Mueller Water Products, Inc. (MWA) Q1 2014 Earnings Report, Transcript and Summary

Welcome, and thank you, all, for holding. [Operator Instructions] Also, today's call is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Ms. Martie Zakas. Ma'am. You may begin, ma'am.

Thank you, Laurel, and good morning, everyone. Welcome to Mueller Water Products 2014 First Quarter Conference Call. We issued our press release reporting results of operations for the quarter ended December 31, 2013, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Mueller Water Products had a 159 million shares outstanding at December 31, 2013. Discussing the first quarter's results this morning are Greg Hyland, our Chairman, President and CEO; and Evan Hart, our CFO. This morning's call is being recorded and webcast live on the Internet. We have also posted slides on our website to help illustrate the quarter's results, as well as to address forward-looking statements and our non-GAAP disclosure requirements. At this time, please refer to Slide 2. This slide identifies certain non-GAAP financial measures referenced in our press release, on our slides and on this call and discloses the reasons why we believe that these measures provide useful information to investors. Reconciliations between GAAP and non-GAAP financial measures are included in the supplemental information within our press release and on our website. Slide 3 addresses our forward-looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward-looking statements, as well as specific examples of forward-looking statements. Please review Slides 2 and 3 in their entirety. During this call, all references to a specific year or quarter refer to our fiscal year, which ends on September 30 unless specified otherwise. All operating results discussed in these prepared remarks are from continuing operations unless specified otherwise. A replay of this morning's call will be available for 30 days after the call at 1 (866) 418-8386. The archived webcast and the corresponding slides will be available for at least 90 days in the Investor Relations section of our website. In addition, we will furnish a copy of our prepared remarks on Form 8-K later this morning. After the prepared remarks, we will open the call to questions. I'll now turn the call over to Greg.

Thank you, Martie, and thank you for joining us today as we discuss our results for the 2014 first quarter. I'll begin with a brief overview of the quarter, followed by Evan's detailed financial report, which covers key drivers affecting our businesses. I will then provide additional comments on the quarter's results and developments in our end markets, as well as our outlook for the 2014 second quarter and balance of the year. For Mueller Water Products as a whole, year-over-year net sales increased 5% and adjusted operating income grew 86% to $14.1 million in the quarter. Adjusted net income per diluted share improved to $0.01, from a loss of $0.02. Our Mueller Co. business unit increased net sales 9.2% in the first quarter with growth across most product lines, especially valves and brass products. This increase was achieved despite a decline in domestic hydrant unit volume of 13%, which was due to a number of our distributors and end-users delaying orders while they waited for further clarity regarding the applicability of the Reduction of Lead in Drinking Water Act for fire hydrants. In late December, legislation was passed specifically exempting fire hydrants from the act. Consequently, we believe the decline in hydrant sales is only a timing issue, and we expect to see year-over-year domestic unit volume improve in subsequent quarters. We are pleased with the year-over-year operating income improvement at Mueller Co. Adjusted operating income improved 82%. Adjusted operating margins improved 390 basis points to 9.7%. In addition, net sales of Mueller Co.'s newer technology products and services grew about 12% this quarter compared with last year. Although Anvil's net sales declined slightly, adjusted operating income improved 24%, and adjusted operating margin improved 160 basis points. Overall, results for the quarter were about as we anticipated. We continue to believe results for the balance of 2014 will improve year-over-year, primarily due to expected growth in our key end markets and the benefits of stronger operating leverage. With that, I'll turn the call over to Evan for a detailed discussion of our financial results for the quarter.

