded the 40 basis point increase in adjusted operating margin compared to last year, offset by higher raw material costs and price.

Looking at our latest 12 months, Mueller Co.'s adjusted EBITDA margin was 28% or 140 basis points improvement from the prior trailing 12-month period. Looking ahead to the third quarter and staying with Mueller Co., this year, our bookings in advance of the effective date of the price increase were lower year-over-year, and shipments were comparable between the quarters. We believe that overall distributor inventory levels at the end of the second quarter were about flat year-over-year. Therefore, we have entered the third quarter with less visibility than we typically have at this time of year. While we remain cautiously optimistic about end-market demand growth from residential construction and the municipal markets, uncertainty from less forward demand visibility remains for this business.

Mueller Technologies had a strong first half of the year, with nearly 17% sales growth. We expect that growth rate to moderate in the second half of the year, largely due to year-over-year comparisons. You'll remember that last year, our third and fourth quarters were our strongest quarters for Mueller Technologies. Second half growth is expected to come from increased shipment volumes of AMI systems and growth of fixed leak detection projects. For example, we announced yesterday that San Jose Water Company has selected Echologics leak detection technology. This project will be the largest deployment of Echologics' fixed leak detection technology to date, with more than 10,000 nodes deployed throughout San Jose service area. And we expect the bookings in the third quarter for distribution of fixed leak detection products will exceed all bookings for these products to date.

Looking at the third quarter on a consolidated basis, with the tougher comp in AMI products and the lower pre-buy in advance of the effective date of the price increase at Mueller Co., we believe third quarter consolidated net sales percentage growth will be in the low to mid-single digits.

From an operating perspective, the combination of continued productivity improvements offset by the rising raw material cost environment and the dilution from the Singer acquisition, are expected to result in adjusted operating margins for the third quarter comparable with previous year Q3 margins. We believe that the demand environment for our municipal and residential end markets remain strong over the long term. But for the full year 2017, we expect consolidated net sales percentage growth to be in the low to mid-single digits, much as it is expected to be in the third quarter. Evan will wrap up now with some other items. Evan?

Based on our current expectations for the full year, corporate expenses will be $33 million to $36 million, depreciation and amortization will be $42 million to $44 million and interest expense will be $22 million to $23 million. We expect our adjusted effective income tax rate to be 32% to 34%. Clearly, higher in the second half of the year. And capital expenditures to be between $33 million and $37 million.

Finally, we expect 2017 free cash flow to be driven by improved operating results and an improvement in working capital. Our target is for free cash flow to exceed adjusted income from continuing operations.

Operator, would you please open the call for questions?

(Operator Instructions) Our first question comes from the line of Mike.

I'm not hearing anything, operator, if Mike is asking a question.

Okay. Let's move on to the second question. It's coming from the line of Seth Weber.

I guess, first, just a clarification, Scott. I mean, are you looking for organic revenue growth for Mueller Co. here in the third quarter year-over-year, excluding the Singer acquisition?

Yes, very slight, I think, is where I would put it, Seth. I mean there is going to be some organic growth. I think there was some pent-up demand as we referenced in the -- from the west, where we have that slowdown and bookings will grow there. So to answer the question directly, yes, we expect a small amount of organic growth from Mueller Co. in Q3.

Okay. And I guess, kind of taking that to the next level, bigger picture. I mean this is going to be your fourth quarter in a row with kind of plus or minus zero growth in the Mueller Co. business. I mean, what do you really think is going on there? And what do you think is the real kind of sustainable top line growth level for that business? I'm trying to reconcile, you've been pushing through price increases pretty consistently, but it's not showing up on the revenue line. So I'm trying to understand what the kind of inherent volume growth for that business really is?

I think the inherent volume growth should be around something like 100 basis points or better, greater than GDP. I mean, that's kind of how I think about the business. The many years of neglect in the water infrastructure set us for a long-term growth that exceeds normal growth for lack of a better word. I referenced it in my comments, one of the things I want to make sure we do as we talk about these things is speak plainly, so that there's no questions. Price we have gotten in the past, we have not got it in Q2. In fact, price was about $1 million unfavorable in the quarter. So we had good price for a long time. Certainly, while the raw material was dropping, we were able to get a little bit of price and the spread would open. That certainly, reversed itself in Q2. I suspect, that's a lag that you'll see. I expect we'll start to get support for price now, as we start to see the increase in raw material costs. But we'll have to wait and see. But I think, to answer the question directly, that we should see better than GDP growth in water spending for some time. I think inherently there has to be.

