Mueller Water Products Inc (MWA) 2017 Q3 法說會逐字稿

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

I would now like to turn the call over to your host, Mrs. Martie Zakas. Ma'am, you may begin.

Good morning, everyone. Welcome to Mueller Water Products 2017 Third Quarter Conference Call. We issued our press release reporting results of operations for the quarter ended June 30, 2017 yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com.

Discussing the third 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 or 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 (866) 446-5476. 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 third quarter. I'll begin our discussion this morning with a brief overview of the quarter 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 full year.

Overall, we are pleased with third quarter net sales growth of 3.3%, highlighted by 4.5% growth at Mueller Co. Although there were some minor puts and takes, net sales growth was about as we expected. Operationally, we continued to execute on our productivity plans and realized the resulting cost saving. However, higher material costs represented stronger-than-expected headwinds in the quarter. During the quarter, we completed our $50 million accelerated share repurchase program and also repurchased an additional $5 million worth of shares under our existing share repurchase authorization.

All in all, we were pleased with the quarter. Progress in the market, progress in integrating Singer Valve and progress in operational improvements all met our expectation. Going forward, we will continue to execute on our initiatives to drive productivity improvement, accelerate our product development and deliver exceptional value for our customers.

And with that, I'll turn the call over to Evan.

Thanks, Scott, and good morning, everyone. I will first review our third quarter consolidated financial results and then discuss segment performance. I will only be discussing our results from continuing operations.

Net sales increased 3.3% in the 2017 third quarter, a $232.2 million as compared with $224.7 million for the 2016 third quarter. Net sales increased due to volume growth at Mueller Co. in the February acquisition of Singer Valve. Gross profit, excluding a purchase accounting adjustment related to Singer Valve inventory, was $83.3 million for the 2017 third quarter compared with $83.2 million last year. Productivity improvements were largely offset by higher material costs at Mueller Co.

Selling, general and administrative expenses were $38.7 million in the 2017 third quarter compared with $39.4 million last year, primarily due to lower personnel-related expenses. SG&A expenses as a percent of net sales was 16.7% or 80 basis points lower than the 17.5% in the prior year. Adjusted operating income increased 1.8% to $44.6 million as compared with $43.8 million for the 2016 third quarter. Lower SG&A expenses were partially offset by higher material costs.

As you may recall, 2016 third quarter adjusted results excluded $21.2 million of other operating expenses comprised of a $16.6 million noncash pension settlement charge and charges primarily associated with the demolition of a surplus facility. Adjusted EBITDA for the 2017 third quarter increased to $54.8 million compared with $53.6 million for the 2016 third quarter. For the trailing 12 months, adjusted EBITDA was $163.1 million or 20% of net sales, an improvement of 70 basis points compared with the prior year period.

Net interest expense decreased $900,000 to $5.1 million in the 2017 third quarter as compared to $6 million in the 2016 third quarter. Income tax expense was $13.4 million or 35.7% of pretax income for the 2017 third quarter and $5.6 million or 33.7% of pretax income for the 2016 third quarter. We grew third quarter adjusted earnings from continuing operations per share to $0.16 from $0.15 last year.

I will now move onto segment performance beginning with Mueller Co. Mueller Co. net sales for the 2017 third quarter increased 4.5% to $207.6 million as compared with $198.7 million last year. The increase was largely due to volume growth in both the U.S. and Canada and the addition of Singer Valve. Adjusted operating income was $54.1 million in both the 2017 third quarter and 2016 third quarter. Adjusted operating income benefited from volume growth and productivity improvements offset by higher material costs. Adjusted operating margin decreased 110 basis points to 26.1% for the 2017 third quarter compared with $27.2 million for the 2016 third quarter. Adjusted EBITDA for the 2017 third quarter increased to $63 million compared with $62.6 million for the 2016 third quarter, and adjusted EBITDA margin for the quarter decreased 120 basis points to 30.3% from 31.5% last year. However, trailing 12-month adjusted EBITDA margin through the end of the third quarter was 60 basis points higher compared with the prior year.

And now Mueller Technologies. Overall, Mueller Technologies' third quarter net sales decreased $1.4 million to $24.6 million compared with $26 million last year. Mueller Technologies' net sales of AMI and leak detection and condition assessment products were higher year-over-year, but were more than offset by lower AMR and visual-read meter shipments. Adjusted operating loss was $1.6 million in the 2017 third quarter and was $1.5 million last year.