Thanks, Greg, and good morning, everyone. I'll first review our first quarter consolidated financial results and then discuss segment performance. Net sales for the 2014 first quarter of $257.4 million increased $12.3 million, or 5% from the 2013 first quarter net sales of $245.1 million due to higher shipment volumes and higher prices at Mueller Co. Gross profit improved 17.5% to $67.1 million for the 2014 first quarter compared to $57.1 million for the 2013 first quarter. Gross profit margin of 26.1% in the 2014 first quarter improved 280 basis points from 23.3% in the 2013 first quarter. This improvement was driven primarily by higher sales prices and higher shipment volumes. Selling, general and administrative expenses were 20.6% of net sales in the 2014 first quarter compared to 20.2% of net sales in the 2013 first quarter. SG&A expenses for the 2014 first quarter were $53 million as compared with $49.5 million in 2013. Adjusted operating income for the 2014 first quarter increased 86% to $14.1 million compared to adjusted operating income of $7.6 million for the 2013 first quarter. This increase was due primarily to higher shipment volumes and higher sales prices. Adjusted EBITDA for the 2014 first quarter increased to $28.8 million compared to $22.4 million for the 2013 first quarter, an improvement of 29% from last year. Interest expense net for the 2014 first quarter declined $900,000 to $12.6 million compared to $13.5 million for the 2013 first quarter. This decrease was due to a lower level of total debt outstanding. In the 2014 first quarter, income tax expense was $300,000, on income before income taxes of $1.4 million, resulting in an effective income tax rate of 21.4%. Even if the tax rate for this quarter had been comparable to our previous guidance of 37% to 40% for the full year, our adjusted earnings per share for the quarter would still have been $0.01. Adjusted net income per diluted share for the 2014 first quarter was $0.01 compared to an adjusted net loss per diluted share for the 2013 first quarter of $0.02. There was a weighted average of 161.7 million diluted shares of our common stock outstanding for the 2014 first quarter compared to a weighted average of 159.2 million diluted shares outstanding for the 2013 first quarter. I'll now move on to segment performance and begin with Mueller Co. Net sales for the 2014 first quarter increased 9.2% to $165 million compared to $151.1 million for the 2013 first quarter. This increase was due primarily to higher shipment volumes across most product lines and higher pricing. Adjusted operating income for the 2014 first quarter improved 82% to $16 million compared to $8.8 million for the 2013 first quarter. Adjusted operating margin for the 2014 first quarter improved 390 basis points to 9.7% compared to 5.8% for the 2013 first quarter. Adjusted EBITDA for the 2014 first quarter grew 36% to $27.1 million compared with $20 million for 2013. Mueller Systems' net sales for the 2014 first quarter increased by about 10% year-over-year. Sequentially, we reduced our operating loss due primarily to higher sales. Year-over-year, our operating loss expanded less than $1 million due in part to an inventory adjustment that impacted the first quarter year-over-year comparison. For the full year, the inventory adjustment impact is expected to be neutral. R&D expenses primarily related to the development of our fixed leak detection offering were also higher. I'll now turn to Anvil. Net sales for the 2014 first quarter decreased 1.7% to $92.4 million compared to $94 million for the 2013 first quarter. The decrease resulted primarily from lower shipment volumes. Adjusted operating income for the 2014 first quarter improved 24% to $7.3 million compared to $5.9 million for the 2013 first quarter. Anvil's adjusted operating margin for the 2014 first quarter improved 160 basis points to 7.9% compared to 6.3% for the 2013 first quarter. Adjusted EBITDA for the 2014 first quarter increased 15% to $10.8 million compared to $9.4 million for the 2013 first quarter. Turning now to a discussion of our liquidity. Free cash flow, which is cash flows from operating activities less capital expenditures was negative $11.3 million for the 2014 first quarter compared to negative $5.6 million for the 2013 first quarter. We continue to expect 2014 full year free cash flow to be stronger than 2013, driven primarily by better operating results. At December 31, 2013, total debt was $600.7 million and included $420 million of 7 3/8% senior subordinated notes due 2017, $178 million of 8 3/4% senior unsecured notes due 2020 and $2.7 million of other. Net debt leverage was 3x at December 31, 2013, using December 31, 2013 data, we had $138.5 million of excess availability under our asset-based credit agreement. I'll now turn the call back to Greg.

