Mueller Water Products, Inc. (MWA) Q2 2015 Earnings Report, Transcript and Summary

Welcome, and thank you all for standing by. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this point. Now I'd like to hand the call over to Ms. Martie Zakas. Thank you. Ma'am, you may begin.

Thank you, Rae, and good morning, everyone. Welcome to Mueller Water Products' 2015 Second Quarter Conference Call. We issued our press release reporting results of operations for the quarter ended March 31, 2015, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Mueller Water Products had a 160.8 million shares of common stock outstanding at March 31, 2015. Discussing the second quarter's results this morning are Greg Hyland, our Chairman, President, and CEO; and Evan Hart, our CFO. This morning's call is being recorded and webcast live on the Internet. We have also posted slides on our website to help illustrate the quarter's results, as well as to address forward-looking statements and our non-GAAP disclosure requirements. At this time, please refer to Slide 2. This slide identifies certain non-GAAP financial measures referenced in our press release, on our slides and on this call and discloses the reasons why we believe that these measures provide useful information to investors. Reconciliations between GAAP and non-GAAP financial measures are included in the supplemental information within our press release and on our website. Slide 3 addresses our forward-looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward-looking statements, as well as specific examples of forward-looking statements. Please review Slides 2 and 3 in their entirety. During this call, all references to a specific year or quarter, unless specified otherwise, refer to our fiscal year. Our fiscal year ends on September 30. A replay of this morning's call will be available for 30 days after the call at 1 (800) 396-1242. The archived webcast and corresponding slides will be available for at least 90 days in the Investor Relations section of our website. In addition, we will furnish a copy of our prepared remarks on Form 8-K later this morning. After the prepared remarks, we will open the call to questions. I'll now turn the call over to Greg.

Thanks, Martie. Thank you for joining us today as we discuss our results for the 2015 second quarter. I'll begin with a brief overview of the quarter, followed by Evan's detailed financial report. I will then provide additional comments on the quarterly results and developments in our end markets as well as our outlook for the 2015 third quarter and the full year. Our overall results for the second quarter came in about as we expected. We experienced strong net sales growth in our primary end markets but were faced with harsh winter weather-related expenses, a continuing decline in the oil and gas market and unfavorable Canadian currency exchange rates. Sales to our primary water markets continue to grow as Mueller Co.'s domestic net sales of valves, hydrants and brass products increased approximately 12% this quarter compared with the prior year. We saw growth in demand for our products in both the residential construction and municipal markets. Anvil's net sales declined 5.9% in the second quarter compared with the prior year. We experienced growth of about 6% from sales in the nonresidential construction market. However, this growth was more than offset by an approximately 40% decline in sales to the oil and gas market. With that, I'll turn the call over to Evan.

