Mueller Water Products Inc (MWA) 2018 Q4 法說會逐字稿

Welcome, and thank you for standing by. (Operator Instructions) This conference is being recorded. If you have any objections, you may disconnect at this time. I'll now turn the conference over to Whit Kincaid. Thank you. Please begin.

Good morning, everyone. Welcome to Mueller Water Products 2018 Fourth Quarter and Fiscal Year End Conference Call. We issued our press release reporting results of operations for the quarter ended September 30, 2018, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Discussing fourth quarter and full year results and the outlook for 2019 are Scott Hall, our President and CEO; and Martie Zakas, our CFO. This morning's call is being recorded and webcast live on the Internet. We have also posted slides on our website to help illustrate the quarter's results as well as to address forward-looking statements and our non-GAAP disclosure requirements.

At this time, please refer to Slide 2. This slide identifies 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 non-GAAP and 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. Please review Slides 2 and 3 in their entirety.

During this call, all references to a specific year or quarter, unless specified otherwise, refer to our fiscal year, which ends September 30. A replay of this morning's call will be available for 30 days at 1 (800) 860-4697. 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, Whit. Thank you for joining us today to discuss our results for the 2018 fourth quarter and full year. I'll give you a quick overview of the quarter, and then Martie will follow with additional commentary on our financial results. I'll then provide some further color on key areas later in the call. And finally, we will conclude with a discussion of our outlook for 2019.

We had a solid finish to the year with a 12.1% net sales growth and an 8.7% increase in adjusted operating income in the quarter. Improved execution and strong demand in our end markets helped us generate very good volume growth at both Infrastructure and Technologies. We also benefited from the price increases we implemented earlier in the year, which helped us offset material cost inflation in the quarter. We continue to feel the impacts of inflation primarily driven by higher prices for raw materials. In addition, we felt the impact from higher freight costs compared to the prior year. These headwinds have been especially challenging for the specialty valve portion of our business, which has longer lead times.

We have responded by announcing price increases for many of our products in September, which we expect to help offset anticipated inflation in 2019. I am proud of how we executed this year, evidenced by growing annual net sales 10.9%, adjusted operating income 11.4% and adjusted net income per share 20.5%. We made significant progress executing our key initiatives to grow and enhance our position as a leading water infrastructure company. We demonstrated our balanced and disciplined approach to capital allocation as we further strengthened our balance sheet with our debt refinancing while increasing our reinvestment in the business and returning $60 million of cash to shareholders in 2018 through dividends and share repurchases.

We've talked about how acquisitions that leverage our strengths can accelerate our organic growth. I am extremely excited about our announcement to acquire Krausz Industries, which I will touch on later on the call. This is a wonderful opportunity to broaden our product portfolio for our North American customers and expand our global reach.

With that, I'll turn the call over to Martie.

Thanks, Scott, and good morning, everyone. I will start with our fourth quarter consolidated financial results, then review our segment performance. Consolidated net sales for the 2018 fourth quarter increased $27.4 million or 12.1% to $254.3 million driven by higher volumes at both Infrastructure and Technologies as well as higher pricing at Infrastructure.

Gross profit increased 5.6% in the quarter to $85.5 million, yielding a gross profit margin of 33.6%. Volume growth and higher pricing contributed to this increase. We continue to experience the impacts from higher costs due to inflation as well as manufacturing inefficiencies in the quarter, which impacted our gross margin. The primary drivers of inflation include material costs, which increased approximately 5% year-over-year in the quarter and higher freight costs.

Selling, general and administrative expenses were $42.9 million in the quarter, up $900,000 from last year with the increase primarily due to personnel-related expenses. SG&A as a percent of net sales decreased to 16.9% in the fourth quarter from 18.5% in the prior year quarter. For the year, SG&A as a percent of net sales decreased 60 basis points to 18.2%.

Adjusted operating income increased 8.7% to $42.6 million in the 2018 fourth quarter. The adjusted results this quarter exclude $2.1 million of other charges. The improvement in operating income was primarily due to higher volumes and higher pricing, which were partially offset by higher costs from inflation and manufacturing inefficiencies at Infrastructure. Adjusted EBITDA for the 2018 fourth quarter increased 8% to $53.7 million. For 2018, adjusted EBITDA was $180 million or 19.7% of net sales.

Turning now to taxes. For the 2018 fourth quarter, we reported a net income tax expense of $9.7 million or 28% of income before income taxes. This rate differs from the statutory rate primarily due to the effects of state income taxes, manufacturing deductions and discrete items. On an adjusted basis, the fourth quarter income tax rate was 27.7%, which excludes $100,000 of onetime impacts from tax legislation.