Thanks, Evan. I'll now elaborate on our 2014 first quarter and end markets and provide an outlook for the second quarter and comment on the balance of the year. I'll begin with Mueller Co. We continue to see strong growth in domestic demand for our Mueller Co. core products. Domestic unit shipments for iron gate valves were up 8% and brass products were up 13%. However, domestic unit shipments for hydrants declined 13% year-over-year, as a number of our distributors and end-users delayed orders while they sought clarity of the applicability of the Reduction of Lead in Drinking Water Act to fire hydrants. As I noted earlier, we believe, this first quarter decline was only a timing issue, and we expect to see year-over-year domestic hydrant sales volume improve in subsequent quarters. We believe the market as a whole remains strong, and the volume increase we saw in our iron gate valves and brass products was driven primarily by growth in residential construction, although we also saw some positive activity in municipal spending. Year-over-year sales in metering products increased to about 10% in the first quarter. Overall, Mueller Co. net sales during the quarter grew 9% year-over-year, net sales from our core domestic iron gate valves, hydrants and brass products grew 13% year-over-year, even with the decline in hydrant sales. Anvil's net sales declined slightly year-over-year. We saw a drop-off in demand for our products from the oil & gas market, as we approached the end of the calendar year. Shipments of our products to address nonresidential construction market were mixed. We saw positive growth in activity from warehouse construction, but other types of construction declined. In total, our shipments driven by non-res construction were flat year-over-year. As Evan mentioned, in spite of the decline in net sales, Anvil was able to increase adjusted operating income year-over-year, primarily due to lower costs. Turning now to our outlook for the 2014 second quarter. I'll start with Mueller Co. Overall, we believe the fundamentals in our market are stronger entering the second quarter of this year than they were last year. Demand for our products from residential construction and, to a lesser extent, municipal spending is up nicely. In addition, we believe inventory at some of Mueller Co.'s distributors are down as we enter the second quarter. There are a number of items that are likely to affect the second and third quarter year-over-year comparisons relative to timing of shipments. First, as we previously discussed, distributors and end-users delayed some hydrant orders in our first quarter as they sought further clarity regarding lead in fire hydrants; second, in early January, we announced a price increase on iron gate valves and hydrants to be effective on February 14, 3 weeks later than it was last year; consequently, we will have 3 fewer weeks to ship the orders received before the price increase than we did last year. And this could potentially have an even greater impact on year-over-year comparisons in the second and third quarter. More of the orders placed in advance of the effective date are expected to ship in the third quarter of this year than they did last year. Third, the severe weather in the Northeast and Midwest this year has resulted in construction delays that could also impact the timing of shipments in the second quarter. Considering all of these factors, we expect Mueller Co.'s net sales to increase in the mid-single-digits in the second quarter. We expect both Mueller Co.'s adjusted operating income to improve and adjusted operating margin to expand year-over-year for the 2014 second quarter, although at rates -- lower rates than we experienced in the first quarter. We are in the midst of changing the manufacturing process for certain sizes of our iron gate valves. This change is expected to result in a write-down of some of our existing equipment, but it is expected to deliver between $3 million and $3.5 million in cost savings on an annualized basis. We expect to take an associated $1.5 million noncash charge during the second quarter. This expected charge is not included in the adjusted guidance I just gave. At Anvil, while we expect the energy and nonresidential construction markets will improve, we think that these improvements will most likely be in the second half of the year. Consequently, we believe, Anvil's second quarter net sales and adjusted operating income will be essentially flat year-over-year. For Mueller Water Products as a whole, we believe, 2014 second quarter net sales will increase in the mid-single-digits year-over-year, driven by performance at Mueller Co. We expect solid increases in our 2014 second quarter adjusted operating income and expansion in adjusted operating margin year-over-year. I will now take a moment and talk about our expectations for full year 2014. As we said on our last call, overall for the Mueller Co. base business, which excludes our metering and leak detection products and services, we expect year-over-year net sales rate to be in the high-single-digits. In 2013, net sales of our metering products and services grew by approximately 50% year-over-year. We expect to continue to see nice growth in 2014 but expect the growth rate to be about half the 2013 growth rate, based on the delivery schedule of our current backlog and anticipated timing of new projects. In total for Mueller Co., 2014 net sales should -- growth should be comparable to the 2013 growth rate, based on our current outlook for residential construction, continued growth in municipal spending and continued adoption of smart meter technology. We expect Mueller Co.'s adjusted operating income and adjusted operating margin to improve over 2013. We also believe our metering and leak detection products and services will be profitable for 2014 with growth in net sales and adjusted operating income weighted towards the second half of the year. For Anvil, year-over-year net sales are expected to grow in the low- to mid-single-digit range and adjusted operating margin should expand slightly based on our current expectations of increased demand in our oil & gas and nonresidential construction end markets in the second half of the year. Other 2014 key variables include corporate spending is expected to be $34 million to $36 million; depreciation and amortization is expected to be $58 million to $60 million; and interest expense is expected to be about $51 million, based on our current debt outstanding. Our adjusted effective income tax rate is expected to be 37% to 40%. Capital expenditures are expected to be $34 million to $36 million. For 2014, we continue to expect free cash flow to be stronger than in 2013, driven primarily by better operating results. Additionally, we expect cash income taxes to be minimal in 2014, as we continue to benefit from utilization of net operating loss carryforwards. We also expect to make only minimal cash contributions to our pension plans in 2014. In total for Mueller Water Products, our full year outlook remains substantially the same as we provided on the last conference call. With that, I'll open this call for your questions.