Turning now to a discussion of Mueller Water Products liquidity. Free cash flow, which is cash flow from operating activities of continuing operations plus capital expenditures, was $34.2 million for the 2017 third quarter compared with $54.4 million for the 2016 third quarter. Timing of disbursements as well as higher income tax payments resulted in lower year-over-year free cash flow in the quarter. At June 30, 2017, total debt was comprised of a $479.7 million senior secured term loan due November 2021 and $1.5 million of other. The term loan accrues interest at a floating rate equal to LIBOR plus a spread of 250 basis points. A June 30, net debt leverage was again below 1, and our excess availability under the ABL credit agreement was $109.5 million.

I'll now turn the call back to Scott.

Thanks, Evan. As I mentioned before, we are pleased to see the increased growth in our end markets this quarter, with our overall net sales growth coming in about as expected. I continue to be encouraged by the operating performance of the company as we delivered meaningful productivity improvements in the quarter. These improvements, however, were not enough to offset the unfavorable material cost environment we are in.

It appears that last year at the end of the third quarter, materials had bottomed out. This year, prices of brass ingot and scrap metal are on the rise. And in the 2017 third quarter, we were up 13% and 20%, respectively, from the second quarter and 25% and 30%, respectively, year-over-year, which unfavorably impacted our margin. We expect material costs to continue to rise but the impact to be less as we expect to further offset these costs with additional productivity improvements and higher market pricing. With this rising material cost environment, price has been lagging to changes in these input costs. However, we were encouraged to see higher pricing in the third quarter versus the second quarter.

Moving on to a more detailed discussion on Mueller Co.'s results. Mueller Co. experienced solid net sales growth in the quarter despite a difficult comparison with the year ago. Last year, third quarter sales growth was the strongest in the last several years. This year, net sales were up in the mid-single digits and included growth from both our domestic and international markets. Additionally, we experienced growth from the Singer Valve acquisition, which I am pleased to report has experienced a smooth integration into Mueller Water Products.

Adjusted EBITDA margins remain at roughly 30% but decreased 120 basis points year-over-year in the quarter due to higher material cost. On a trailing 12-month basis, however, adjusted EBITDA margins continue to improve, up 60 basis points over the last 12-month period. The unfavorable material cost environment led to our decision to announce brass price increases in both the U.S. and Canada during the third quarter. As I mentioned before, we are realizing improved brass pricing and expect this to partially offset significantly higher material costs in the fourth quarter. The brass price increase announcement also led to strong quarter volumes in the third quarter. We believe our strong order volume in advance of the price increase is a positive signal that our end markets' outlook remains solid.

Taking a closer look at sales in the third quarter at Mueller Technologies, results were somewhat mixed. You will recall last quarter, we expected growth to moderate as we entered into tougher comparison period. We were encouraged to have realized sales growth in our higher margin product offerings, fixed leak detection, pipe condition assessment and AMI systems. However, lower AMR and visual-read meter shipments more than offset this growth. As a result, 2017 third quarter net sales decreased $1.4 million year-over-year.

To close out the third quarter discussion, I am happy to report our fixed leak detection business continues to gain interest in the market. As you will recall, during the quarter, we announced the San Jose project, which could be up to 10,000 nodes. On the strength of that project and due to the success of West Coast trials, we received additional orders from adjacent water authorities in the Bay Area.

Now looking ahead to the full year. For our 2017 full year on a consolidated basis, we expect low to mid-single-digit net sales growth year-over-year. We expect adjusted operating income improvement to slightly exceed net sales growth. We expect higher shipment volumes, productivity improvements and better sales pricing to drive this margin expansion. Although, we also expect to face significantly higher material costs.

And we'll wrap up now with some other items.

Based on our current expectations for the full year, corporate expenses will be $33 million to $35 million, depreciation and amortization will be $42 million to $43 million, and interest expense will be $22 million to $23 million. We expect our adjusted effective income tax rate to be 31% to 33% and capital expenditures to be between $36 million and $38 million. Finally, we expect 2017 free cash flow to be less than the $83 million generated in 2016, primarily due a larger income tax payment in 2017. We expect 2017 free cash flow to approximate adjusted income from continuing operations.

Operator, would you please open the call for questions?

(Operator Instructions) Speakers, our first question is coming from Mr. Mike Wood.

Just curious if you could provide some more color on fiscal fourth quarter profit margin guidance, I guess, particularly at Mueller Co.

Well, I think that we continue in the fourth quarter to expect the debt margin expansion, as we have in every other quarter except the third quarter, mainly due to the fact that we're experiencing somewhat better price environment, and we believe that the rapid rise in materials that we saw in the third quarter kind of slow down a little bit like we're not expecting 30 points of brass increase or 25% in the base steel metal. So ballpark, think kind of 20 to 40 basis points kind of margin expansion overall at Mueller Co. and kind of still wait and see where we are with Tech.