For 2018, the adjusted effective income tax rate was 26.2% as compared with an effective rate of 30.8% in 2017. The 2018 full year adjusted effective rate was lower primarily due to a decrease in the federal income tax rate as a result of new tax legislation.

Our adjusted net income per share increased 13.3% to $0.17 for the quarter compared to $0.15 in 2017. 2018 quarterly adjusted EPS excludes $2.1 million of strategic reorganization and other charges, $300,000 related to the reduction of our ABL commitment and $100,000 related to the tax legislation.

Now I'll turn to our segment performance, starting with Infrastructure. Infrastructure net sales grew 9.3% to $223.5 million in the fourth quarter due to higher shipment volumes and higher pricing. For 2018, Infrastructure had a strong year with 10.7% net sales growth. Adjusted operating income for the fourth quarter was $50.1 million, a decline of $900,000. The benefits from higher shipment volumes and higher pricing were primarily offset by higher material and freight costs in conjunction with carryover manufacturing inefficiencies we discussed last quarter. For the quarter, higher pricing did cover material cost inflation; and for the full year, higher pricing covered these inflationary costs. Adjusted EBITDA for the 2018 fourth quarter decreased $400,000 to $59.8 million in the 2017 fourth quarter, yielding an adjusted EBITDA margin of 26.8% for this segment.

Moving on to Technologies. Technologies' performance was much improved this quarter with strong sales growth and a small operating profit. Net sales increased 36.9% to $30.8 million in the quarter primarily driven by higher volumes at Mueller Systems. Adjusted operating income was $300,000 for the fourth quarter, an improvement of $2.5 million versus 2017. The improvement in adjusted operating income was primarily due to higher volumes and manufacturing performance, partially offset by higher costs associated with inflation. As a reminder, in our third quarter, we had delayed delivery of some sales at the end of the quarter, and delivery of those sales helped to benefit this quarter's net sales and operating income.

Now I'll review our liquidity. Free cash flow, which is cash flow from operating activities of continuing operations less capital expenditures, increased $18.8 million to $33.8 million for the 2018 fourth quarter. In 2018, we had generated $77 million of free cash flow compared with $18.8 million in the prior year. The $58.2 million improvement in free cash flow is due to an increase in cash flow from operating activities driven by both improved operations and timing of expenditures partially offset by higher capital expenditures. Additionally, in the fourth quarter of 2017, we made a voluntary $35 million contribution to our U.S. pension plan, which impacted our free cash flow. We invested $28.8 million in the quarter for capital expenditures and $55.7 million in 2018, an increase of $15.1 million from 2017, largely to upgrade our equipment and manufacturing capabilities, which will further drive cost productivity improvements and efficiencies across the organization. We also are investing to expand our large valve casting capabilities in our Chattanooga facility.

At September 30, 2018, we had total debt of $445 million, a decrease of $35.6 million from last year. At the end of the fourth quarter, our net debt leverage ratio was less than 1x and our excess availability under the ABL agreement was approximately $125 million.

I'll now turn the call over to Scott.

Thanks, Martie. I'd like to comment on a few key areas and then discuss our full year 2019 outlook. We are in the early stages of a transformational process as we take a company with a strong history in manufacturing iron and brass products for municipal and residential infrastructure to one that provides more intelligent, value-added solutions to help customers manage and deliver important resources. Mueller Water Products is uniquely positioned to leverage its large installed base of fire hydrants and other products with new technology offerings that can help our customers deliver the most important water resources to their communities. As a reminder, we have 4 key strategic areas we remain focused on to drive results.

Delivering integrated, customer-focused support and alignment of our people, products and processes is foundational for executing our other key strategies. The strategic reorganization we announced in September of last year was focused on creating an integrated, customer-centered support structure with centralized common functions and integrated information technology. We reconfigured our divisional structure around products with 5 business teams that have line and cross functional responsibility for managing specific product portfolios.

Under the new organizational structure, engineering, operations, sales and marketing and other functions have been centralized to better align with business needs and generate greater efficiency. As part of this process, we recently launched our new Mueller brand identity at the 2018 WEFTEC conference to bring our family of brands more closely together in support of our ongoing efforts to drive revenue growth. The changes we have made over the past year have led to improved execution of our key initiatives across the organization.

We are well positioned to grow and play an integral role in building the future of our industry. Accelerating the development of new products will help us expand our market leading position and grow organic sales above market. Increased investment in our product development capabilities, including expanding our engineering staff, has helped develop our pipeline and launch several key new products this year. To accelerate our efforts, we opened a new technology center of excellence in Chattanooga, which will focus on our valves and hydrants. We are in the process of creating a new technology center in Atlanta to focus on software and communications technologies. With this change, we will transition the network operations center and all hardware and software development activities to the center of excellence in Atlanta. We are pleased to have Chattanooga and Atlanta join Toronto, which is our center of excellence for leak detection.