Okay. That's helpful. And I guess, my follow-up question. How are you thinking maybe, obviously, you've only been there a short time. But have you changed your thoughts around capital allocation? You do have the share -- the accelerated share program that you announced previously. But are you thinking any more -- are you closer to any M&A? Or are you thinking about boosting the share buyback at all? Or maybe just your kind of updated thoughts on capital allocation.

Sure, yes, so let me reiterate that we are on path with what I laid out in our last quarter call, where we were examining our strategic options as far as where to take the business outside of just pure-play water infrastructure as we look at these swim lanes that I think, I described in detail in the past. We have all of that still -- that work ongoing. We have our board meeting in July, still teed up to have that work presented and then something to communicate to you in the -- after that kind of in the first quarter of next year kind of time frame, where we lay out what our strategic direction is going to be. We are filling our M&A pipeline. We continue to look at many options, but I think that we're not going to have a knee jerk reaction here. The bolt-on, certainly we'll continue with, but if there's been going to be a new leg in the stool, so to speak, it's not going to come because somebody put out an offering memorandum out or something like that.

Our next question comes from the line of Mr. Brian Lee.

Just a follow up on the guidance point. On the low to mid-single-digit guide for the year, it's a subtle change from the mid-single-digit number from your prior outlook. Is that all from Mueller Co.? Or can you maybe provide some context on the mid-single-digit and 15% growth targets you had laid out for Mueller Co. and Technologies on the last call?

Yes, so I think that -- thanks for the question. To clarify, I think, overall, we have. We're moderating our view to how much growth we will get in the Mueller Co. business in 2017. I've been here a quarter now, and I've seen the bookings and the trends, and I think that there are -- there's really mixed kind of messages from the market as far as where the growth is going to come and how sustainable it is in the near term. I do believe the team has had a difficult environment. I can't point to a single municipality that said, "Oh, I'm not going to do what I said I was going to do." But I do think that the pent-up demand has been muted by people's waiting for this infrastructure spending. And so I think that uncertainty doesn't look like it's going to be fixed any time soon. Though, I think it's proven to kind of -- so I think that number is going to be in the 3 or lower kind of range for Mueller Co. But the AMI trends remain strong. So I think that our success rate with AMI and where our growth is coming from, I still expect that business to deliver 15%. And I expect that business to give us better conversion on the growth. Frankly, I expect them to give us better conversion on the growth than they gave us in Q2. So we've got some work to do there, but they’re aware of it and we're working on it.

Okay. That's super helpful. Maybe, Scott, just staying on Mueller Co. for a second. You mentioned the weakness in the international segment. Can you remind us how much international exposure you have there? I'm assuming it's mostly north of the border here. And then how much of that is playing into your sort of slightly downgraded view of Mueller Co.'s outlook? Was that the biggest surprise outside of maybe the California weather on the quarter?

Yes. So to be clear, I said, outside North America, Canada remains okay, not great, but okay. Really it's a Mid East, Latin American problem in the quarter. And part of it is a comp, but it's about 5% of the business, but it's -- I think the outlook for it could be a difficult Q3 again as well. So big Middle East mostly, though, I think is where we're experiencing the softness and I don't know the outlook right now. We've got a couple of things in the hopper that could get them back to kind of breakeven. But no, right now our forecast is breakeven for that non-North American piece of the market, but there is some risk there.

Okay, great. And last one from me and I'll pass it on. Just on the -- you had alluded to the rising raw material costs and the guidance here for fiscal Q3 is for operating margins to be relatively flat year-on-year. How should we think about the trend in margins here in that context of maybe a tougher year-on-year environment from a raw materials cost perspective? Just curious to hear your take on what we should be thinking there.

Okay. No problem. So we -- thanks for the question, because I kind of want to spend a little time on this. So in my comments, the prepared comments, I said, we had about a 40 basis points improvement at Mueller Co. And if you really dig into where the productivity came from, there were some material usage productivity and there were some machine utilization productivity and then there were some, mostly, some insourcing absorption productivity that really were really strong in the quarter that I want to make sure everybody realizes. And if you think about the difficulty they had from a volume point of view, and then you go ahead and layer in the ballpark million dollars of inflationary pressures they felt in their raw material buying and $1 million or so of price pressure we felt on year-over-year price declines. Manufacturing team basically delivered the 40 basis points, plus the $2 million and covered -- flex their spending, so that the little bit of lower volume, also didn’t hurt margin. So I'm very pleased with the situational awareness and the execution at Mueller Co. around that. With that said, I have no reason to expect they can't deliver similar performance in Q3 from an execution point of view. But I've cautioned you to -- when you think about the margin in Q3, the reason I'm calling it flat is because I haven't said we're going to get that price back. And I haven't said, we're not going to be able to feel those same inflationary pressures. If we're able to move the price in the market, as we're certainly trying to recover those increased raw material costs, then I think we could have some margin expansion. But I was very plain in the discussion that that's not in our outlook right now, because I haven't got a long history of being successful, say “I'm going to raise price and put it in my pocket.” There's always some dynamics there that we forget or it's difficult in the industrial market. So I've got it flat, but yes, price and cessation of the inflationary pressures would be upside in the quarter.