[Operator Instructions] Your first question comes from Kevin. Kevin R. Maczka - BB&T Capital Markets, Research Division: Kevin Maczka, BB&T Capital Markets. First, Greg, with the -- given the hydrant decline, the Mueller Co. sales and EBIT increase I thought was pretty impressive. You mentioned how being a contributor, and you also mentioned muni spend to a lesser extent. Can you guys dive in a little deeper on that muni spend piece and talk about what you're seeing there? How much of visibility do you have now that we're into a new year and a lot of these budgets are set?

Yes. Kevin, I think, when you look at the visibility on muni spending, that we generally believe, as I said in our prepared remarks, that we'll see it up year-over-year and a lot of that, I think -- a lot of that is based on input that we get from our field salespeople, as you point out, have the opportunity, they're talking with the municipalities on a day-to-day basis, and they would say generally they're seeing budgets freeing up and expanded this year as compared to last year. Now we know that there's going to be variability during the year, so it's tough for us to say exactly what percentage growth. But I think as we said on our last call, we still think it's in the low-single-digit growth that we think that we'll see demand for our products coming from pure municipal spending for repair, replacing or upgrading existing systems. Kevin R. Maczka - BB&T Capital Markets, Research Division: And on the housing side, Greg, it doesn't sound like you're view there has change much if at all, even though, there's been -- we get some spotty data on the housing and non-res markets from time to time including more recently?

Yes. Kevin, at least what we're seeing now through our first quarter and again what we're getting from our field and our distributors is that we think that in most areas of the country, those excess lots that we have been talking about for several years have been absorbed, so we should see a growth rate more on lock step with overall growth in residential construction. And so I think that when we feel a little more confident about the outlook from residential construction, primarily because we expect to see a pickup in new lot development and I think if we even look at some of the other -- some of the analysts have focused strictly on housing, I think that at least what we've seen recently, I'd say the overall opinion is demand -- new land development or demand for land is still pretty strong. Kevin R. Maczka - BB&T Capital Markets, Research Division: Okay. And if I can just ask one more, Greg on Mueller Co. margins. The hydrant sales were down, and I think that's typically one of your higher margin product lines, so but we still saw this really impressive margin expansion overall in Mueller Co. Can you just dive into that in a little bit more detail? Is it all utilization, we hadn't really had the price -- the new price increase yet. What was -- what are the big moving parts that really contributed there?

Good question, Kevin, and I would say, we certainly benefited from the increase in iron gate valves and brass products. When you look at those 2, their unit volume was up nearly 13%. Also, one of the benefits we had this quarter, and you may remember our first quarter call last year, where we talked about, we had a very rough quarter at our Pratt business unit. Well, we experienced this quarter some pretty nice operating income growth there, but it was as I said, off of an easier comparison in Q1 last year. I think that we -- also, we benefited from higher sales prices, particularly as our shipments of our lead-free brass products have grown significantly on a year-over-year basis. And when we look at our brass products sales, by far, the vast majority of those now are no lead. And we have higher prices associated with those products and higher margins. When we also look at Mueller Co. in this quarter, we benefited from pricing during the first quarter, both from the January 2013 price increase on valves and hydrants and, as I just said, higher pricing on lead-free brass products. We also had a little benefit -- and when we had this -- the issue that surfaced in the industry relative from going from leaded to no-lead, we were able to make that change in a weekend. And we start shipping to the marketplace and offering to the marketplace no lead hydrants. At that time, we also put a price increase -- an immediate price increase on those hydrants. We probably saw a little benefit from that in this quarter, but probably not much. All in all, when we look at it, the -- on a year-over-year basis, on our 390 basis points improvement in margin, probably about -- we estimate about 270 basis points of that or 70% of the margin improvement probably came from pricing. One could argue that the lead-free brass products could be mixed. But in essence, when we look at the higher pricing and certainly the lead-free brass products being a much higher percent of our sales this year than they were last year, we think that those were the real drivers of our -- of the margin and the conversion year-over-year. I should note, because I talked pretty extensively about the positive impact of no lead or no lead brass products, that will on a year-over-year basis anniversary this coming quarter and that while not so much -- I'm sorry, in the third quarter, that we started in the second quarter last year, but really in the third quarter, primarily only shipping no-lead brass products. I'd tell you, that's a pretty long-winded answer. Hopefully, I hit the point you wanted to have discussed. Kevin R. Maczka - BB&T Capital Markets, Research Division: Yes. That's great, Greg, very helpful. Just one more point, can you put a number on that lead-free mix since that sounds to be one of the key issues here?