As we invest in engineering talent, we are working to improve manufacturing operations by developing a culture focused on driving operational excellence. We are bringing best practices focused on lean manufacturing with an investment mindset to deliver manufacturing productivity improvements. Efforts will facilitate innovation and new product development, helping us drive sales growth and strengthen product margins. Effective capital investments and efficiencies at our facilities will allow us to drive down costs, which can fund additional productivity initiatives and continued investments in product development.

We believe these efforts will help improve our conversion margins in 2019 and beyond. We are successfully implementing a go-to-market strategy that leverages all of our products and services. This helped us achieve our highest annual net sales growth since 2013. We have executed multiple price increases to cover inflation while delivering strong volume growth at Infrastructure and improve growth at Technologies. Our plan is to continue to enhance sales growth of our existing products by strengthening our relationships with our customers and channel partners and realizing synergies among our product lines with a unified sales and marketing strategy.

Our key strategies are supported by a strong balance sheet and substantial free cash flow, which enable us to reinvest in our business while returning cash to shareholders. We further strengthened our balance sheet this year by refinancing our debt to provide us with a structure that yields long-term flexibility and preserve secured debt capacity. We also reduced uncertainty by extending our debt maturities and fixing our rate at what we felt was an attractive interest rate when you consider rates over the long-term cycle.

In 2018, we generated $133 million of operating cash flow, which we used to reinvest in the business and return to shareholders. We increased our capital spending in 2018 to $56 million, enabling us to further accelerate manufacturing efficiencies and expand our capabilities to meet the growing demand for water infrastructure products as utilities repair and rebuild their aging infrastructure, including the large valve manufacturing capabilities in Chattanooga. In addition, we repaid $36 million of debt and returned $60 million of cash to shareholders through a combination of dividends and share repurchases.

Our acquisition pipeline is focused on leveraging our existing channels, strengthening our market position and expanding our geographic footprint. Yesterday, we announced an agreement to acquire Krausz Industries, which we believe offers an excellent opportunity to broaden our product portfolio by adding a high-quality brand of pipe repair products to our infrastructure business. Krausz is a family-owned company with a long track record of innovation and growth. We believe this acquisition is complementary from customer, product and manufacturing perspectives.

The HYMAX family of products allows us to address a broader scope of needs for the water infrastructure system while expanding our global presence. Our understanding of their end markets and our shared customers will allow us to accelerate their efforts in the U.S. and abroad. Going forward, we will continue to look for opportunities which are close to our core areas of expertise.

I'd like to now review our full year 2019 expectations for consolidated results. Our annual guidance excludes any impact from the pending Krausz acquisition, which we expect to close in December of 2018. For 2019, we anticipate continued healthy demand in all of our end markets. This includes municipal spending, which represents approximately 60% of sales growing in the low to mid-single-digit range. Residential construction, which makes up approximately 30% of sales, is expected to grow in the mid-single-digit range.

Finally, we anticipate mid- to high single-digit range of growth for the natural gas distribution market, which represents a little less than 10% of sales. I am very encouraged about the progress we have made executing strategies to drive sales and increase adjusted operating income, which are creating a strong foundation for future growth. We continue to believe we are operating in healthy markets, which will accept price increases to cover economic costs. Our annual guidance assumes that the future impact of tariffs will be covered by price increases and market activities. Any additional tariffs could impact the timing of our ability to change prices to cover additional costs.

For 2019, we expect to increase our organic consolidated net sales between 4% and 6% on top of strong sales growth of nearly 11% in 2018 with organic adjusted operating income growth between 7% and 9%. We believe our balanced and disciplined capital allocation, supported by a strong balance sheet and substantial free cash flow, will continue to benefit shareholders while supporting organic growth and acquisitions.

Now Martie will provide some final comments on other components of our 2019 outlook.

Thanks, Scott. Corporate SG&A expenses are expected to be between $35 million and $37 million. We anticipate the depreciation and amortization will be between $50 million and $53 million. Net interest expense will be between $20 million and $21 million, and capital expenditures will be between $56 million and $60 million. We anticipate that our effective income tax rate for the full year will be between 25% and 27%. We will benefit from a lower corporate income tax rate in 2019 compared with our 2018 blended rate. However, our 2019 estimated effective tax rate reflects the elimination or reduction of certain deductions that benefited 2018, such as the elimination of the domestic manufacturing deduction.