Our next question comes from Mr. Michael Gaugler.

Scott, on the last call, you mentioned you were anxious to get out on the road and visit the plants. Perhaps, you could provide us with some color on what you found, particularly in the area of opportunities to improve margins?

Yes, I think the -- well, thanks, Michael. I think the tours have been, first of all, fantastic, and I think the teams that I've inherited here is very talented and I think, our employees are very motivated. With that said, I think that as you think about self-directed workforce, you think about cellular manufacturing, you think about single piece flow. There is opportunity at all the plants I've been to, to improve. Some have quite a large opportunity set and others are near world-class. I would really like to applaud the team in Albertville, Alabama, is the best foundry I've ever been in. And great visual systems, you know exactly where they are in their production schedule every day, every way, where they are in their assembly schedule. The flow in the plant is all things that you can see what's -- what operation is going to happen next. And so an impressive facility. On the other end, I think there are some, again, I think underinvestment in certain places. So I think between some of the machine shops and some of the foundries, there is opportunity as it relates in the brass business and in the gate valve business for margin expansion both through a combination of investment and relaying out some of the plants and thinking more about flow. Now the thing I normally would do here is try and quantify it for you and give you 100 basis points here or 200 basis points there. I think there is enough of an opportunity set that we conceptually at a high level, should be thinking about margin expansion of somewhere around 50 to 75 basis points a year. And then, I think we are underinvested in our engineering resources as it relates to new product development and so, some piece of that being reinvested back into the engineering and product development piece of the business.

Okay. That's good color. Then as a follow up, regarding the San Jose Water announcement. Should we expect to see other announcements like that from large, well-known water utilities in the near future?

We have a couple of things in the hopper that we -- that we are optimistic of. So yes, and as I said in my comments, we expect the distribution, leak detection product, that DX product actually in Q3, take more orders in for each of the next foreseeable quarters than all previous year's sales. So it's finally catching on. I think the success we've seen in the trials we've run, the leak locates have -- the efficacy of this product is starting to catch on, and we really think we may have -- we're hoping we've caught lightning in a bottle here, but it's too soon to call it. But our early indications are really exciting.

Our next question comes from the line of Jose.

Scott, you gave some good color on Mueller Tech business. I'm just wondering, if your expectations are still for kind of the profitability improvement in that business over the course of the year that maybe you guys had at the beginning of the year?

So I realize when I'm talking on these that there's employees listening too, my expectation is that we committed to $10 million of operating improvement when we developed our plant. And if we're going to have a culture of educate -- execution, we do what we say we're going to do. With that said, I think I look at the conversion we got in the quarter. We increased sales $3 million and only turning into $1.1 million of operating improvement. I would have expected that to be in the $1.5 million to $1.7 million range kind of number. So I realize, we have some risk, and there's probably on that $10 million of year-over-year operating improvement, there is risk. But if you're going to have a culture of execution, then you find ways to develop your countermeasures. You take other actions to meet your commitment levels. And so we have to review those plans for technologies, and it can't just be always sell your way out of trouble. Sometimes you have to look at your cost structures. You have to look at your inputs. And so to answer the question directly, I still expect it. But I recognize, having seen Q2 performance, that there is a little bit of risk.

Okay. That's very helpful. And maybe, Evan, you can help out on this one. What's kind of the expectation for the -- on the warranty expense kind of going forward? Any kind of kins to this that you can call out?

Well, Jose, with this particular issue, as we mentioned, we did record about $9.8 million in the quarter, and we were left with about an $8.4 million warranty reserve for this particular item. And I will note that back in Q1, we saw about $800,000 of expense for this particular problem and that really was the catalyst for us to take a more detailed look, do an in-depth study and refine our estimates to come up with the particular charge in the second quarter. We think that the charge is adequate and sufficient to cover these issues with the radios produced between 2011 and 2014. I think going forward, we'll just have a normal warranty charge provision that we've always had, and so there's nothing expected from a large magnitude like this in the future.