Kevin, we think, it's probably -- we think that probably just the higher pricing added about $2 million to $2.5 million to our revenue with a nice percentage of that dropping to the bottom line.

Our next question is from Walter.

I wanted to ask a little bit about the -- yes, I wanted to ask about the weather disruptions that you're experiencing. And maybe if you can quantify it in terms of days, or revenue dollars, or percent, something like that.

Walt, we wish we could. The -- it's very difficult. I mean we're getting reports in from our distributors in the Northeast and Midwest that are telling us that, that their branches have been shut down a number of days, where no one -- obviously, where no one's getting to work, so no one's answering the phones or shipping products. But on the other hand, there's probably no -- there's no construction going on. So it's very difficult. It's frustrating for us not to be able to come and say that, boy, we think it's going to affect us a specific dollar amount. At this time, we just see and get the reports from the field. The construction activity that was taking place last year had just been shut down this year. So we know it's going to be some kind of an impact, but it really is difficult for us to put a dollar value on that. Who knows if the weather that most of you are getting in New York today, is that going to continue in the March, or we're going to suddenly spring come early. But I know that when we look through the first 5 or 6 weeks of this quarter, clearly, the reports we're getting from our field is that the weather is impacting construction activity.

Okay, okay. I think that's clear. With -- how should we think about this though? Is this a temporary timing issue where you think that whatever happens in the first quarter gets made up in second -- I mean in the March quarter gets made up in the June quarter?

We would certainly expect that would be the case, because it gets back to the macro drivers, we are bullish about -- still bullish about the housing market as we talked about. As Kevin asked, we're seeing positive signs on municipal spending, so we don't think that demand goes away. Now if -- I would have to say that if we see such a significant cutback in construction work in the second quarter when we look at our third and fourth quarter, we may get to a point where crews just aren't available to do all the work to catch up. I don't -- we certainly don't know enough right now to say that could be the case. So I think as we look at it, we think it may be a timing issue. And as we look at it today, we think for the full year it should wash out.

Okay, okay. That's a good point. And then just a last one would be a follow-up to that first question about the muni spending. Do you track number of projects that you're seeing from your municipal customers? And if you do, how -- can you quantify those in terms of number of projects or dollar amounts?

Well, it is difficult for us to, I would say, get a decimal point accurate handle on that, primarily because so, as we said in the past, so much of what we have -- of what we ship goes through our distributors, and it can get lost. But we do direct -- make direct quotations on public works on a number of public work projects. So if we look on that on a year-over-year basis, a number of our quotes are up 20%. So that's in the number of quotes we've made to public projects, and if you look at that on a dollar volume year-over-year, it's up almost 13%. So our conclusion there is, well, obviously, maybe we're seeing more projects and though in total they may just be slightly smaller projects because the dollar value of the quotes are not up as much as the absolute number. But all in all, we're looking at it as both very positive indicators.

Next question comes from Mike Wood.

This is Adam in for Mike, Macquarie. Quick question on Mueller Systems. Do you guys still expect that to be profitable for the year?

Adam, at this time, we do expect it to be profitable for the year. And as we said in the prepared remarks, weighted towards the second half of the year. This is based on several factors as we're sitting here looking at it today. Certainly, based on the shipment schedule of our existing backlog, orders that are either in the quotation stage or about to be quoted -- we're about to issue quotations that we expect to win, also coupled with we think some benefits that we'll see in the second half of the year on cost reductions we've implemented. Certainly, when we look at our backlog, we have a positive weighting of our backlog to our AMI offerings, which will improve our mix. On the cost side, we expect to start shipping in the second generation of our radio, which has both improved performance and cost less to manufacture than our current design. I think it's also important -- when we look at the second half, a factor that contributes to our belief that we think that this business will break even is that we expect to start seeing lower deployment costs than what we're currently experiencing. We've developed an installation tool that now verifies that proper installation is done before the installer leaves the site. Before, if an installer made a mistake and left, it would cost us more to come back and fix the problem. Now we can do it while the installer is there. Secondly, we've automated some of the processes that configure the network, which will reduce our labor cost and error rates. So when we look at it, the deployment costs can be -- the variability of the deployment costs can be a big impact. And we think that in the second half of the year that our deployment costs will be reduced by about 50% from what we are currently experiencing. So I think, Adam, when we look at in total, I think, given the volume that we expect to see in the second half of the year, and that's based on our current backlog and the orders we expect to win. We expect to see a greater mix of AMI and coupled with lower cost and deployment costs that we think that all of these factors as we view them today will make this business profitable. But as we pointed out in our call when we talked more specifically last conference call that we know that we are exposed and this business today given the project nature is exposed to any slippage in a -- in the project, in the installation. And so if we go a couple of months and it moves from our fourth quarter into the first quarter of 2015, that could impact the profitability of our business, but as we look at it today, we expect these businesses to be profitable.