With that, operator, please open this call for questions.

(Operator Instructions) Our first question is coming from Seth Weber with RBC Capital Markets.

This is Brendan on for Seth. Just a couple to start here. Were there any pull forward -- I mean, your volume was a lot better than we had thought. Was there any pull forward ahead of the price increases that you announced?

We don't think there was too much there. We did a -- as we said in the prepared remarks, the September price increase was fairly rapid with a kind of a short window with relatively few releases allowed for our channel partners. So we don't think much got pulled into the year, but certainly, there is some possibility. But to give everybody an idea here, the notice period was right at the minute of 30 days and the pull forward allowance was for a single release. And so people couldn't push -- pull pricing into the future for very long. But there may have been a little bit there. Yes.

And then another pleasant surprise versus our model was the profitability in your Technologies business. You mentioned earlier that it benefited from some of the delayed orders last quarter. Is that -- was that the driver really for the profitability this quarter? How should we think about your ability to sustain profitability going forward? And is that $30 million sales, is that kind of like your break-even point going forward?

Look, I think the -- as we said last quarter, we always want to make sure we're real straight about that. I told you I think we left a couple of million dollars on the dock at the Q3 call, and so obviously, we got the benefit of that couple of million bucks. So it helped sales in Q4. So you saw it come through. So if you take that away, at our marginal costs maybe it would have been slightly negative or breakeven, but you should think about the Technologies business as, yes, somewhere in that bare margin, $30 million, $32 million kind of breaking through the break-even mark. But there's a lot of pieces moving in that business, but we were pleased with performance. I was especially pleased with the manufacturing performance, which helped. As you'll recall, in Q3, it hurt. So performance matters and execution matters, and I think the team did a better job.

Our next question comes from Michael Wood with Nomura Instinet.

First, just wanted to ask about the 2019 outlook. It looks like it implies roughly 25% conversion margins. Since you had a lot of operational issues in '18 and you're going to begin to lap some inflation, just curious if you can give us some color, commentary in terms of those conversion margins and why they're maybe not a bit stronger like we've seen in the past.

Yes. I think it's a fair pickup on your part. The reality is, I think, the outlook we provided kind of takes the averages of the last 2 years if you think about both the demand point of view and then what is going to happen from a material inflation net to net. And what we do, as you lap Q1 and Q2 inflation, is you look at what the sequential has been and there's still going to be inflation next year. So I think that the reality for us on conversion margin is going to be some period, not for long, of lapping some -- our backlog and some period of lapping inflation. I think that's the weighted average.

Great. And Scott, you'd mentioned in some of your prepared remarks that you have accelerated some productivity initiatives. You also talked about some investments. Can you update us on that longer-term target that you had with the 100 basis point growth, 50 basis point net productivity and whether or not you can achieve that in '19?

Well, I think what we do with our guidance is try to get you to the sales number and the OI number. I think the -- how much more we're going to make there and how much of it comes from productivity and then you've got the increased depreciation associated with the increased capital investment, there's a lot of moving pieces there. I tend to think of those as long-term targets. If you think about averaging the last 2 years, if you think about what's gone on, I think you should use that model kind of for your multiyear look at the business, but discretely next year, it's going to be -- or I should say this year and early part of next year, we have some big execution tasks around large casting foundry. Just to use that moment to remind everybody that we will be out of the in-sourcing of big bodies sometime during fiscal 2019, big valve bodies as we bring our large casting foundry online. There'll be a lot of moving pieces in that. I'm sure we'll have some startups and things of that nature.

But I think, in the whole, 100 basis points of improvement, 50 basis points of flow-through are achievable in the long term for this business. I continue to be convinced that the opportunity set we see from a manufacturing productivity point of view is a healthy one. And I think we have kind of an open field in front of us. I think, as you get into the anomalies of each quarter, as an investment comes on or as startups happen, there may be some noise in that, but I'm not terribly worried about it. And as this quarter, I think, I saw the cost savings, reviewed the cost saving projects. They were real savings, and we just had them wait in the quarter associated with the things we talked about in the prepared remarks.

Great. Finally, can you just give us a little bit of color in terms of the Krausz margins once that deal closes so we can better model in that impact?

Yes. I'll get Martie to fill in the nitty-gritty, but overall, this is a business that caught my attention early because our EBITDA margins and their EBITDA margins are -- they're similar. They're not identical. They're similar. But I think that what I saw is that when you think about how much money is going in to pipe repair and infrastructure repair and whether you see that as growing over the next 5 to 10 years or shrinking, I think it is going take more and more of a utility's budget. So I like the repair space. And when we reviewed the multiyear model, I think that we got it for a fair value for where we think it could be. But Martie, you want to be a little more particular?