And I'd like to go on and say that we did the advanced life cycle testing, Jose, on the things made after '14. We've been running those environmental tests. And the failure rate has been better than industry averages by a lot, like near 0.04%.

Okay. That's helpful.

So I feel like the team -- I wasn't here, but whatever, the changes when they realized they were having some of these issues. And basically, for everybody's benefit, it's when they are underwater in a pit environment, in warm climates. That's when they really start to have a problem.

Okay. And just any changes in terms of the raw material that you saw throughout the quarter that you're kind of extrapolating into the rest of the year? Or is it roughly the same across both businesses?

I would say that when you take a look at our 2 largest inputs, [Stratsdale, Grafton], in the second quarter, they were up about 5%. And as a reminder that accounts for about 15% of cost of goods sold related to Mueller Co. And that was roughly around $1 million impact in the quarter for us. I think as we go forward, I had seen some data, some forecasts that are calling for mid -- kind of mid to say 9% increase in those raw material inputs. So I wouldn't say anything significant at this point on the horizon. But I think we'll be faced with a little higher input cost in the third quarter as well.

Our next question comes from the line of Ryan.

It's Ryan Connors with Boenning & Scattergood. I want to just kind of drill down on this pricing issue a little bit, Scott. And I'm a little surprised about the pricing. I wanted to understand some of the dynamics behind that you mentioned in your comment earlier that there's always these dynamics that crop up that impact price. But my understanding of Mueller Co. has always been that even though it might not have the sex appeal of Mueller Tech, it's a oligopoly market, it's even maybe duopoly. And some of the product niches and pricing has always been very rational. So in this kind of environment, where we've got raw material price cost up, and the demand environment is at least okay, if not phenomenal, at least, certainly serviceable. I mean, what are those dynamics that are preventing you from getting price? Is it some kind of bad actor in the market that's suddenly acting irrationally? Or is it some channel issues? I mean, anything you can give us in terms of why that's happening?

Yes, I can give you my theory, and I'm happy to do that. But it is just that. I mean, here is what's happened. I think that last year, we announced a price increase just as we did this year. And in anticipation of that price increase, distribution took a lot of orders in a pre-buy. Certainly, $15 million, $20 million more than -- than you would anticipate a normal February being. They bought that, they pre-bought it in Q3, and then raw materials ran away. They ran down. And so competitive forces, being what they were in the first quarter of this year, basically -- our first fiscal quarter, basically, the pre-buy that they did in our Q2 for their shipments in Q3, didn't actually result in a higher gross margins for them. So why did the distributor pre-buy? They pre-buy so their gross margins will go up. They get the benefit of the lower cost, but they get to sell into the higher price market. Raw materials ran down and pricing was basically flat, price-to-price was flat. So this year you come along, and everybody announces a price increase. Distribution doesn't pre-buy. And so now, inventories are getting heavy in the distributor lanes. And so they now come out with their buys and people being hungry and not having the visibility, all of a sudden now might be willing to discount a little. Is there a bad actor in the market? Yes, there is a bad actor in the market, in my opinion. Somebody's not got the discipline to keep where they need to be. And I'll say, it's not so much around hydrants, as it is around valves and brass. So when you look at where the price came out, that's part of it. The other thing I want to make sure everybody understands is, when you think about our products, think about the deeper they go in the ground the more valuable they are. So a fire hydrant with a 10-foot stub for Canada sells for more money than a fire hydrant that has a wet barrel. And basically, it's just got the L going under the surface, in the ground. And if you think about what we lost out west as an average, weighted average price on a fire hydrant, or you think about what we lost out west as a result of the rains, that also played kind of almost like a regional mix impact on our price. So I think those were the 2 big drivers of why we've had the difficult price environment in Q2 than we traditionally have, Ryan.

Got it. Well, that's maybe only a theory. But that's a very helpful one. Now my second question is actually related in that bigger picture. But as you look at capital deployment, there have been a number of companies, some of them in the metering side, some of them more on the pump side, and elsewhere, that have started to kind of forward integrate into their channel and distribution and started to go into more of a corporate channel as opposed to the traditional third-party channel. So with that obviously you're not going to tip your hand in terms of whether that's something that's being tactically contemplated. But what's your view of that as a concept? Is that something that at any point you think would make sense? Or do you feel that the traditional channel is the way to go?