Okay. Great. And then when will you know if the price increase that you implemented on brass, when that would be successful? And what's your early read to date on that price increase?

It's -- we believe it's been successful. The order book that we're taking through the month of July, it was sticking, and we're realizing our book. If you look at our backlog right now, we're realizing price to offset cost increases. To not overly complicate this, we are expecting almost 100% coverage from price in the fourth quarter, but not quite. There's a little bit less there. But we measure our bookings coming in to see what they're yielding, and those yields all are encouraging, especially in hydrants, brass and valves.

And just finally, can you give that regional performance again like you did last quarter in terms of sales? And was there any lingering impact from things like West Coast potential price mix impact?

So I think we did see a little catch-up in the West. But basically, we were at our kind of forecasted performance by territory.

And our next question is coming from Mr. Brian Lee.

Maybe first off, just to clarify, Scott, the 20 to 40 basis point improvement that you just commented on for Mueller Co., that's sequential? Is that -- I just wanted to clarify, is that a sequential improvement you're speaking to?

No, and let me be clear. I was speaking to kind of consolidated performance. So I know I -- you asked Mueller Co. But in my mind, I'm looking at consolidated, so that's more in that line. And we're thinking that the kind of that 20 to 40 basis points in the fourth quarter will be overall and basically coming from the recovery of price in the continued productivity performance.

Okay. And just to be clear, the baseline for the improvement is off of the fiscal 3Q or...

Yes, off of fourth quarter.

It's a year-over-year.

Year-over-year, year-over-year.

Year-over-year. Okay. Just wanted to be clear on that. Okay. And then again, on the pricing commentary, super helpful and also encouraging to hear that a lot of the brass past due seems to be sticking here in the fiscal fourth quarter. Can you speak to the price increases that you implemented earlier this year? Sort of what you've seen in terms of those price increases sticking? And then what sort of visibility you have for the rest of the year if you're still looking for feedback on customers from those earlier price increases?

Okay. Sure. So one of the things I think I did in the last quarter is probably scare too many people or something. Certainly, that was not my intent. Sequentially, so Q3 versus Q2, we experienced exactly what I expected to experience, which was price improvement as rising material cost imports forced all producers to look at their market pricing, and we see this lag. And so as we had the squeeze in Q2, where we had a poor price environment coupled with rising costs, we've seen that reverse in Q3, where we've started to see a pickup in the price environment. So after a prolonged bottoming of decline and then bottoming in Q3 of last year in the raw material world, we started to see this uptick. We've seen all through Q3 sequentially month-by-month a better price environment. We have seen through the first month of Q4 sequentially over June and July a better price environment. And we have seen it everywhere, so valves, hydrants, brass. Every single category has seen price. The question that remains, and I guess I've made too much of a big deal about, is that I'm watching very closely to ensure that we get as much price in Q4 as we have inflation. Will we catch it all up at once? Currently, we think there'll still be a little bit of breakage. It's up to operations then to countermeasure that with their productivity plans so that we can then have the margin expansion and continue the growth and cost-reduction programs that we had. But I want to reiterate, bookings in the quarter exceeded shipments by like $30 million, $40 million. So we had a strong order book, and everything we took in was at a higher price with each sequential month. And so we've seen price in all the major categories, and we've seen a good demand environment, which is why I am encouraged. I'm encouraged, and I thought we had a good quarter because. We've seen the improvements in the order book, we finally got some growth, and we finally have started to see the materials and price get back and locks up with each other that as materials go up, so do prices.

Okay. That's great context. Couple last ones from me, and I'll pass it on. Specifically on Mueller Tech, I'm assuming at this point the 15% targeted growth for the year, you're going to be changing that. Is there a new number to report there? And then what's the mix between AMI and legacy at this point? And should we expect legacy deployments rolling off to remain a drag here on organics? Or when do you get to a point that you start lapping those?

Wow, it's a great question. I mean, obviously, the demand was -- fell off on the visual-read and the AMR a little faster than we expected, and we're still evaluating that. But I think long story short, if you were to look at just the meter business, I would say that, that's probably going to be a little bit north of $2 million kind of growth instead of 15% at this point based on what I've seen in the order book, based on the size of the backlog. We were expecting, frankly, 2 projects to have closed in the quarter that we think we're in good shape to win. And those decisions continue to get delayed. And so I'm not going to sit here and say, "The order book is going to be as strong at the end of this year as it was at the end of last year," when we had lead count and others. So I think we are -- I think it's realistic that we won't be in that 15% range. We'll have some growth but nowhere near as much as we had hoped. With that said, I think there's a little upside in Tech as a result of how quickly we get these nodes, the DX nodes, deployed at Echologics. And we're going to be pushing to get as much of that out as we can in the fiscal year, but at the same time, want to ensure that we have as much value-add there as we possibly can. So we're going to be kind of trying to balance that. All in all, I expect the Technologies business to kind of be up in that 5% to 7% range, certainly well below our expectations at the beginning of the year.