Well, I think, yes, overall, look, as you said, they had revenues for fiscal '17 at about $43 million. Through '18, we have seen them continue with the kind of growth rate that they have exhibited in the past. As Scott said, when we look at their EBITDA margins, we can sort of put them in a comparable, sort of the same zone as where Mueller Water Products are as well. So but I think importantly, as we look -- as we think about what the synergies are and the fit with the company, we just think this one goes very nicely, clearly from a customer perspective, certainly the overlap that we have with their customers, certainly from a product perspective as well as from a manufacturing perspective.

Our next question comes from Brent Thielman with D.A. Davidson.

Scott, just maybe back on the acquisition. Is this indicative of the sort of transactions you're sort of cultivating in the pipeline, I guess, given the margin profile seems to be in the same ZIP Code? Is it unique versus other things you're looking at out there?

I wouldn't call it unique. When we think about, in this particular case, brass, gas and repair as a value stream, when we think about where our product gaps are, all of the businesses, all these value streams have some product gaps. So those bolt-ons that help fill out product offerings are something that definitely we want to do in the future. But that is not to say it's the only profile we have. We have markets that I've talked about on previous calls, especially as it relates to geographic expansion and more industrial or maybe even be more stormwater or wastewater exposure, things like that, that we would also invest. We're looking for where we have strength and we can leverage our strengths or where a target may have strengths and can put us into markers that we aren't in today. So those are kind of all of the basic 101 things we look at. But yes, if there were more Krauszes out there, I would definitely be interested.

Okay. And then on the Infrastructure segment, a lot of companies this quarter have been talking about the, in some cases, pretty extraordinary challenges with weather and just getting work done. It doesn't look like there were -- doesn't sound like there was much pull forward. I was pleasantly surprised with the volumes. I mean, did you -- have you gotten feedback that, that hindered your growth to some degree? Or is this sort of volume expectation you'd have going into fiscal '19?

Well, to be clear, we guided something less than we had this year for fiscal '19. We think the markets remain heavy. I think we're right in line with -- or remain healthy. I think we're right in line with our longer-term guidance that we're kind of in that 150 basis points better than GDP kind of number. Now to answer your question specifically, we saw a meaningful impact 1.5 years ago when Harvey roared through Houston, but we didn't see as much with the Mexico Beach or the -- Florence up in the Carolinas. So I'm not really sure why that is. I mean, certainly, we have presence in both of those markets, but I think the damage to drinking water infrastructure was a lot different in those 2 events.

And one more if I could. Do you see the industry responding on the tech side of the business with price increases to offset inflation? Or is that more likely to be absorbed? And I guess, if you'd just kind of help quantify what those costs are as a percentage of the COGS, that'd be helpful too.

Yes, I'm not going to get into segment COGS costs. I think certainly, with brass increases, as you think about meters and radios, there's been inflation. But obviously, we think healthy markets allow material increases represented back in price. The only thing I would say different about the Technologies businesses is you tend to get into longer-term price agreements where you take these large transitions. So it'll be a longer cycle or a longer leg to recover inflation in the technology side.

Our next question is coming from Andrew Buscaglia with Berenberg.

Can you just comment on -- your residential exposure is about 30%. That's definitely come into more focus given recent concerns in that space. Can you just talk about how you guys play into that sector and kind of where you fit in the cycle there and how you guys are thinking about any potential downside from there?

Certainly, I think you're referencing the cooling nature of resi forecasts. I think the thing to remember about us is that we tend to be early cycle and we tend to be in the lot development stage. So if you think about pipe going in the ground and hydrants going -- valves going in, they tend to be when the land is being developed. I think, historically, you should think about us suffering from an overhang of overdevelopment in the past, but we do not believe the inventory of lots, even in this lower outlook period, is such that we are going to be impacted as negatively as, say, a homebuilder. There's still -- with 1.4 million, 1.5 million homes kind of targeted as the outcome, we think we have, in front of us, still a fairly healthy 2019 and potentially even to 2020.

The caveat here and this is for everybody, is philosophically, we understand that if interest rates accelerate rapidly then cost of money for municipalities, the cost of money for homeowners, home development, you could temper future demand. But from what we see from the Fed, from what we've seen from interest rate environment, while we expect it to go up, we don't -- I think a rapid rise would hurt us more. I think that's how you should think about it, think about our...

Okay. Yes, that's helpful. And did you guys disclose a multiple you paid for Krausz? Or would you like to and then talk about a synergy potential, how that would factor into the multiple?