I think the whole channel question is a fascinating discussion, and I think that disintermediation and more direct sales as you see more municipalities trying to enter into the MWBE space and disable veteran. And I think there's just a ton of dynamics going on in the channel right now. You see potentially that HD Supply could be -- have their Waterworks for sale, could go P/E, it could go strategic broader. So there's a lot of moving pieces there. That said, I am not sure our core competency is ever going to be around putting together the portfolio that you need to be a successful distributor. I had a distribution business previously in my career, and I can tell you to make them successful and add value to the people that use them. Generally, a lot of what you have to be good at in manufacturing are not necessarily the things you're going to be good at to be a distributor. And therefore, while it remains a possibility, it's something that I would give a very, very, very low probability to. It's just -- it's a tough part. And the other thing I would say is, when you're #1 in well-established channels, very, very difficult to go into competition with your customers. And so it's always the play of the distant player to kind of take that role to disrupt the distribution channels, because they're really not getting their fair share of the distribution channel. So probably not something that you would see Mueller do.

Our next question comes from the line of Jim.

Jim Giannakouros from Oppenheimer. I understand you're pleased with execution in plants. I appreciate that you're doing good things in there. Is there investment in plant that we should be cognizant of when thinking about incremental margin progression as capacity utilization clears 70% and heads up from here?

Well, I don't think there's anything massive. So I think that we're not contemplating, Jim, a big new foundry at this point. I think that there's enough available capacity. I think there's enough fine tuning. I think there's enough square footage and other things that we -- if we needed a melt furnace at some point, we could buy one. So I don't think there's any massive depreciation load coming in the next 2 or 3 years. But with that said, I think that there is some modernization that needs to happen in Decatur. There is some modernization that needs to happen in Chattanooga. Certainly, there's some modernization that needs to happen in Cleveland, North Carolina. So I think that there will be perhaps, as I said in the last call, $4 million, $5 million, $6 million kind of incremental CapEx for some period of time as we fix the machine tool utilization part of the business and improve our assembly capabilities in those kinds of things. But nothing major.

Got it. Okay. And I apologize I did hop on a little late here. Quite a few comments on the muni side, a pause ahead of clarity on stimulus, et cetera, that you're seeing. Any comments on how residential, I guess either housing starts or more specifically, new community development is tracking versus your expectation? I'm curious to the outlook view through your lens. Our checks and read certainly suggests strength, but your results certainly don't stack up.

Yes, I think that that's one of the things we're trying to connect the dots on is, we feel good about what we've seen in housing starts and land development. I think single-family units were strong in January and February. And I think, we were tracking pretty well in January and February with the single-family dwellings. And then, March was a bit of a cliff that fell off. I think part of that was weather related as it's -- I think when you look at the housing starts data, I think March actually, on an annualized basis, seasonally adjusted was down from the January and February, kind of muting what is good fundamentals going forward for strength in land development. If you think about brass, it's predominantly residential and that's an area that we've got to start getting some growth from here in the -- in Q3 if we're going to meet our and your expectations.

And a clarification point, I think it was Ryan that asked on pricing. I'm surprised as well, you did say that there is a "bad actor". But where is the pressure coming from? Or are you feeling the pressures from distributors that may have inflated inventories? Or can you just provide a little more color there, because I kind of missed the point on where exactly the pressure is coming from?

Okay. So let me try and give you some clarity. If you look at the average price that I sold a distributor in Q2 versus the average price, I sold a distributor the exact same product, Q2 a year ago. That is down ever so slightly, like less than $100,000. If you look at how much an 8-inch gate valve is going for, that's getting buried in Las Vegas versus walnuts getting buried in North Florida. You will see that, that same valve has a different price and I'm making those up, nobody should take them away and say, the actual regional pricing difference is such that losing a lot of the west volume as a weighted average cost us about $0.5 million. And then about $400,000 kind of comes from the mix of different deals between customers. So you might get a rebate or you might get this or you might get that and somebody else doesn't, freight terms and things, the likes that are also part of our price. So it's a complex subject and I want to give too much away on in terms of the competitive dynamics. But at the same time, it's something that I can tell you we have our arms around and we're watching very, very carefully. There should have been better support regardless on both sides for the price increase in valves and hydrants. There has been another increase for brass that's recently been announced, and we haven't baked any of it in to our forecast, because we got to wait and see how everybody behaves. And we'll be watching it carefully. So to summarize, part of it is the regional difference in pricing. Part of it is the mix of large distributors versus small distributors and then part of it is just some small amount of year-over-year price degradation.