Okay. That's great. Last one. Can you maybe just speak to this recent Landis+ Gyr announcement, the relationship there? Just curious if you can walk through some of the dynamics of what hardware or software do you guys provide versus them. And then also, what is it -- how does it integrate? Or how does it work with the Mi. Net given their protocol and their platform that they have there, which I believe is mesh?

Yes. So first, let me back up a little bit before we talk about that and talk in general about technologies and this notion of an open architecture radio. We will communicate with anybody who allows us to communicate with them. We believe our radio ranges, our power utilization, whether we are using something like a LoRa technology or using our own fixed network technologies, that we are open to having our meters and our radios interface with any fixed network. With Landis+ Gyr, our mesh program is just more of that. It's us making sure that our systems can communicate with where fixed networks exist. And a portion of municipalities are -- that LNG have serve electricity and water, and they have strengthened the channel with -- especially from their electricity position. And so we thought it'd be great way to get some volume for our meters using their fixed network and using their channel powers. So I expect that we'll have 50,000 to 80,000 units as a result of this agreement, and we certainly look forward to working with them closer. But long story short, a channel play, a technology play and right in line strategically with our view to an open architecture world.

And our next question is coming from Mr. Seth Weber.

Couple quick clarifications. First, can you give us what the organic Mueller Co. revenue was without Singer or currency?

Yes, it was about 2.5%.

Okay. And then just going back to that last question. Were systems in Echologics' sales in the third quarter about as you expected? Or -- I'm just trying to kind of separate...

No. I think -- no. I mean, Echo was right where I thought it would be. But if you think back to what I said in the second quarter, we're not going to dock. I was expecting more flat sales. But certainly, at the time, did not want it to be down. We booked enough that we could have been flat year-over-year. We had a couple of bumps along the way, a couple of pushouts and -- but no, I'm not going to sit here and say, Seth, that we were expecting it to be down $1.4 million. I was expecting it to be flat but slightly up. But as the quarter developed, it was small. What I think I'm most pleased about, though, I guess, I think fire roots. And the way I think about it is once it became apparent that we're going to have a few operational issues there. The challenge went out to make sure we cover that and that we countermeasure and that we did the things we had to do as a well-operated business to make sure we met our commitments. And I was pleased to see the Mueller Co. performance kind of cover what needed to be covered and get us to where we had said we would be. And so I think when you think about an environment where you are implementing lean manufacturing, where you are focusing margin expansions through your productivity initiatives, where you are trying to manage the market and get in front of price and things like that, that you hit those levers to make sure you meet your commitments. So I would say the systems business kind of fell below expectations. Mueller Co. and Echo were there to pick up the slack. And all in all, I think a solid quarter. The thing I will tip my hat to the systems guys on is that we did book about $3 million or so more than we shipped, and we could have pulled it out if we hadn't had some late quarter problems.

Okay. And then so, Scott, just kind of doing some math here. I mean, looks like -- your guidance. I mean, it's not real guidance. But for Tech, it looks like revenue should be up a little bit sequentially from 3Q to 4Q. And so my question is, that's, call it, a $100 million kind of run rate into next year based on 3Q, 4Q. Is that a high enough revenue number for that business to be profitable? If that -- let's say, revenues of $100 million next year, can Tech be profitable at that level?

That's a great question and one that I'm not trying to dock on, Seth. But I know -- I'm very sensitive to the fact in the beginning of the year, we had guided you to $10 million improvement on about that level of sales. And then I think that, that, with a quarter to go, is something that we're going to have to reckon with because I don't think it's within reach now. In theory, yes, of course, it should be possible. $100 million business should be profitable. But with that said, there's things that have to happen structurally in the business in order for that to be achieved. And I'm not really prepared at this time to say next year's profitability outlook for Tech is extra wide. But we'll go through our AOP process. We're going to press for a significant margin expansion. Even at the price, I think there's opportunity. Even if we don't get a single penny of price in the systems business, I believe there's opportunity for margin expansion. So yes, I don't want to duck it, but at the same time, I don't want to sit here and say we can be profitable at a $100 million. Or we certainly say, we should be profitable at $100 million.

Okay, Scott. And if I could just ask a follow-up. Your leverage here is below one turn. I think you've talked about wanting to kind of look at the M&A landscape a little bit in your first year. But how are you thinking about share buyback here given the leverage ratio? And you haven't announced any M&A, so.