Sure. Go ahead, Martie.

Yes. Just, yes, as we think about it from a multiple perspectives, looking at their forward EBITDA sort of looking a couple years out and certainly not factoring in any what we would deem onetime costs or associated acquisition expenses. Looking at that 2 year out adjusted EBITDA, we'd say we probably paid a little less than 10x. And with respect to synergies, I think we're going to -- would expect to have savings certainly on the cost side as we look to leverage our capabilities and I think importantly on the revenue side as well. As you said, we think this one's -- as we look at it from a customer, as we look at it from a manufacturing, as we look at it from a product perspective, it really is a very complementary fit with our business today. It also gives us expansion from a geographic perspective as well.

Yes, sounds like it. So it sounds like you can get a couple or maybe a turn out there with the synergies that you have that you guys talked about. So yes, thanks for that. I just wanted to see kind of how expensive a deal like this would be, but I guess, looking at it, it's pretty -- it seems like a pretty good deal.

We think so. We're excited.

Our next question comes from Brian Lee with Goldman Sachs.

Maybe first thing just on the -- I just wanted to ask a few clarifying questions. Martie, you alluded to the revenue that Krausz had done in '17 and that they had been growing in '18 at sort of the level you've been expecting them to or that they have been at. Can you give us some sense of what that is? What has that historical sort of growth rate been? Are they in the mid-single digits the way you guys are forecasting for your segment into next year?

Well, first of all, I'd say, well, certainly, once we close the transaction, we'd expect to give you more insights as well, so let me just say that. But no, I think certainly as we cited the market that they play in, I think Scott referenced in some of his prepared remarks, but as we look at the pipe repair market and we think about how municipalities will look for alternative ways to more efficiently manage their expenditures, certainly the ability to repair products rather than a full replacement is one of the reasons we think that this is an attractive market for us as we looked at the Krausz acquisition and importantly, as we looked at where municipalities, we think, will continue to spend. The aging infrastructure, which is certainly something that is not new news to anybody but continuously how the municipalities manage their expenditures, we think this is a great area for them to do it. They have seen, I think, very nice growth probably in the low double-digit over time. And I think as we look out at the pipe repair market, we think that will continue to be a good long-term market.

Okay. No, great. That's -- I appreciate that color. And then on Technologies, you also alluded to part of the big results this quarter was some 3Q to 4Q pushout. Can you quantify in dollars sort of what that amount was?

I said last quarter, Brian, that we thought we'd left about $2 million on the dock, while we went through some extra QA, and that was -- that's how you should think about it, couple million bucks.

Couple million bucks, okay. That's great. And then maybe just going back to the earlier question around margin expansion targets for '19. I know there's a lot of moving pieces in the macro that have been impacting your costs and then also resulting in driving some pricing actions this year. But as you think about the conversion margins, you've historically talked about 35% to 40% or more, 25% to 30% based on the guidance you're giving for next year. Just wondering if you can, not so much walk through the puts and takes, I think I get what's going on in terms of why that's a little bit lower than what you might historically have targeted. But is that a new normal, in your view, I guess, is the first question. And then, if not, what are some of the sort of initiatives that you think you start to put into play as you move through the year, I would imagine, to get you back toward your original targets in kind of the out years?

Okay. I'm going to try to answer this, but I -- it's one of the reason that, a couple of quarters in I tried to get out of the conversion margin game. You've got to look. You know what our primary inputs are, they are around brass and scrap metals. If you think about a longer-term view, basically, metal prices, all of them, dropped from '15 to through basically the fourth quarter of calendar '16, then they started to inflate. And so you've got tremendous conversion margins as your material costs ran away from you, got lower and lower. And then as they turned, we've been in this lag of getting price after we see inflation. And I think that I don't want anybody to sit there and say, oh, this is the new normal. I think it's completely reasonable to expect, as we tried to put it in the prepared comments, for us to actively manage markets to get price. So this year, we just barely covered material inflation with price increases. So that's a good outcome.

Now if everything flattened out, you can do that math. Over next year, we will have decent conversion margins. If our blended cost -- the blended cost changes, whether it's labor, freight, all of the input costs, if it's going to inflate, we're going to get dilution. If it's going to deflate, we'll get margin expansion. And that's all that's happened. And I just want to reiterate, very happy, saw in September with the price increases we put through, the order book stayed strong. We continued to see strong orders into October, so I am not forecasting a new normal forever. I think if you go back to my long-term guidance, 150 basis points better than GDP, 50 basis points of margin expansion over the long term, a year, take out kind of this quarterly noise, you'll see that we think we're on the right path with both our investment strategy, our selling strategy, our acquisition strategy. So I feel pretty good about the future.