Thanks, Greg, and good morning, everyone. I'll first review our second quarter's consolidated financial results and then discuss segment performance. Net sales for the 2015 second quarter of $290.3 million increased $2.2 million, about 1%, from the 2014 second quarter's net sales of $288.1 million, due primarily to higher domestic shipments of valves, hydrants and brass products, partially offset by reduced volumes of products sold to the oil and gas market and metering products. We were also unfavorably impacted by Canadian currency exchange rates. Gross profit and gross margin were both essentially flat. Gross profit for the 2015 second quarter was $82.1 million compared with $82.2 million for the 2014 second quarter. Gross margin for the 2015 second quarter was 28.3% compared with 28.5% in the 2014 second quarter. Adjusted operating income for the 2015 second quarter decreased 6.1% to $26.3 million compared with $28 million for the 2014 second quarter. Gross profit and adjusted operating income benefited from higher domestic shipment volumes of valves, hydrants and brass products; higher shipments of Anvil products into the nonresidential construction market; and higher sales pricing at Mueller Co. and Anvil. This year's adjusted operating income was negatively impacted by Anvil's lower sales into the oil and gas market, approximately $1 million of higher costs associated with the unplanned plant closures at Mueller Co. due to weather, and a $1.2 million unfavorable impact associated with Canadian currency exchange rates. Selling, general and administrative expenses were higher year-over-year, which included investments in our leak detection and pipe condition assessment businesses. Selling, general and administrative expenses were $55.8 million in 2015 second quarter or 19.2% of net sales. Adjusted operating margin decreased 60 basis points to 9.1% for the 2015 second quarter. Adjusted EBITDA for the 2015 second quarter decreased to $40.7 million compared with $41.8 million for the 2014 second quarter. Trailing 12-month adjusted EBITDA was $184.6 million. We also benefited from lower interest expense this quarter due to lower interest rates and lower amounts of debt outstanding, following the refinancing that we completed in the 2015 first quarter. Interest expense net for the 2015 second quarter declined $6.4 million to $6.1 million compared with $12.5 million for the 2014 second quarter. Income tax expense for the 2015 second quarter of $7.2 million on income before income taxes of $19.5 million, resulted in an effective income tax rate of 36.9%. This compares to an effective income tax rate of 24.2% for the 2014 second quarter. Net income per diluted share for the 2015 second quarter increased to $0.08 compared with $0.06 in the prior year, and adjusted net income per diluted share increased to $0.08 from $0.07. There was a weighted average of 163.3 million shares of our common stock outstanding for the 2015 second quarter compared with 161.9 million shares outstanding for the 2014 second quarter. I'll now move on to segment performance and begin with Mueller Co. Net sales for the 2015 second quarter increased 4.1% to $199.2 million compared with $191.3 million for the 2014 second quarter. Domestic net sales of valves, hydrants and brass products increased about 12% due to growth in demand for both the residential construction and municipal markets. These higher sales were partially offset primarily by lower shipment volumes of metering products. Net sales were also negatively impacted by $1.7 million due to unfavorable Canadian currency exchange rates. Adjusted operating income of $27.8 million for the 2015 second quarter was flat with the 2014 second quarter. In our base Mueller Co. business, which excludes metering, leak detection and pipe condition assessment technologies, adjusted operating income improved $3.7 million, largely due to higher shipment volumes of domestic valves, hydrants and brass products. This improvement was offset by lower shipment volumes of metering products, harsh winter weather-related expenses of approximately $1 million, the unfavorable impact of Canadian currency exchange rates of about $1 million and investment in technology and business development in our leak detection and pipe condition assessment business. The harsh weather-related issues resulted in 2 plants experiencing a total of 6 shutdown days. Although we were able to meet most of our deliveries, we incurred higher cost due to overtime and the unplanned shutdown. Adjusted operating margin of 14% for the 2015 second quarter declined slightly from 14.5% for the 2014 second quarter. Adjusted EBITDA for the 2015 second quarter increased to $38.5 million compared with $37.9 million for the 2014 second quarter. Adjusted EBITDA margin for the quarter decreased 50 basis points to 19.3%. I'll now turn to Anvil. Net sales for the 2015 second quarter decreased 5.9% to $91.1 million compared with $96.8 million for the 2014 second quarter. During the quarter, we saw mixed results from Anvil. We believe we saw growth of approximately 6% into the nonresidential construction market this quarter. However, this growth was more than offset by an approximately 40% decline in net sales to the oil and gas market. As a reminder, in fiscal 2014, net sales to Anvil's addressed oil and gas market were about 20% of Anvil's net sales and less than 7% of Mueller Water Products' consolidated net sales. Adjusted operating income for the 2015 second quarter was $7.4 million compared with $8.6 million for the 2014 second quarter. Adjusted operating margin decreased to 8.1% from 8.9% for the 2014 second quarter. The decrease in adjusted operating income and adjusted operating margin resulted from this quarter's product mix as previously discussed. Adjusted EBITDA for the 2015 second quarter was $11 million compared with $12.2 million for the 2014 second quarter. Adjusted EBITDA margin for the 2015 second quarter was 12.1% compared with 12.6% for the 2014 second quarter. Corporate expenses for the 2015 second quarter were $8.9 million compared with $8.4 million for the 2014 second quarter. Turning now to our discussion of our liquidity. Free cash flow, which is cash flows from operating activities less capital expenditures, was negative $21.6 million for the 2015 second quarter compared with positive $600,000 for the 2014 second quarter. The year-over-year change was driven primarily by an increase in inventory due mostly to an effort to spread production more evenly between the periods in anticipation of the upcoming construction season at Mueller Co. And in the 2015 second quarter, net sales were weighted more towards the end of the quarter, which impacted the timing of our receipts. We continue to focus on working capital management and efficiency by lowering the level of working capital needed for sales. The quarter-ending average of accounts receivable, inventories and accounts payable compared with net sales over the past 4 quarters declined by about 70 basis points compared with the year ago. At March 31, 2015, total debt was comprised of a $496.4 million senior secured term loan due 2021, $15 million outstanding under our ABL agreement and $2.1 million of other. The term loan accrues interest at a floating rate equal to LIBOR subject to a floor of 75 basis points plus 325 basis points. In April, we entered into a forward-starting interest rate swap agreement to effectively fix the interest rate on $150 million of term loan borrowings at about 5.6% beginning September 30, 2016, and ending on September 30, 2021. Net debt leverage was 2.6x at March 31, 2015. Using March 31, 2015, data we had $172.8 million of excess availability under the ABL agreement. I'll now turn the call back to Greg.