Okay, great. And in your current backlog in that business, what's the mix of AMI versus the sort of legacy AMR?

Yes, our backlog is up about 22% year-over-year, and that's about $5 million. And I'm going to say that probably 50% to 60%, 70% of that is AMI.

Okay, great. And just on Anvil, I'm not sure in the past you've given sort of the oil & gas versus non-res growth. Is there a mix benefit or sort of headwind from either of the 2? Or are they sort of similar margin?

The margins are close enough where I don't -- I wouldn't characterize it as a headwind or tailwind for each. It's just that I think the absolute growth rate that we're seeing in that market has -- is not so much mix related.

Our next question comes from Brent Thielman. Brent Thielman - D.A. Davidson & Co., Research Division: Yes, D.A. Davidson. Greg, have you seen some evidence of that hydrant orders are churning here subsequent to December and into the second quarter?

Yes, we actually saw a nice pickup in orders the last couple of weeks in December. So now I wouldn't say, Brent, that, that's across the board from all of our distributors, but I think those who were concerned about their inventory levels, we did see a pickup in orders. We're sort of mixed on when we think those will ship. We think the majority of those will ship in the second quarter, but we think it's possible we'll see some of those even slip into the third quarter. We know some distributors in especially in that November time frame when there was a lot of uncertainty were concerned about possibly getting stuck with leaded hydrants in their inventory and they were pretty aggressive in discounting those. So we think some municipalities took that opportunity to bring them into their inventory. So all in all, we believe we saw orders picking up in late December that were probably -- we would have normally expected to get in November if we didn't have this issue. And we expect the majority of those, as I said, to ship in Q2 with some possibly going into Q3. Brent Thielman - D.A. Davidson & Co., Research Division: Okay, that's great and helpful. On the price increases in Mueller Co., can you give us some degree of what those numbers are?

Yes. When we look at our iron gate valves, it's a 7% price increase. When you look at our hydrants between the price increase that we announced immediately put in effect in December for going to no lead and the price increase that we announced here effective on February 14, that amounts to about 10%. Brent Thielman - D.A. Davidson & Co., Research Division: Okay. And then just lastly, the margin drag from the tech business, I'm not sure if you called that out in terms of Mueller Co.

We did. And when you look at Mueller Co. in total, it was a little over like the 300 to 340 basis points this quarter.

Next we have Jerry Revich.

It's Jerry Revich from Goldman Sachs. Greg, can you talk about further opportunities you have for production process optimization along the program that you mentioned for the select product lines in Mueller Co. that will add $3 million? Are there any other similar opportunities that we should be thinking about? And where are we in that optimization process broadly?

Yes. I think, Jerry, when we look over the next 18 months, we think that beyond the projects that we specifically referenced, we think that the productivity improvements and the cost savings and all will come just from the continued implementation of the lean initiatives that I would say that we are probably between year 3 and year 4. We continue to see, and it's contributing to our margin improvement, headcount per unit go down and -- now we're always looking, I think, more on is there a way to also in bringing in automation, but we weigh the benefits of bringing in automation versus where we are in our current manufacturing processes and how long it would -- how quickly the payback would be if it makes obsolete some of our current systems. Again, and I would say our biggest contribution to the bottom line will be the increased utilization, especially on our foundries. Foundries, as we've discussed in the past, have high fixed costs. We were -- if you look at our Albertville foundry in our -- for our hydrants, a year ago in the first quarter, we were at about a 45% capacity utilization rate. This quarter, we were at 50%. If you look at our -- around 50%. If you look at our Chattanooga facility, where we do our iron gate valves, we were in the, last year, between 40% and 50%. This year, in this quarter, we're between 50% to 60%. So relative to improving our overall performance, I think our #1 opportunity is the increased capacity utilization. I think we will continue to see over the next 18 to 24 months year-over-year an improvement just from the lean initiatives we have implemented, and we do think that we will have some opportunity on just changing the process together as we pointed out here. But I think that when you look at it, I think that -- I've ordered those in the order of where I think that they will have the greatest impact for us.