Okay, great. No, that's -- I appreciate that color. Maybe 2 last ones for me, and I'll pass it on. One is you alluded to the manufacturing efficiencies having impacted you. I know you had talked about that coming into the quarter. Can you give us some quantification of what that impact was and if those issues are all behind you or if there are some still lingering impact heading into fiscal Q1? And then secondly, just any updates you can provide on the tax liability issue that's been plaguing you guys?

Maybe I'll take part 1. Martie, you can take part 2. Part 1, last quarter, I said -- you'll recall, just to remind everybody on the call, we lost a holding furnace in one of our facilities. We, I think, kind of run inefficiently by melting and then pouring. We didn't get the benefits of having a large holding furnace, and as a result, we also had repair costs. And basically, the way the system works, right or wrong, we end up with anything we put in inventory is a higher cost, is there at a higher cost. And so when you sold those in Q4, the ones that you made in Q3 that were still in inventory, you basically have lower margins. I forecast and I think on the Q3 call that, that was going to be a $1 million hangover or so. And it was right around that number. I'm not going to get exact because I can't recall it. But it was, let's call it, a $1 million of manufacturing inefficiency hangover from Q3. Apart from that, we saw relatively good performance at the foundries apart from that hangover from Q3. So we don't see any residuals, but I think it's a -- these things are part of the business as such -- as the management team did to manage them, and I think we have the safeguards in place. And on the tax issue, Martie?

Yes. Really, Brian, there's no update I think since we last provided our disclosure in and around the Walter tax situation. I think we said at that time, we continue to work constructively to reach an agreement. We did call out that we think that certainly when you consider the refunds for certain of the years or applied against some of the liability that the net liabilities will be substantially less than those that the IRS put forth in their proof of claim. But until there's further progress, we're not in a position to predict the amount or the extent to which we might be responsible, and we do not have any update with respect to finding or reaching a resolution with the party.

Our next question is coming from Joe Giordano with Cowen.

This is Tristan in for Joe. I'm sorry, I'd just like to go back a little bit on the profitability discussion. If we look at Technologies next year, is your guide -- what's implied exactly for your guide next year at Technologies?

I am not providing guidance at the segment level. I think it's meaningless at this point when we're talking about what is less than 12% of sales or something like that. So we're going to continue to work Technologies. We're going to continue with the innovation we've put in place with our Mi. Net product line, our radios, our meters. We're going to continue the integration of both cellular leak detection along with AMI leak detection. We're going to continue to integrate with smart hydrants and hopefully a smart valve at some point in the future and focus the team on development of sustainable differentiation and sustainable differentiated products and not get into a cycle on a $90-ish million business with the vagaries of community demand. So not going to go there. But I feel very good about the progress the team has made both from a manufacturing point of view, very happy with the product development reviews I've done, with as far as their new collector systems, how many different software initiatives they have underway right now, improvements to both range, power utilization of our radios, very, very happy with Technologies.

Sure, fair enough, Scott. And could you remind us how much of your manufacturing and procurement is done in China?

I could not. We have a facility in China. I don't think we publish it, but it's not much.

Yes, I don't think we've broken it out, but it's not that large. Our largest plants are all located in the U.S.

And let me say again, if you think about what the impact with tariffs have been, and I don't know that number, but it's less than $1 million or so. So it's not a big number. My point is, 1.5 years ago, long before there was any trade dispute, we knew that we wanted to be able to get all of our bodies, all of our disks, actuators and be in control of our own destiny. That's why 8 months ago we told you about the launch of the Chattanooga large casting facility so that we would be able to 3D print all the tooling and then take cycle times from what right now is 12 or 14 weeks for foreign made and equally long for domestically made valve bodies. And we should be up and running. We'll have P-Caps running probably in June through September of 2019 and like to be in full production with the ability to make American-made and American-sourced valves completely by September. So I think we have a leg up on everybody else who continues to bring in foreign-made valve bodies.

So you're not seeing any -- you're not expecting any tightness in the supply chain at all, right, at this point?

I don't know about tightness. I mean, it's really difficult with the rhetoric around the next $200 billion and what's involved and what's not involved and what those actual dates are. So the one thing I've learned over the years is you can no longer say there's -- the ripple effect or what it could do domestic supply in some other area will certainly impact the supply chain. So if the automotive sector all of a sudden starts changing how they buy steel, it will have an impact. Maybe it'll impact scrap. Maybe -- but I haven't foreseen how that will happen. I can tell you that, today, we believe that, given the status quo, that tariffs will negatively impact 2019, and we think we have that expectation in our guidance.