Thanks, Evan. During the second quarter, we were very pleased and encouraged by the pull-forward of orders that we saw at Mueller Co. in relation to the valve and hydrant price increase we implemented in mid-February. We estimate that orders our distributors placed ahead of the effective price increase date were up 18% year-over-year and up 11% for the quarter. This activity supports our belief that our distributors expect to see strong growth in the second half of this year. As we mentioned earlier, even though Mueller Co.'s plants were closed for a total of 6 days in the quarter due to weather, we were able to maintain our delivery promises. Also during the quarter, 3 major cities elected to install our fixed leak detection technology as part of a program of the National Institute of Standards and Technology, or NIST, that is designed to promote smart cities. Water loss and energy are key focus areas of this program. Participants in this program include AT&T, IBM, among others. Echologics' fixed leak detection technology was selected to be utilized for this program. 2 of these cities, including Las Vegas, have begun piloting our fixed leak detection technology, and 1 city is scheduled to begin its pilot shortly. We are pleased to be participating in the smart cities program and to start demonstrating more broadly the effectiveness of our fixed leak detection technology. We continue to see long-term potential with leak detection and pipe condition assessment, especially outside of the United States. As mentioned before, we are investing in technology and business development to better pursue these opportunities. Also, during the quarter, as we mentioned earlier, we continue to see growth in sales of Anvil's products that go into the nonresidential construction market. It looks as if the rebound in this market is taking hold. We saw further deterioration of Anvil's sales into the oil and gas market. We estimate sales of these products were down approximately 40% in the second quarter. During our last earnings call, we noted that we experienced a 25% reduction in demand for these products from mid-December to the end of January. Rig counts are now down 50% year-over-year, which indicates we may see further deterioration in sales into these markets. For Mueller Systems, we continue to have outstanding quotations on several large AMI projects, and we expect to win some of these projects. However, these utilities have extended their timeline for awarding these projects. I will now provide additional color on our second quarter performance. Net sales at Mueller Co.'s base business, which excludes meter, leak detection and pipe condition assessment technologies, were up about 7%. This increase was driven in large part by domestic shipment of valve, hydrants and brass products, which increased 12%. We also saw strong growth in sales of our water treatment valves. Additionally, we saw growth in valve and hydrant shipments in Canada, although we were affected by unfavorable Canadian currency exchange rates. For our metering products and systems, as expected, year-over-year net sales declined in the second quarter, largely due to the tough comparison we had relative to the timing of a large project last year. Mueller Co.'s adjusted operating income was flat year-over-year, and adjusted operating margin declined 50 basis points. However, Mueller Co.'s base business, which again excludes metering, leak detection and pipe condition assessment technologies, showed a 13.5% improvement in adjusted operating income, and adjusted operating margin improved 100 basis points to 18.1%. This strong growth in the base business was driven by domestic shipments of valves, hydrants and brass products, although partially offset by the impact of our unplanned plant shutdowns and foreign currency exchange rates, as Evan described. The outlook for our macro drivers supports our expectation that we will continue to see growth in our key water end markets. Forecasts for growth in housing starts in calendar 2015 now average about 14%. This growth rate is slightly lower than what was forecast several months ago, but still much higher than the 8.7% growth in calendar 2014. It is also important to note, improved housing construction also helps bolster the health of municipalities and water systems as local governments benefit from increased property taxes as well as connection fees and other ancillary fees associated with residential and nonresidential construction. State and local seasonally adjusted tax receipts continue to increase, and the CPI for water and sewage rate increased 3.9% over the 12 months ended March of 2015. Turning now to our outlook for the 2015 third quarter. I'll start with Mueller Co. For our base business, which excludes metering, leak detection and pipe condition assessment technologies, we expect net sales percentage growth to be comparable to what we achieved in the second quarter. This growth is expected to be driven primarily by domestic demand for our valves, hydrants and brass products from both the residential construction and municipal markets. We expect Mueller Systems' net sales to be roughly flat year-over-year. In total, we expect Mueller Co.'s net sales percentage growth to be in the mid-single digits with sales of valves, hydrants and brass products growing at a higher rate. When looking at adjusted operating income for Mueller Co. in total, we expect adjusted operating income to increase, driven by higher sales of valves, hydrants and brass products. We expect this increase to be offset in part by additional investments in technology and business development activity related to leak detection and pipe condition assessment, and continued adverse impact of unfavorable Canadian currency exchange rates. In total, we expect adjusted operating margin could be flat year-over-year. Moving to Anvil. While we expect Anvil sales into the nonresidential construction market to continue to grow, we expect Anvil's total net sales to decline year-over-year, as previously discussed. We expect Anvil's adjusted operating income to be down in the third quarter year-over-year due in part to negative impact from product mix. Anvil's oil and gas products are domestically manufactured, but we tend to realize higher margin from sales of those products. Although we expect adjusted operating income to be down in the third quarter, margins should be up slightly. For Mueller Water Products as a whole in the third quarter, we expect net sales will be up only slightly, due to declines at Anvil. Adjusted operating income and adjusted operating margin should increase year-over-year due to improved performance at Mueller Co. Additionally, we will also benefit from lower interest expense year-over-year. I will now provide an update on our outlook for 2015. We expect that our consolidated performance for the full year will be comparable to what we outlined on our last earnings call. However, based on developments since our last earnings call, we think we may see a further drop-off in net sales and operating income at Anvil, as well as a possible drop at Mueller Systems, although we believe that any of these declines will be offset by improved performance at our Mueller base business. At our Mueller base business, we continue to expect year-over-year net sales to increase in a range comparable to the 7.3% growth we saw in 2014. However, we expect domestic net sales of valves, hydrants and brass products to grow at a higher rate, driven by demand from the residential construction and municipal markets. However, total net sales growth at Mueller Co. could be slightly less than the growth we saw last year due to potential delays in the awarding of project orders for Mueller Systems. We expect Mueller Co.'s adjusted operating income and adjusted operating margin to increase in 2015 compared with 2014, as we expect to benefit from a favorable mix of our higher-margin valve, hydrants and brass products. We expect Anvil's net sales to be lower in 2015 on a year-over-year basis. We also expect adjusted operating income and adjusted operating margin will be lower in 2015, excluding the non-reoccurring $2.5 million gain we recorded in the fourth quarter of 2014. As we look at the full year, we expect that the growth in nonresidential construction will not be sufficient to offset the decline in the oil and glass -- gas market. For Mueller Water Products as a whole in 2015, we expect net sales growth in the low single-digits with stronger growth at Mueller Co., offset by a decline at Anvil. On a year-over-year basis, we expect higher growth in adjusted operating income and adjusted operating margin compared to 2014 due to a more favorable product mix. So again, in total, we expect full-year profit performance to be consistent with the outlook we presented last quarter. We believe any potential deterioration at Anvil and Mueller Systems will be offset by a stronger mix at Mueller Co. I will now highlight other 2015 key variables. Corporate expenses are expected to be $34 million to $36 million. Depreciation and amortization are expected to be $58 million to $60 million, interest expense is expected to be about $27 million to $28 million. Our adjusted effective income tax rate is expected to be 37% to 39%. Capital expenditures are expected to be $36 million to $38 million. For 2015, we expect free cash flow to be driven primarily by improved operating results and lower interest payments, offset by cash income tax payments, as we have substantially exhausted our federal NOLs. We expect 2015 income tax payments to approximate our reported income tax expense for the year. We also expect to make only minimal cash contributions to our pension plans in 2015. Our expectation is for free cash flow to exceed adjusted net income. Subsequent to the end of the quarter, we announced, an increase in our quarterly dividend. We also announced yesterday that our Board of Directors has authorized a share repurchase program for up to $50 million of our outstanding common stock. The stock repurchase program is part of a disciplined capital allocation strategy that seeks to enhance the value delivered to our shareholders by investing in both organic and external growth opportunities as well as returning cash to stockholders through dividends, and with this program, repurchasing outstanding shares. This program reflects confidence in our strong financial position, long-term business strategy and growth prospects. With that, operator, I will open up this call for questions.