Right. I think the answer we gave before is the one will -- it will be balanced, it will be continuing to look at our dividend, continuing to look at share buyback, continuing to look at the opportunities in the M&A pipeline. I think the whole capital allocation discussion is a fair one to have. I would say, given where we are, we went through with our Board, the strategic review, if you will, strategic business review, to look at where we thought the attractive spaces were both in potable and nonpotable water where we thought the attractive spaces were from a geographic basis and looking at that M&A pipeline. And I would say we'll probably be more active in the near future than we have been. I think we said we did $5 million over and above the $50 million ASR. And I would say we'll be more active than $5 million as I think the cash flow and cash generation looks good for the business, and there's still plenty of powder dry for acquisitions. But balanced approach, probably a little more stock buyback and go from there is kind of how I'd like to frame it for you.

Our next question is coming from Mr. Brent Thielman.

Scott, maybe on that last question on Mueller Technologies, and because I know you come in with a strong background here. But as you spend more time with the business, are you finding things you can do to markedly improve the cost structure of the business?

Yes, I think so. I think this quarter -- the 2 quarters now, we're kind of right at the end. I don't want to get into too much detail. But suffice it to say, with 4 days left in the quarter, we had a couple of machines down that were not anticipated. And all hands on deck, ended up throwing some over time at it, ended up throwing some more cost out. I think it sounds like a repeat of what I told you last quarter. So I'm a little bit sensitive to always having some kind of late quarter excuse for not making a number. And -- but certainly, there's plenty of things there, to answer your question directly both from a sourcing point of view, what can we outsource, what can we cast ourselves, what -- look at our assembly processes, look at automation, look at a lot of things there that I think we can structurally take off out of the cost of producing a radio or the cost of producing a meter. So I am -- I do see it, and I also want to try to say that, operationally, the team has already taken out quarter-over-quarter a significant amount of OT, a significant -- their first pass yields and quality costs have come down like 70% quarter-over-quarter. So there is operational improvement there, but there are still things we can do.

Okay. And those investments, maybe in new automation or those things, you're still evaluating? Are you planning to put those to action over the course of next 12 months?

Well, our planning cycle is that we're -- this quarter we're in right now is what we call our annual operating plan cycle, and we will make our allocation decisions as regards to capital at that point. And we're not going to sign up for CapEx that doesn't pay for itself. And so as long as the resulting cost improvements were coming as people think about capital, and we think about capital plans, then it'll get through our screen. If it doesn't, then it won't get through our screen. That's kind of the process we're in right now.

Got it. Okay. And then it -- Scott, it seems like we keep hearing about more activity in residential project, kind of land development across the country, which should be good for Mueller Co. I know it's difficult to pinpoint exactly where the products are going. But I guess, I'm a little surprised just given what you hear out there from the developers, construction companies, volumes don't have a little more momentum behind them. I guess the question, are you still seeing some pullback in municipal repair replacement? Is there maybe an inventory overhang out there with distributors? Is it -- activity is just not coming around as much in kind of where the Mueller brands are really strong? Any color there based on context of what you're hearing out there?

Yes. I think the -- I think everybody who's basically gone before us, and you're looking at municipal spending that's either flat, I think the census data would even say the pipe and hydrant part of municipal is actually down year-over-year. So I think that what we're seeing is if it wasn't for the lift we're getting in, in the resi construction space, repair and replace would be slightly down year-over-year. And so it has muted the growth that we would have expected otherwise. And if you look at everybody else who's reported in the quarter, I think flat to down is kind of where we are muni-wise. And it wasn't for the growth in residential construction, we too would be. But there's not a lot of share shift going to go on here in these markets.

Right. Okay. And then one last one, I guess. If I recall, Canada had been a headwind for some time, certainly through other industrial manufacturers out there. Does this kind of volume improvement look sustainable? Is there sort of some year-over-year comps to think about? What do you see in there?

Well, certainly, the price environment in Canada improved. It was a net positive for us, and we started to see some volume improvement year-over-year. I think we're keeping our eye on it. There are some reports that maybe their residential cycle is a little overheated right now and could draw back any team, but we're keeping our eye on it. But it has certainly been, for Q3, a good news story after kind of dragging in exchange problems, et cetera, kind of dragging on the business through first couple of quarters. But good news Q3, and hopefully, sustain through the rest of the Q4.

Our next question is coming from Mr. Jose Garza.

Scott, just -- you kind of touched on it a little earlier. But I guess, you guys had a Board meeting in July and just wanted to see -- any updates on kind of capital allocation with the Anvil cash? And kind of how you're going to communicate that to the investment community?