And Greg, you spoke about lead versus lead-free products for a couple of your product lines. And can you just take a step back and tell us if there are any other product lines that will be impacted and what the opportunities are for your business? It sounds like there might be a sustainable shift here.

Jerry, as we sit here today, we don't see any imminent change, but I will tell you, in September we didn't expect that there'd be any disruption on the hydrant market either. But if we look relative to the lead, no-lead issue, the act that we were referring to actually was introduced in January of 2011. The industry had to January of 2014 to change the named products from that, that contained lead to no-lead. And for us, the biggest impact is on our brass products, so those are our curved stop and a number of smaller products. We made the change in the hydrants quite frankly from a lead standpoint, I think that we've made all the changes that there are to be made and we don't see anything really changing in base material for our valves or our hydrants. So I think that most of the changes that we can think of are now in effect.

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I'm sorry, Jerry. I didn't hear your call there. You broke up a bit -- your question.

[indiscernible] press release that [indiscernible]

Jerry, we're not able to hear you at this point in time. I think you're breaking up.

Next question comes from David Rose.

David Rose, Wedbush Securities. Most of my questions have been answered but maybe a couple of quick follow-ups. Maybe on the Anvil side in particular, you commented on the nonresidential construction side. I think you'd given some broad color, but maybe you can give a little bit more color in terms of specific end markets that are a little bit stronger? And some regional context as well? I think you did that on the last call if I'm not mistaken.

Yes, yes. We -- actually we saw -- if we look at our different product lines in the market, our fire protection -- our products going to fire protection we're up year-over-year almost 7%. And as we said in our prepared remarks, we think that was -- the big driver there was we did see an uptick in warehouse construction. And as you would expect, warehouse construction, fire protection is very, very important. So when we look at our others on the industrial side, when we look at the industrial, when we look at -- either we were seeing a couple of quarters ago, we were talking about we saw a nice uptick in hospitality and construction. We didn't see that this quarter. And we also, I think on the institutional side continue to see that slight -- see that flat or maybe just down very, very slightly. So when we look out to our Q2 as we said that we see overall, we think that Anvil's probably going to be flat year-over-year and think that, that's probably both our energy markets as well as our nonresidential construction being flat. We do think that we'll see the second half of the year pick up, but that's based on -- that we had a number of months in 2013 where the architectural billing index was moving in the right direction that was -- that would certainly indicate that construction would follow, and we would expect construction to follow in 2014. So I would say that all in all, we were a little disappointed in what we saw out of the non-res construction markets in the quarter because we had had a couple of quarters where we saw some year-over-year growth. This one was spotty, as I said, with the growth in warehouse, construction and flat or down slightly in some of the other sectors. And in this quarter, I don't think we necessarily saw any one particular region, strength in any one particular region like we did out of the Southwest in the last quarter.

Okay. And then on the water side. Was there any particular benefit from year-end spending on the municipal side, where you had to ease up your budgets? I think, any sort of anomalies on the volume side that you might want to call out aside from the fire hydrant side?

Nothing that we saw. As I said, we had -- we think that most of our growth came from residential construction. But on the municipal side, we saw -- we think a stronger first quarter this year than what we did a year ago.

Okay. And then lastly just to be clear on the impact of fire hydrant sales on the margin side. Just run through 40% contribution roughly, a little higher, on 13% of sales. Is that kind of the way we should be thinking about it as a driver?

Yes. I think that when we look at the fire hydrants, we feel very comfortable that we should at least see a 40% conversion margin.

Next we have Seth Weber.

It's RBC. I was -- your comment about dealer inventories being down. I mean, we've -- over the last couple of years, it feels like the dealers have been willing to run at lower inventory levels kind of run more just in time. Do you feel like there's some restocking that's happening now? Or is that just a seasonal uptick that you're starting to see here?

Seth, we think that we will see a restocking. Not sure that we have been in the -- certainly have begun to see the restocking yet with the weather. I do think that we'll see a restocking as a result of our price increase. As we have said many times that when we announce our price increase, we allow our distributors to give us orders ahead of the price increase so they can protect their price, and so that they do the pull forward. We'll ship those to the -- more towards the end of the second quarter. That will certainly help on the restocking because they place larger orders ahead of the price increase. But I did mention that when you look on a year-over-year basis, the timing of our price increase this year, being 3 weeks late, gives us 3 weeks -- obviously 3 weeks less time for shipping. And we're estimating that we believe that, that probably on a year-over-year basis means that $6 million to $7 million of shipments of orders that were placed before the effective date of the price increase will ship in the third quarter and again on a year-over-year comparison basis if our price increase this year would've been the same time as last year, those $6 million to $7 million worth of shipments would've occurred in the second quarter. So I do think we will start seeing inventory -- they'll start restocking and I think that we'll see that really when we start shipping the orders that came -- that are being placed ahead of the price increase.