[Operator Instructions] Our first question is coming from Mr. Mike Wood.

First, I just would like your thoughts in terms of how Mueller's business might be impacted by the drought in California and other states. I understand there's a bill in the Senate there that requires the municipalities to conduct the annual water loss audits and reduce leaks. So wondering if you're seeing any of that opportunity come yet?

I think that right now, we think that California could affect us in a couple of ways. We think in the long term, probably more positive than negative. In the very short term, we're seeing more and more talk about -- it will be very difficult for builders to get permits to build new housing so as not to deplete the water supply any further. But I think -- as what we think longer term, we do think there's probably more opportunity. Interestingly, in the last quarter, we've had 2 major cities in California sign contracts to do pilots for our fixed leak detection. I think that this certainly ties in to their possibly getting prepared to be able to perform these water audits and to be able to report. I think that also part of that is obviously to report on what they're losing -- what they could be potentially losing. So I think that when we look at where our technology is evolving on the leak detection, both from a fixed standpoint as well as pipeline condition assessment and the other fieldwork that we do, we think that there is a -- we think that this represents a real opportunity. And as I said, in the last 90 days, we had 2 major cities sign contracts to pilot technology, and we have appointments from several other cities in California that want to come in and talk specifically about our leak detection. So when you look at the over $7 billion that was approved in November, I think by 2 -- a vote of 2 to 1 by the voters in California to have money available to spend to upgrade water infrastructure, we think that our suite of products that we have in the technology that this will be a benefit for us. Probably not something that we would be able to point to of any -- substantially in 2015. As I said, I think that the technology that may be most applicable to the situation out there, we're going into the pilot phase. But it's very encouraging that we now have these major cities wanting to do these pilots.

Great. And then have you seen yet or entered into the rush of projects coming to bid on the advanced metering side? Any early indications of success, particularly in the large city projects there?

As we said in our prepared comments, when we go back about 9 months ago, we had, I'd say, a nice uptick in the number of large projects for AMI that we quoted. Some of those, including fixed leak detection, and of course, that's where we've been spending a fair amount of our R&D money. Unfortunately, none of those have been decided. And quite frankly, we're past the point where 4, 5 months ago, we thought they would have made a decision. So from our perspective, we haven't lost any of those. A little disappointed that the process is taking as long as it is, but we still are optimistic that we will win some of those, but nothing specific that we can report as of now.

And final question for me. The buyback authorization, any indication how quickly you might use that? And is this part of an ongoing capital return strategy even after this authorization is complete?

Mike, I think it is part of our ongoing -- I think an ongoing program. I think certainly, when we look at it initially, we think the repurchase of stock could be used to offset any dilution from our stock compensation program. At this juncture, we don't anticipate implementing a formulaic repurchasing plan. I think we will approach it on a quarter-by-quarter basis as we consider all capital allocation options. But given -- I think the confidence that we feel with our balance sheet, given the confidence that we feel relative where the direction and demand is going for our end markets, our board authorized, as we said, to look at repurchasing stock as again an option for our capital allocation or how we allocate capital. And we'll disclose -- obviously disclose any activity in this program in our quarterly reports to the SEC.

Next question is coming from Mr. Noah Kaye.

If we could first touch on the pull-forward that you mentioned in the base business for valves and hydrants, is your expectation now -- probably it isn't [ph], implied by the guidance. But is your expectation now that kind of any drag after the price increase as distributors have stocked up an event, has that sort of been worked through now? Do we expect to see, for this next quarter and for the rest of the year, kind of a normalized growth rate? Maybe if you could just touch on it a little bit.

Yes. And in fact, when we look at our distributor inventory as we exited this quarter for our Mueller business, inventories were up at our distributors year-over-year. They typically will hold between 30 and 45 days, and we think a number of them were approaching 60 days. I think a combination of that, some of our distributors obviously in the Northeast, I think, saw delays in construction due to the weather. But I do think that we believe that it is indicative of, as we said in our prepared remarks, that our distributors are pretty bullish about the activity they expect to see in the next couple of quarters. But we would expect in the April time period that some of this inventory would have to move out before we start seeing replacement orders. Our orders in April, when we look at valves and hydrants, actually are up slightly over -- year-over-year. So we think that's positive, especially since they went into the quarter with additional -- with higher inventory levels. We'll have to see how it plays out. It could have an impact, depending on how quickly that they move it. But right now, we think it will be -- it will smooth out during the quarter, and we should not see a disruption to our orders and shipments.

Okay, great. The next question, in the past quarters you've commented on where capacity utilization's at in kind of your core product lines, valves and hydrants. Can you give us an update where that was this quarter?