Well, as I said, we're going to stick with what we said, which is we continue to look at the capital allocation. We want to take a balanced approach. That balanced approach will look at dividend policy, it'll look at share buyback and it'll look at M&A. I think that the refocusing of the M&A pipeline, I think, it had been primarily focused on potable water. We're going to be looking at some other adjacencies that we think are also attractive, but I really don't want to get into what they would be. But we're looking for alignment with channel, or we're looking with -- for alignment with our manufacturing capabilities, or we're looking for geographical alignment. So that's kind of where the M&A pipeline is. But I think in the near term, you can expect in the next -- by near term, I mean next 3 to 4 quarters kind of thing. A little more participation with stock buyback than you had seen for from us in the third quarter, where I think after the ASR we've done, we did $5 million or something. So I think you'll see some of that cash be used there. Also I was pretty happy with the cash generation for the quarter as well, so I think it gives us some flexibility that we have that we wouldn't have had before.

Yes. I guess, tied to that, I mean, just kind of the puts and takes on kind of reducing, I guess, kind of the growth debt on the term loan. And maybe this is a better question for Evan. But how do we think about that here in the short term since the cash, I guess, it's just the interest is, I guess, a negative carry there?

Yes. I mean, certainly, we're talking about it. I'll let Evan give you the full answer. But if you look at what we're earning on the cash versus what the spread is on the debt, certainly, it's something that we're talking about that would give us anything to pay that down and if -- what the economics of it. But go ahead, Evan, and...

Yes. No, that's right. I would say we're in the evaluation stage really across the board when we look at the capital allocation. And specifically, with respect to the Term Loan B, we have about $480 million outstanding with $350 million -- a little over $350 million in cash. So we're in a solid position. But I think that's all tied into this share repurchase, debt retirement overall discussion, and I think will balanced as we move forward.

Okay. And I guess, just in terms of how you guys would approach a share repurchase. I guess, what's your preference in terms of an ASR versus just out in the open market?

I don't really want to say one way or the other. I mean, if we do an ASR, obviously, we'll announce it. But I think it just causes some front running, and I have a bias for open market activities. But I think that there's greater financial minds of my own that will say this is a better way to do it or not. And certainly, it would be something we take in concert with the Board as we go forward. But I'm not sure that the ASR and having that does any good for you. So I have a bias for open market, but we'll see as we go forward.

Okay. And then just one more. Just kind of your sense on kind of hydrants and pipes, kind of I guess, year-to-date, I guess, in your market, you did talk about a little bit about the quarter. Just any kind of bigger picture there?

I'm not sure what you mean, Jose. Do you mean, I'm sorry, in terms of the overall market growth? Or...

Yes, for Mueller Co.

Yes. I mean, valves and hydrants are going to be up, and we originally came into the year talking in terms of mid-single digits. You'll recall last quarter, I said no, that's probably low to single-mid digits. I think that's all being driven by what it's been a little less strong muni environment than we anticipated. A little bit stronger resi market, but not enough to offset. So I still think we're going to end up in that kind of 3% range with a fairly strong fourth quarter for valves, hydrants and brass what we talked about in terms of core. And the fundamentals about still needing to retrofit the existing infrastructure, along with an improving resi environment, we're still not back to what I would consider equilibrium. If you think about us being around 1.2 million housing starts and you say, "We kind of need to be between 1.4 million and 1.6 million housing starts," might have been our long-term equilibrium. So there's 10% to 15% growth opportunity there, plus you take the need or the retrofitting, if you will, of the existing infrastructure, you come up with the growth number that says our long-term growth of valves, hydrants and brass what we consider our core should be a little bit stronger than GDP kind of growth. There is no reason and I've seen nothing that would make me change my mind in that direction. So I think that the long-term growth for those businesses should be like that. I think in the near term, we'll get a little lift because there was a lull. And I also think that all -- the Washington situation is one that continues to perplex, not a political comment one way or the other. But I do think that we have to say what we're going to do about infrastructure so that people all start moving in the direction. Because right now, it feels highly confused and a little choppy out there.

Our next question is coming from Mr. Jim Giannakouros.

Price increases in brass, similar in magnitude to what's been introduced in hydrants and valves? Or how should we be thinking about magnitude there?