Okay. And that's actually very helpful. On the Systems and Echologics business, do the revenues for the quarter include the Jackson, Mississippi contract? Or is that still part of what you're expecting for the second half?

No. When we look at the Jackson contract, it is -- it's on schedule. We've actually begun shipping -- in the first quarter, shipping the commercial and industrial meters. We've also begun installing some of the AMI infrastructure, so we estimate, to look at that project, that of the total order we shipped about 15% of it in the first quarter so that was in our revenues. And at this time, we estimate by the end of fiscal year 2014 that we will ship about 90% of that order with 10% sliding into fiscal year 2015. So -- but we still see 75% of that order being shipped between Q2 -- between the second, third and fourth quarter.

Okay. And could you -- earlier in the call you had kind of framed your quote or your inquiry levels for the core Mueller business. Could you do a similar exercise for the Systems and Echologics business, kind of just frame for us what's your project pipeline or your inquiries pipeline looks like for that business?

Yes that's -- we're up year-over-year, and I will say it's a little more difficult for us because we know a number of those quotations are for budgetary purposes and they may not yet be real projects if that -- so it's -- and, so we're seeing it up nicely in the 50%, 60% rate, but we're not sure how many of those are yet ready to be real projects, or if it's in the very early stage for a municipality to start determining, hey, why don't we have [ph] the budget maybe a year or 2 from now? But we're pretty confident, as we said -- as I said earlier, that we are seeing more and more utilities interested in AMI.

Next question comes from Joseph Giordano.

It's Joe Giordano from Cowen. Just quick, I think you said this earlier and I just couldn't pick it up. What was the Mueller Systems margin drag on overall Mueller Co.? And how does that compare to the margin drag last -- first quarter of last year?

Yes. When you looked at margin drags, yes, [indiscernible] about 340 basis points. If you look at our fourth quarter, it was at 400 basis points. So we're seeing sequential improvement. But back to the factors that Evan mentioned, in the quarter a year ago, it was about 200 basis points. So we had that inventory write-down and as well as some higher R&D costs that should be associated with future revenues that impacted this quarter, and it was about 340 basis points.

Okay. And similarly, you said you're still -- expect it to break even on the year, which you had previously said. Are you tracking on that? As if -- are you tracking now where you thought you'd be maybe a quarter ago? Or has that assumption become even more back-weighted?

No, I'd say that right now, we haven't seen any real slippage in the schedule of our backlog. That will have the biggest factors, as I just mentioned. If a project moves from fourth quarter into first quarter given where we are and currently the size of this business, that could have an impact. Right now, we haven't seen any real slippage. Seth's question relative to Jackson, as I just answered, it's on schedule. So -- and based on the quotations that we have outstanding, if they convert the orders as we expect and ship when we expect, that supports our belief that we will -- that this business will still break even. But I said that those are the factors and we haven't seen much change since our last call.

Okay. And how much of Yonkers do you expect to have this year?

The Yonkers that -- we began shipping that, and I would say that the vast majority of that will also -- will go this year. So I think that at least we think 80%, 85%. We do have one more question that Jerry was breaking up. Jerry Revich of Goldman Sachs. And he was able to e-mail his question. And his question is, "When do you expect to deliver the hydrant shipments that were delayed in the December quarter?" And we expect -- we estimate -- we try to determine how many orders were delayed. And the best proxy we had was using the growth rate we saw year-over-year on our small diameter valves. Quite often our small diameter valves are installed at the same time a hydrant's installed. So using that as a proxy, it's not always exactly the same, but as I said, it gives us a ballpark estimate. We estimate it was probably $4 million to $5 million of hydrants that we would've expected to book and ship in the first quarter based on the growth rate that we saw on large diameter -- on the small diameter valves I referenced. Of that 4 million to 5 million, we expect probably a majority of that will ship in the second quarter with some of it going in the third quarter. Well, with that, if there are no questions, again, we thank you for your interest, and thank you for your questions, and see you all soon.

That does conclude today's conference. Thank you, all, for joining. You may now disconnect.