In the second quarter, on our Mueller business, we were about 70%. Anvil, probably slightly under 65%, there may have been even a slight drop in our capacity utilization because of the slowdown in our plants that manufacture products that go into the oil and gas market. So when we look on a year-over-year basis, we used more of our capacity in the second quarter of this year at Mueller than we did last year. And as I said about 70%, and we think slightly under 65% at Anvil.

Does that -- as you look in your relation to your forecast for Anvil for the rest of the year, does that continue to be the case? I mean, obviously rig counts are where they are. Do you kind of think you maintain that utilization level throughout the rest of the year, or do you see that picking up?

Yes. As I look at it, I think that there is a chance that in aggregate, our capacity utilization may go up at Anvil, because we do expect to continue to see growth in demand from the nonres construction. And -- but I would say right now, looking at it, is it probably will be around that capacity utilization rate for the rest of the year. It could be up slightly, but pretty difficult to tell right now.

Okay. And finally, I think I ask this every other quarter or so -- but where are you seeing opportunities right now from kind of a technology addition or a lateral addition, on the water technology front? What areas are really getting your focus right now?

Yes, I would say that -- we're getting the -- as Mike asked in the initial -- in the very first question, we're seeing more and more cities -- we're having discussions with more and more cities and seeing a greater interest in piloting our fixed leak detection technology. Most of this right now has been driven on the transmission line side, and -- but we're also moving in the distribution. Our first big order from American Water in West Virginia on the distribution side. We're just about finished installing that. And so I think when we look at California especially, we've seen much more interest, but across the country, too. And we're also focused outside -- increased our focus outside the U.S. Part of the higher SG&A cost that Evan referenced are due to the -- some of the sales resources and business development resources we have added outside the United States. We're particularly very bullish about the opportunities that we will have -- that we could have in the U.K. As we've said on previous calls, the U.K. seems to be much further along in monitoring leak detection, and in fact, applying penalties to water systems whose leakage rates start to increase, and they set certain targets. Having more and more discussion in France. And in fact, we just received some initial results from a nice project that we were awarded in Malaysia. And the good news for us is that we've started finding some leaks that they were unaware of, and that's good news for them, though I'm sure they're disappointed they had those leaks. So I would say, we're seeing more and more interest in fixed leak detection, both domestically -- and I would say that as compared to the 6 months ago, we're having more discussions and getting more interest internationally.

Next, we have Mr. Ryan Connors.

First, Greg, just wanted to ask you about kind of the California situation. You mentioned the longer-term aspects of this and how it will obviously spur some investment and opportunity. But in the near term, is this -- you talked last quarter about some headwinds in the Southwest on the residential side. And I wonder whether that's, in the short term, this isn't as much of a headwind as a tailwind given the negative impact it could have on new home construction. There's been some talk about lack of water availability and tough -- problems getting zoning for new water resources for new development, things like that. So can you talk about kind of the shorter-term ramifications of that situation?

Sure. The best I can, Ryan. Just to put the last quarter in perspective, we still saw growth in our West region last year. It was -- though the growth was less than what we had forecasted. Actually, in this quarter, we saw our greatest growth for our valves, hydrants and brass shipment dollars of any of our regions in the U.S. and was up 20% year-over-year. So that was back to more of a rate that we expected to see last quarter, but we came in, I think, around 5%, 6%. So it is a -- I think that, as I mentioned earlier, our hypothesis is in the very short term, it could be a bit of a -- we could see a bit of a slowdown in the growth rate we have been seeing in the West, if in fact we start seeing a cutback in housing developments due to water availability. But we don't have enough visibility to say, hey, in the next 6 months, how much of an impact this may be. I'm not familiar enough to know if land that's already under development, where they've gotten the permitting and haven't put our equipment in yet, if that's going through and it could be an impact maybe 3 or 4 quarters down the road. But I think that there is that possibility in California that we could see, in the very short term, a little bit of a cutback in land development for residential development. So -- but I think that we're still in a wait-and-see mode. I know that the builders are countering, saying that the homes that they are building today are so much more water-efficient, and it would be a mistake not to add. That may be good argument. We will see how successful it is. But I think in the short term and probably not in the next 6 months, I don't think, but it could be a bit of a negative if builders don't get permits to put in new housing developments.

Great. Those are some good points. Over on the Anvil side, this oil and gas issue, I just wonder if you can expand on it. Just because I'm trying to understand what's happened in the last few months. I know -- you talked about a 25% decline rate in orders on the last conference call. And if I recall correctly, part of what you were saying was some of that was due to inventory destocking, and so that it might have actually overstated the decline in end user demand. So we were a little taken aback by the sticker shock on the 40% decline. So I guess, if you can just give us any color you can on what happened, how that's -- how much of that is destocking versus end-user demand and at what point we might see stabilization there?

Yes. Just to go back, what we said in our call -- last earnings call, we talked about the 25% decline. Specifically, we said that from mid-December through the end of January, we saw a 25% decline in our shipments from Anvil into oil and gas. And we said, if that continues, here is the kind of impact it would have on us. And I'm sorry if that was taken as a forecast. Because at that point, we sure weren't in a position -- and we're not in a position now to forecast what's going to happen in the oil and gas business in general. And I'm not sure there are many are that are in a position to forecast what's going to happen in oil and gas. But what happened is, if we look at the last quarter, rig counts dropped. They're down now about 50% to 55% on a year-over-year basis. We correlate -- our demand for our products correlate reasonably well with rig counts. And because when they're putting in the new wells and start production, that's when demand for our products, so that's what drives demand for our products. So in fact, the 40% we saw for the quarter, if we look at our March quarters and our -- March shipments and month-to-date in April, we're down about that 50% range. So we are correlating with the rig counts.