I think it was -- I think the hydrants and valves back in February went after $0.07. It was delayed. I can't even remember off the top of my head what the yield looks like right now. I think in brass, we went after $0.05, and the yield will be something less than that. So I should say the yield should be around $0.05 and I think we went after $0.10 and expect to get $0.05 or $0.06. These yields with exchange and everything else were a little bit, I don't know, choppy. We've used that word for demand. It's uneven. So we've seen an ever-improving bookings edition on brass, but brass costs have continued to go up. I think if you look at -- I'm going off at the top of my head here, but if you look at Q3, I think our average brass was $2.78. I think in Q4, we expect that number to be around $2.87. So another $0.09. So if you think about a yield in the 5% range and you think about a cost probably going up another $0.09, $0.10 a pound, you'd be kind of right there with where I think the quarter is going to come out. The announced price increase and the yield price increase are always something that moves around for us. And I think in the past, we've guided that when we announced a price increase, we generally expect to yield around 50%. And I think that's where we're modeling perhaps right now, and that's what we think we're going to yield.

Okay. That's helpful. And since we're on that, I mean, puts and takes on Mueller Co. margin progression, obviously, liking that prices there are offsetting inflation. But can you frame for us or size base incremental margins on volume growth? And how much in productivity benefits should we be thinking annually? And what are you guys targeting there?

There's a lot to that question. I think Mueller Co., full year, I'm expecting somewhere to be a little south of $20 million total productivity. And if you were to do that math on what they've delivered so far versus what's left to be delivered, I think there's probably another couple of million dollars in the quarter in Q4 as some of the bigger projects, like project [bear] come off the year-over-year comparison because they were implemented in Q3 of last year. So probably, a couple of million more to come from Mueller Co. in cost out. Probably, think about it in the context of maybe a couple of million in price in the quarter. And so all in all, that 30 basis points I was talking about improvement on a consolidated basis, I think that Mueller Co. could be anywhere from up similar numbers to kind of down 40 basis points depending on what you assume for steel, scrap and brass. So if you hold this flat, kind of that $2.78 number, we'd be up. If it runs all the way to $2.87 in the quarter or $2.90, we could have a few more headwinds, and we're not contemplating that all of the price yield will come in, in one great swoop here in August. So that's kind of the best way I can dimension it for you, Jim, is that it's going to be a range of outcomes. But where we think we are right now is that there's a couple of million left to get in price, a couple of million left to get in productivity. There'll be a little bit of volume absorption. And depending on what happens with scrap, steel and brass will kind of be the determinant.

Okay. So that $20 million is an FY '17 number. I mean, is there a productivity or a cost takeout figure that you're contemplating for -- on an annual basis? Is it $5 million or $10 million that you typically targeted? It sounds like you had some heavier lifting coming into this fiscal year. But is there something just when we're modeling out years, how we should be thinking about your productivity initiatives?

Yes. Sorry. Yes, I think we should be looking -- I generally say 100 basis points forever, and then you have to reinvest in the business, and you have to have a steady drumbeat of new products coming in. So if you think about total productivity at, let's call it $20 million, and then net inflation at takeaway, then you would expect to see about 100 basis points of productivity from the combined planned operations every year. And that contemplates, though, for your out year modeling that we grow our new product or our vitality index to something approaching 15% to 20%. So that you have 15% to 20% of the products you're making, year 1, year 2, year 3, that you're going to have the steepest productivity. The notion that when you start a new product, its highest cost is its first year of production, and its lowest cost is its last year of production. That's kind of how you should manage the product life cycle, where the bulk of your productivity comes from. And so we haven't yet achieved a vitality index in anywhere near the 20s, but it's something we have to. And then at the same time, as we're getting those new products across our machines into our foundries, we should be able to give 100 basis points of productivity. Next year, I think it'll be a little heavier than that. Next year, I believe that we should have kind of this year kind of productivity, kind of $20 million-ish and then a little bit of inflation, but the net flow through to be a little higher. Because I do believe we've under invested in engineering. And as I said in the Q2, I think it's something we have to invest in, in order to kind of [pry the pump] on new products.

Got it. That's very helpful. And one last one, if I may, quick one. On Middle East, I know it's small, but there had been hiccups there. Has that stabilized? Or still declining quarter-over-quarter?

I would call it up, but it is kind of bumpy. I mean, it was up Q3 versus Q3 last year. There's a couple of big projects going on over there in Oman. There's some big investments. They continue in Saudi and some other places, where there's desal projects that could be of interest to us. But I would say it's bumpy and -- but it was a good quarter internationally overall.

Our next question is coming from Joe Giordano.

This is Tristan in for Joe today. If I look at your distributors, how do they forecast the level of inventory that they need to carry here? And what kind of visibility do they have there?

Gosh, how do I answer that? They don't. They give you some point-of-sale information. They have their financial targets, our 2 largest, Ferguson and HD supply. Well, HD Supply has just been purchased by of Clayton, Dubilier & Rice. Wolseley Ferguson, they have their cash metrics that they're trying to manage. They have their terms that they're trying to manage. So it's a negotiated discussion region-by-region based on what sell-through looks like, so our visibility quarter-to-quarter is relatively short.