Our next question comes from Walter Liptak with Seaport Global.

I wanted to just do a couple follow-ups. One on Krausz. Can we get the geographic breakdown? It looks like their center came out of Europe but might have a lot of exposure in the U.S.

No, to be clear, they're an Israeli company. We think about them as 75% or so of their sales U.S. based.

North America.

North American based, sorry, I shouldn't say U.S.

Okay, 75% U.S. Okay.

No.

Let me clarify. 75% come from North America.

From North America, got it. Okay. And the sectors, it looks like part of it is muni and some -- might be some irrigation. I wonder if you could help us with understanding the sector mix.

Well, the majority is in drinking water and stormwater management, but I think that the reason you probably read that on websites and such is that when you think about water use and ag being such a big part of it that I believe the company feels that they have a tremendous opportunity to go in and do site repair in these subterranean systems that a lot of the ag systems use. But it's not much. But it is a growth opportunity.

Okay, that helps. And just in -- I apologize if you talked about this already. But the Atlanta tech center, consolidating things there, have you talked about the dollar amounts or timing? And I think you spoke about some cost savings from that tech center. I wonder if there's any kind of quantification about that.

Martie?

Yes. So in terms of setting up the Atlanta center for excellence, that is underway. We do think that we'll incur some onetime costs associated with that probably in the neighborhood of about $5 million, and then we do expect that we will get the savings over time as well associated with that with probably look for less than a 3-year payback, I would say, on that. And in terms of timing, as I said, it's in process, and I think we would look to have it sort of fully up and running in our 2019. Also, just to expand on a little bit further, I think certainly we think Atlanta is attractive from a talent perspective, but I think I also want to point out that when we look at where our other facilities are and particularly as you look at the location of our Chattanooga facility, we think by moving this to Atlanta, it will certainly make it much easier and enhance the synergies and the leverage that we get from the -- having the manufacturing facilities in Chattanooga as well as their technology center as well as our Albertville plant, which is just a little over 2 hours away.

And I think the nexus of putting technology in iron is really what we're going for. So the savings obviously are great, but that's not the deciding factor.

That's not the driving -- it's a factor but it's really not the driver behind the decision.

And our next question comes from Jose Garza with Gabelli Management.

Scott, I was hoping you could maybe just kind of comment on inventory levels at the distributor level and anything kind of notable there.

Yes. We don't -- I was actually in the field with a couple of large distributors, both at GWI and then meeting a couple of others. We don't see anything out of the ordinary there. They're still looking at their gross margin, return on investments, how many turns they're getting. They're kind of around their historical averages. We've not seen any kind of end-of-year buying to get the levels for programs or anything like that. So I think that we're pretty much at the norm. And with that said, I think as we went through October, we were watching bookings levels pretty closely, especially as it related to Infrastructure, and they were basically in line with our expectations.

Okay, excellent. And just on Krausz, it looks like they might have just one facility in the U.S. Is that accurate? Or do they have more, manufacturing?

Yes, they have a single facility in the U.S. as far as doing any value add. And then I think they have a few more warehouses.

Yes, exactly. They have got some distribution facilities here, 1 large and 2 sort of smaller ones.

There might be some painting and things like that going on at the one large one.

Okay. And just lastly for me, on the gas side, on the gas distribution side, I guess, a little bit higher growth rate on that business. Anything worthwhile noting there? Or maybe is there some projects? Or is it new product introductions or anything that's kind of, I guess, a little bit higher growth rate in that business as you guys look out at '19?

Well, I actually had one person say to me that the consequences of not maintaining your water infrastructure are a little different than the consequences of not maintaining your natural gas infrastructure, and therefore, they're a little more hyper about it. But nothing -- there's no fundamental change other than that you do have a little bit better growth associated with gas because it's not 100% penetrated. So if you think about water, every house is served by water. But today, gas lines pass many, many houses that aren't being served. And so you have that opportunity that becomes a lower cost way to heat or to manage water. So it's just the dynamic of having the natural growth plus that little bit as you get more adoption of natural gas to a home.

Well, I just want to -- I think we're near the end. Or operator, is there any more calls?

We have no further questions.

Great. So I want to thank everybody for coming. Like I said, I felt we had a pretty good quarter, and I think that the growth is -- was a highlight for Q4 and I think that we had decent performance as well from our manufacturing facilities, even though we had some challenges from the cost side. So all in all, I feel pretty good about 2019, and I look forward to seeing you all again soon. Thank you very much. Operator?

Thank you. With that, we'll conclude today's conference. You may disconnect your lines at this time.