Okay, great. That's helpful. And then just one last one for me, if I could. On leak detection business, taking that global, I think it makes a lot of sense and it's strategically compelling. Can you give us any more kind of granularity on that program and that investment program? What exactly those investments entail? Is it sales, distribution? What exactly those investments are? And what specific regions you're targeting and maybe the magnitude of the dollar spend on those things?

Yes, yes. When you look there, we are targeting and at a point where if we look at both -- in North America, Europe and Asia, we're looking to double the size of our sales force or business development people. And to put that in perspective, we're looking to increase from 12 full-time dedicated people to 25. A lot of that spending has -- we've already hired a number of those people. And we're now seeing the expense of those people hitting us on a year-over-year basis. But we think that we are locating them in markets that have a -- we think a real need and a positive disposition to using the -- I'd say, the latest leak detection. And the U.K. was one that I referenced a little earlier. On technology development, we look like we're spending probably in the range $1.5 million to possibly $2 million more this year. And most of this is focused on our fixed leak detection technology for both domestic and international markets. And a lot of that is on the -- in addition to the, I'd say, the core technology on the acoustical technology, but more on, probably more on how we communicate that data and extend the battery life and be able to operate on frequencies around the world. So it's really on -- adding to the salespeople will help us across -- adding our number of salespeople will help us across the board. From our field pipe leak detection and we do in the field from our field pipe condition assessment, and also promoting our fixed leak detection. And more on to the development side, R&D, it's more on further developing our fixed leak detection, taking what we're learning from these initial pilots and incorporating what we learned to that into the technology. And as we've said, we think that in total that will impact us by about $5 million year-over-year.

Our next question is from David Rose.

A couple of questions on -- one is just housekeeping. What was the net earnings drag from the Anvil O&G decline? Would you ballpark it?

Evan, go ahead.

Yes. If we look at our Anvil business on a year-over-year basis, our operating income declined by about $1.2 million, and that was about $2.4 million down for volume. We saw a 6% increase in nonresidential construction, which is roughly about 80% of Anvil revenues. And then for the other 20%, which is oil and gas-related, we saw a decline of about 40%. And I will say that the margin difference between our nonres and oil and gas business is about 800 basis points. So for the nonresidential business, we manufacture domestically as well as source from offshore. But our oil and gas business it's all domestically manufactured product, and so we do experience a higher margin of about 800 basis points.

Okay. So I'll back into the number then, but that's helpful. And then how many production days would you estimate that you lost last year due to weather?

Actually, we did not lose any production days last year. Our production that we lost this year was in the Southeast. Actually, 5 in Chattanooga, Tennessee; 1 in Albertville, Alabama. So we thought that was a pretty valid year-over-year comparison. We didn't make an attempt to try to determine how much revenue we may have lost year-over-year. Because certainly, we know that there was a revenue impact last year also. And we think that this year, that the weather impact from a revenue standpoint probably impacted the Mueller Systems and Echologics more than it did Mueller, because Mueller did make shipments to our distributors.

Okay, that's helpful. And then lastly, if we can go over to the Echologics again, can you maybe just touch upon maybe the significance of the relationship with the Las Vegas water center of excellence?

Yes. We're very excited about that relationship, because as we look around the country, Las Vegas seems to be, let's say, one of those early technology adopters. They certainly -- they have tested a number of -- we think a number of leak detection technologies. They tested our technology for some time before they made the commitment that they did. Plus, we think that Las Vegas, the water authority there and the water people are very proactive and looked at as leaders. So we think that what they do could influence not only other utilities in the United States, but also, I think, water systems outside the U.S. So it was -- I think that it's been a longer-term relationship. They have been one of the first to test a number of our leak detection technologies, both from our fieldwork and our fixed leak detection. And we're pretty excited, I think, because again, I think they're generally viewed as being much more proactive in addressing and applying new technologies into managing their system.

And is there -- do have any other plants similar to Las Vegas that we might be seeing soon?

Yes. As I mentioned -- as we mentioned in our prepared remarks about the National Institute of Technology's smart city program, Las Vegas was one of those cities that are participating with our leak detection. There were 2 other major cities. That one, we have already installed the pilots. The other, I think, is being installed this week. A lot of those results are expected to be made public in June. So I think that we'll be able to talk specifically about what those cities are doing. And as I've said that we're getting more and more inquiries about the fixed leak detection, and hopefully, we'll be able to -- we'll have permission to share with everyone what those cities are doing.

Our next question is from Kevin Bennett. Kevin C. Bennett - Sterne Agee & Leach Inc., Research Division: Greg, I wanted to dig in on metering a little bit, if I could. Can you potentially quantify the decline in sales in the second quarter?

Yes. Kevin, on a year-over-year basis, sales were approximately down about $4 million, somewhere between $3.5 million and $4 million. A lot of that was due certainly to, as you recall, the big projects that we had in Mississippi. We were in full shipment mode in the second quarter of last year with that project. And as we sit here today, we don't have a project of that size to replace it, though we have several quotations outstanding that's -- for projects larger than that one. Kevin C. Bennett - Sterne Agee & Leach Inc., Research Division: Got you. And then are we still -- I think last quarter, you talked about you were looking for 20% growth in the back half of this year. Is that still a good number? Or is it probably a little bit lower than that?