Our next question comes from the line of Joe.

This is actually Tristan for Joe Giordano at Cowen today. I believe that Singer Valve has a much more global -- is much more global than other businesses that you have. Have you already identified some of the -- some opportunities where you might be able to like go back to these global customers and introduce your full range of products?

Yes, that's part of the integration is when we think about the synergies, we are looking where they can take us and their channels are established and we are looking where we can actually grow their presence in, in our existing channels. And so whether we do some Mueller branded pressure control valves or Singer as a channel can actually take gate valves and butterfly valves and the like, into their markets. Certainly, those are the things that we're working on, and that we've identified. But I think, to be fair to the development team out there, I think the channel development work is more than an immediate quarter kind of timeline. So when we think about where that growth is going to come from, and we think about those developing infrastructures around the world, we think that the sell cycle on those is measured in quarters, not in days.

Okay. And then I think, one of your competitor has mentioned that they have remote disconnect capabilities, which I think you were probably one of the few companies to offer up until now. Could you remind us of some of the tech that separates you from your competition?

Yes. I think that the biggest difference is a, for everybody's benefit, we are patented with our RDM technology; and b, our actuation technology is such that we're not going to denigrate anybody, but we're confident that we have more than 50% advantage in battery life usage when you actually have to use the RDM. Ours is the most efficient from a, not having to go back out and replace the battery you can get -- I don't want to be incorrect here, so somebody clean me up if I'm wrong. But I think, twice as many actuations where you can actually turn off and turn back on the meter without actually having to service the battery. So way fewer truck rolls if you use our solution than anybody else's. And basically, it's because we've patented the valve and the actuation methodology that is the most power efficient.

Our next question comes from the line of (inaudible).

So last quarter AMI backlog was up 70% from last year, this quarter around 12%. So what's the average time you expect to turn that backlog into revenue?

It's a great question that I'm not trying to duck here, but I'm trying to get some clarity on for ourselves. I think the behavior here is that you get your award and contract from your municipality or from your PUC. And you get a target date when they're going to start their install. And then you get another target date when they're going to start their install. And then as you get closer, you get refinement. So all of the stuff that's been awarded and contracted is on the book. But it's really, really difficult to estimate the timing until we get within the 90-day window of when they're actually going to use the resources to put the trucks in the field, to start the change outs. And the part that's really, I think we've got a fair deal of clarity around is the part where it's new construction, new homes are going up, they're being sold. That's got some clarity around it. It's these swap programs that the estimates vary wildly on. And so I know it's not a very satisfying answer, but the answer is, we miss on the contracted pieces by 90 or 180 days quite often.

All right. That helps. And then looking at, I guess acquisition scenarios. For the Mueller Technologies segment, is it an area that you would consider to complement what you have? And also for Mueller Co., can you find adjacent business operating at the margin profile you do in the -- in that business?

Well, I think the margin thing is difficult. And I understand the margin dilution discussion, but very much a -- we have to create opportunities that if we can make investments that exceed our weighted average cost of capital, and then we're creating value. And sometimes the margin, the EBITDA margins will be diluted, and sometimes hopefully, there'll be accretive. But this is a very, very good business we have with Mueller Co. from an EBITDA margin point of view. But I also think that there are adjacencies out there that we could absolutely, get into to lever and be successful with. As for Mueller Technologies, I'm less inclined right now to do acquisitions. I think there's a lot of operational heavy lifting to do in front of that business. I think, I said it earlier, I'll say it again, I think that if their conversion had been stronger on the $3 million of volume, then you would say, okay, they're executing and everything is running exactly the way you want it to run. And then you would consider that they have the capacity for an integration. But I don't think we're there right now. And so I would expect to see a little more execution, if you will, in the systems business. I think in the Echologics business, it's a different challenge. I think that their order book has swollen. I think the challenge of the San Jose Water thing, we have to be mindful that there could be pieces there that we would need to bolt on to increase their capabilities and increase their assembling capacity. And that I would certainly do. Because I think the future is bright there, and I think we have enough operational excellence in Mueller Co. and in other parts of the business that we can make sure that business grows to its full potential by levering what's internal. So more inclined to do adjacencies, willing to do bolt-ons at Co., and Echologics. I want to see some execution on technologies first. I'm sorry, on systems, first.

I show no questions at the moment.

Okay. Well, let me thank everybody, and that will wrap us up for today. And Martie, if you have anything you want to say to wrap up. We'll go from there.

Nothing. Thank you all very much.

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