All right. And then if I look at your AMI meters, I don't know if you can tell, who are you gaining share from? And I don't know if you have any colors on what region you're gaining share the most.

Well, Tristan, that's -- I would say that the market is in an adoption phase, and so you're not taking share from anybody. This is an emerging market. The AMI space, whether it would be kind of that AMR operatable or a fixed network AMI, that as people adopt, you battle it out with all of the traditional players. There's only a few people in fixed network. We are growing faster there, we believe, than the market is actually growing. So we should have, at the end of it, a higher participation in the AMI market than we have in the traditional markets. That's been the strategy. So I wouldn't characterize it as taking share from anybody. I would characterize it as AMI being adopted, replacing visual-read or broad buy AMR and us participating in that emerging market. With that said, I think that one of the things we're not doing as an industry, perhaps others are doing it better than us, is if you think about the fixed networks, I think the fixed network in a 50,000-person city and below, you can see maybe some economics for people like us and people at traditional competitors to put in a fixed network. But I think if you get to New York City or even Philadelphia, which is out there now, or one of these top 25 MSAs, to think they're going to deploy a fixed network for the water infrastructure, deploy a fixed network for the electrical infrastructure, deploy a fixed network for policing, deploy a fixed network for street lighting, deploy a fixed network for all of the things that will ultimately need to be automated in a metropolis, I think it's unrealistic to think that water is going to be at the locust (sic) [locus] or some kind of a reserved bandwidth is going to be at the locust (sic) locus of those deployments. And that's why we commit ourselves to being in this open architecture environment. That's why we are in LoRa. That's why we will look at IEEE 802.11 and every communications method, whether it be WAN system or whatever. Because we know that in the large-scale deployments in the future, a person that's positioned to integrate into fixed networks that are, let's call them, open architecture will be well positioned. And we believe that, that's the path we're on with our product development. And we'll continue to believe that, that's the right path to take share in the emerging market.

Yes, I appreciate the comments, Scott. When I was talking about share take, I guess, I was just referring to you integrating or implementing AMI technology where maybe some of your competitors have a visual-read, that sort of thing. With that being said, are you seeing any buckets of strength, different locations in the U.S.?

I don't -- I can't answer that. It's not that I won't, it's that I can't answer, but I'd be happy to get back to you when we look at the regional data. But I think it's pretty broad-based. I know the West Coast Southern Cal probably had the greatest adoptions so far, kind of the early adopters. But I can't answer because I don't have the data in front of me. But certainly, it's not something we'd be unwilling to share, so be happy to get back to you or Joe.

Now our next question is coming from Mr. Seth Weber.

Just real quickly. We've been hearing more recently about China trying to make some progress with water leakage in their systems. I'm wondering if you have any initiatives to try and push into that market. Do you have feet on the ground there? Have you had any conversations with any potential customers there?

So to answer the question, I know this came up on another call, China is not a focus for Echo right now. I mean, it is something that we're interested in. It's something we'll be following up. We do have feet on the ground in China. We actually have access capable of having the discussion in Shanghai, in Beijing, in Guangzhou. But right now, as we think about where Echo is in its deployment and especially as it relates to pipe condition assessment and fixed leak detection, China has not been one of the Southeastern Asian cities that have been a focus for us. I think that the biggest thing has been kind of that Malaysia, Singapore, the island nations that have relatively limited access to fresh water and extremely high marginal cost of water. That's kind of how we focus the Echologics businesses around that marginal cost for gallon of water is more than kind of digging another well, then it's well positioned for people to be willing to be spend for a fixed leak detection network. But to answer the question directly, Seth, it's not a focus area for us at this time, but it could become in the future.

So I see nothing else in the queue. What I'd like to kind of summarize saying is, look, I was pleased with the quarter between the growth that we were able to show from shipments, along with the increasing backlog, which is I said at the end of the Q&A was around $15 million, along with the improvement we saw in performance from the plans, offsetting what was some pretty stiff headwinds in the material environment, along with an improving sequentially price environment, I was happy. And as some will tell you that's difficult. So I thought we had a solid quarter, and I thought the team responded well to the challenges that you have in the quarter. I thought, operationally, we were on point, and I was happy with the sales team's ability to put through the price increase and deliver volume. So all in all, I'm positive, and I thought it was a good quarter and be happy to talk to any of you after the fact. We have some calls lined up. But in summary, pleased with Q3.

And on that note, with nothing left, I think, Martie, we're good. Operator, I think we can...

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