I would say, right now, it's cloudy. Our 20%, when we were on our earnings call 3 months ago, we knew what projects, what quotations we had outstanding. And at that time, based on the best information we had, we had an estimate of what time those projects would have been awarded. And on some of those, or at least one of those large ones, we expected it to be awarded during this last quarter. It was not. So that's still -- so that's being stretched somewhat. So our shipments in the second half of this year -- to get any real growth in our shipments, we will have to be awarded and be able to start shipping those. So our outlook right now is, for our full year shipments to be flat, as I said, for the full year, though we would still expect to see greater shipments in the second half -- shipment growth second half year-over-year, while in the first half of this year, we had a decline. The 20% growth, I think, it depends on our being awarded, being able to start shipping. And I think that if we don't get the -- if these aren't awarded in the next 6 to 8 weeks, then I think that we probably won't have time to be able to ship them this year. Kevin C. Bennett - Sterne Agee & Leach Inc., Research Division: Sure, that makes sense. And then, Greg, can you remind us about the big contract you have with American Water for meters. When does that come up for renewal? And then how is that business going? I think last quarter, we talked about how they were potentially pushing out some of the meters, but just an update on that...

That project -- that arrangement runs through the end of this calendar year. At this point, we don't know if it will just be extended or how they'll handle that. I think a pushout that -- the pushout we saw, I'd say, this time last year, we believe, based on the order pattern that we've seen, now that we're in the construction season, so far in April and March, that they're back to procuring or releasing what they had historically. So we think that, that business should play out as we expect for the rest of the year. And sometime between now and we think the end of this calendar year, we'll have a handle on whether or not the current contract or the current arrangement will be extended or how they'll handle that. But through the end of -- the arrangement runs through the end of this calendar year. Kevin C. Bennett - Sterne Agee & Leach Inc., Research Division: Great. And then last question from me. Moving to Anvil, and more specifically the nonres piece, you said we had 6% growth in the quarter. I was wondering if you could elaborate that on a bit, maybe talking about different verticals or different geographies that you're seeing strength in? Or is it a broad-based recovery or still spotty?

I would say that we didn't see anything that would suggest one region is stronger than the other. But when we look at it, our fire protection shipments were up over 9%, and our mechanical, just slightly under 5%. And so that fire protection goes through a number of -- obviously, a number of verticals, from warehouses to high-rise buildings. I would say that what we can interpret it, is that we probably saw more of the traditional nonresidential construction and less industrial construction. Because we tend to see a bigger spike in our demand for our mechanical product when it's driven by industrial spending versus the, I'd say, the more traditional nonresidential. So Kevin, I'm not sure if that gives much help. Tough for us to say anything regionally, but we saw even a greater increase in our fire protection products than we did on the mechanical side.

Our next question is coming from Mr. Joe Giordano.

Quick on Mueller Co. I mean, you talked about the 12% in hydrants and valves and brass products. Can you maybe parse that out, price versus volume? And I was wondering what kind of impacts you're seeing on cost side, the lower raw materials.

Yes. Joe, on the volume side, it was -- and again, it was probably in the volume side, I'm going to say, it was in the 8%, 9%, and the rest of that would have been pricing.

And then when you take a look at raw materials, we are seeing lower purchase prices for scrap steel and brass ingot. However, we are seeing our purchase component cost being slightly higher. So overall, net for raw material purchase components, which account for about 50% of cost of goods sold for Mueller Co., I would say, in looking at it from a full year perspective, maybe a slight tailwind. But the significant tailwind from scrap steel and brass ingot are a little bit eroded due to purchase component costs being higher.

Okay, that make sense. And just a question on California just to kind of build on what we've been talking about. The decline that you're looking at potentially in new residential construction, how much of that do you think can be offset by increased spending at the municipality level to combat some of this?

Yes. And just to -- right now, when we look at our next couple of quarters, our outlook here, we don't think we'll see a decline. We think that there's certainly more and more discussion that could creep into this 6 months. But it was -- I think it's a little more speculation right now. And that's a good question. When you look at the $7 billion that was approved by the voters, a lot of that obviously going to maybe some new infrastructure. But a lot of it's to repair and replace the existing infrastructure. So looking at it right now that we can say, if it plays out this way and builders are unable to get permits to put in new developments, we're pretty confident, given the money that's been approved and the need and the focus on reducing leakage rates and upgrading the existing infrastructure, that demand for those products could in fact offset it. But right now, it would be premature for us to make that specific comment, because we're still learning on what's happening out there.

Next, we have Mr. Walter Liptak.

I wanted to ask about the Anvil business with exposure to oil and gas. And specifically, I think you addressed the volume part of it pretty well, but I think a lot of these companies they sell to are also trying to get prices down. And I wonder what your view is of price. And if there's more deterioration, what's the breakout of price versus volume?

Yes. Well, I would say we really haven't seen price deterioration yet, but it would be reasonable to expect that we could. Right now, we're not forecasting it. We haven't seen it. But I think certainly, when you get into markets like this, those types of -- you start seeing some negative movement on pricing.

Okay, got it. And then just to follow up on the weather issue during the quarter. I'm not 100% sure on how we should be taking these 6 days where you had unplanned shutdown. Is it -- it sounds like you maintained deliveries, so you didn't lose revenues, or is there revenue that pushed out into this quarter?

No. I think that's right. I think that -- I think that we really didn't lose revenue, because we wanted to make sure -- as I said, we made our delivery promises so distributors had an inventory entering the construction season. I think the impact that we saw in the -- we earned less margin in the second quarter than what we would have expected on that revenue, because of the unabsorbed overhead when the plants were shutdown, as well as the overtime that we had to work in order to make those shipments. So we don't think that impact flows into -- anyway into Q3. We think that we saw the impact in Q2, and it impacts us somewhat on our margin.

Next, we have Seth Weber.

So I just wanted to go back to the Systems and Echologics business. The path to profitability, it seems like it was not EBITDA-positive this quarter, is that correct? And are you still expecting that to be EBITDA-positive this year? And then bigger picture, as you kind of make a lot of these investments, can you just talk about how we should think about the trajectory of the margin for that business going forward? It sounds like maybe the cost and the investment is a little bit higher than where I was thinking it would be 6 or 12 months ago. Kind of does that change the ramp on the margin that you see ultimately getting to?

Yes, and I have to break it down -- break down the answer by Systems and Echologics. So let me talk about -- because the investment that we pointed out going into this year is really all on the Echologics side. We did a lot of work on looking at the leak detection market, the global leak detection market, about a year ago. And there's -- but looking at outside sources, that they sized this market around the world somewhere around $1 billion, $1.1 billion. I think that we have some debate but -- if that's the exact number. But anyhow, it's pretty big, given that we had $10 million of sales -- $10 million to $12 million of sales last year. So we think there is a lot of upside. And as we look at the leak detection market -- in the leak detection market, we've seen no clear leader. In fact, we've seen no clear technology -- no technology taking a clear lead. Some are putting meters at 2 different points, and they're measuring what the water lost between those points, but then they have no idea where they're losing that. So, Seth, from that trajectory, I'm going to say that right now, that we're certainly in the investment phase in 2015. We think when we get to 2016, that we're going to generate more revenue. We think a lot of those investments will be behind us. But I would expect right now that Echologics could be breakeven to slightly positive in 2016. And it is beyond that, that I would expect to see this business really ramping, as we make inroads in international markets as well as domestic markets. And what gives us confidence that we do see this ramping up is the pilots that, for instance in the 2 major cities in California, in the last several weeks that have signed contracts to do the pilots. Mueller Systems, I think we're in a different pace. Mueller Systems, we've developed a lot of technologists, we've invested. So we're not really investing that much in the R&D and Business Development on Mueller Systems. I think at Mueller Systems where we are, is we need additional volume, and we need the additional volume on the AMI, because that's the higher -- that's our higher-margin product. And if you look -- as we said if you look at 9 months ago, we've seen a nice pickup in our quotation activity, and we have -- and we're bullish about winning several of those large projects. I think that as what we said earlier on our call, 90 days ago, we would have thought -- we would have been at least awarded one of those and start shipping those in 2015. I think right now that, that's cloudy, and we may not. For us to be profitable with the operating income line for Mueller Systems this year, we will need to win at least one of those. We'll know in the next 6 to 8 weeks whether or not we have a chance of doing that. I think on Mueller Systems, again when we look out beyond 2015, that we expect these projects to be awarded, and we'll start seeing some pretty significant upturn in that performance of that business. I think we're still -- as we've said, I think in the last couple of years, that we think in 3 to 5 years, that business can be anywhere between $130 million and $160 million in revenue. We currently -- last year, we were about $95 million revenue. And when we get to that $130 million to $160 million, we think that we can be in that 20% EBITDA margin for that business. So that was a long-winded answer. I think that this year for us to be EBITDA positive on these combined businesses, will be based on what happens we think in the next 6 months on these major projects. Relative when we look at the next several years, we think that both of them should provide some very nice growth for us.

Okay. That was actually very helpful. And then just going back to the 3 pilot cities that you have going. Are those single-sourced? And can you just -- what's the expectation on time? I'm just trying to get some more color, I think you mentioned maybe June, there'll be some feedback to you. Is your expectation then it goes out to another RFP, or is that basically just revert back to you to get a contract going forward?

And let me go back. We have more than 3 cities right now doing pilots. What we referred to in our prepared remarks is that this is a program that's being spearheaded by the National Institute of Standards and Technology out of Washington D.C. IBM, AT&T, I think GE, GE Lighting, were selected to participate on the energy side. We were selected to participate on the water side -- water-loss side. So this is a very specific pilot, where a number of cities are participating. All of them are participating on leak detection. Some of them are doing it on lighting, some are doing on leak detection. And then there will a report out by the National Institute -- by NIST on what they found on smart cities. And so that is -- I will say, that's 1 group of pilots. I would suspect since those pilots at that time will have only been going on for about 3 or 4 months with these cities that they'll continue to run those pilots for a few more months before they make a decision on what they want to -- on how they want to move forward. So I don't want any confusion. The one we referenced on those 3 cities was part of a much bigger program, a smart city program, and our technology was selected to be part of that. And we're running other -- as I said, we're running other pilots. So I can't put it in perspective that, for instance, at American Water, we received a -- our first big order for distribution leak detection in the October of 2014. We had been running the pilot there for 6, 7 months. So I would say that when I look at -- when we look at our pilots that we have installed that it will probably -- those pilots will run through the end of our fiscal year. And then I would suspect that we would start seeing that some cities -- it will vary, some cities may go out for an RFP; some cities will say, "Okay. Here is what I want to monitor. What's the cost to do that?" So right now, I'd say it's a little more speculative. But what I can say is that the feedback that we've received from our pilots is those that are using them -- that are participating are pretty impressed with the technology. And we're finding leaks that they were unaware of. So -- but it's going to be a -- I would say, as I said earlier in my answer, that I don't think that this is a big growth for us that we're going to see in 2016. But we sure think we're putting in the foundation. We'll see growth in 2016 and would expect we start seeing much greater growth in 2017 and beyond.

At this time, there are no further questions.

Well, that concludes our today's call. Thank you for your interest in Mueller Water Products and for joining us this morning.

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.