Mueller Water Products, Inc. (MWA) Q3 2015 Earnings Report, Transcript and Summary

Welcome, and thank you all for standing by. At this time all participants are in listen-only mode. After the presentation we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this point. Now I will turn the meeting over to your host Martie Zakas. Ma'am, you may begin.

Thank you, Mary. Good morning, everyone. Welcome to Mueller Water Products' 2015 Third Quarter Conference Call. We issued our press release reporting results of operations for the quarter ended June 30, 2015 yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Mueller Water Products had 160.4 million shares of common stock outstanding at June 30, 2015. Discussing the third 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 up 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 third quarter. I will begin with a brief overview of the quarter followed by Evan's detailed financial report. I will then provide additional comments on the quarter's results and developments in our end market as well as our outlook for the 2015 fourth quarter. Our net sales performance for the third quarter was not as we had expected and was notably impacted by above average rainfall, primarily in Texas, Colorado and parts of the Midwest, which impacted Mueller company's base business. Outside of these geographic areas we experience good growth in Mueller company's base business. Despite the decrease in net sales, adjusted EBITDA margin for the 2015 third quarter improved 160 basis points to 19.2% as compared with 17.6% for the 2014 third quarter. Moreover, we had particularly strong margin improvement at Mueller company's base business, which includes our valves, hydrants and brass products, with an adjusted EBITDA margin of 30%, an improvement of 260 basis points from 27.4% last year. Anvil's net sales for the 2015 third quarter decreased to $89.2 million as compared with $104.5 million for the 2014 third quarter due to lower shipment volumes, primarily into the oil and gas market. Anvil's third quarter financial performance benefited from lower overhead and raw material costs which partially offset the gross profit impact from the net sales decline. We believe that much of what we thought back in net sales this quarter was more short-term in nature and that the longer term expectations for our primary end markets and our growth prospects remain positive. I will discuss this in more detail later in the call. For the quarter our adjusted net income per diluted share increased to $0.15 up 36%. With that I will turn the call over to Evan.

Thanks, Greg, and good morning, everyone. I'll first review our third quarter's consolidated financial results and then discuss segment performance. Net sales for the 2015 third quarter decreased $17.5 million, or 5.5%, to $301 million as compared with $318.5 million for the 2014 third quarter, due primarily to lower shipment volumes, the divestiture of our Canadian municipal castings business earlier this year and unfavorable Canadian currency exchange rates. Gross profit for the 2015 third quarter was $96.2 million compared with $97.3 million for the 2014 third quarter. Gross margin for the 2015 third quarter improved to 32% compared with 30.5% in the 2014 third quarter. Gross margin at Mueller company's base business improved 260 basis points year-over-year. Gross profit and adjusted operating income benefited from improved operating efficiencies, lower raw material costs and higher sales pricing. These benefits were more than offset by lower shipment volumes, especially at Anvil and unfavorable changes in Canadian currency exchange rates. Selling general and administrative expenses were lower year-over-year due primarily to personnel related expenses. Selling general and administrative expenses were $52.9 million in the 2015 third quarter compared with $55.3 million in the 2014 third quarter. Adjusted operating income for the 2015 third quarter increased 3.1% to $43.3 million compared with $42 million for the 2014 third quarter. Adjusted operating margins improved 120 basis points to 14.4% for the 2015 third quarter. Adjusted EBITDA for the 2015 third quarter increased to $57.8 million compared with $56 million for the 2014 third quarter. Trailing 12 months adjusted EBITDA was $186.4 million. We have a tax-related receivable from Walter Energy from prior to the our spin-off from Walter in 2006. In July 2015 Walter filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Subsequent to this filing we recognized a noncash write down for the entire receivable balance of $11.6 million in the 2015 third quarter. Interest expense, net for the 2015 third quarter declined $6.2 million to $6.3 million compared with $12.5 million for the 2014 third quarter. We benefited from lower interest expense this quarter due to lower interest rates and lower amounts of debt outstanding following the refinancing we completed in the 2015 first quarter. Income tax expense for the 2015 third quarter of $8.7 million on income before income taxes of $25.2 million resulted in an effective income tax rate of 34.5% compared with 36.9% for the 2014 third quarter. Net income per diluted share for the 2015 third quarter decreased to $0.10 compared with $0.11 in the prior year. However adjusted net income per diluted share increased to $0.15 from $0.11. As I just discussed we had a write down of a non-cash receivable from Walter. This write down in restructuring negatively impacted third quarter net income per diluted share by $0.05. There was a weighted average of 163.5 million shares of our common stock outstanding for the 2015 third quarter compared with 162.2 million shares outstanding for the 2014 third quarter. We purchased approximately 524,000 shares of our common stock during the 2015 third quarter under our stock repurchase program. I will now move on to segment performance and begin with Mueller company. Net sales for the 2015 third quarter decreased $2.2 million to $211.8 million compared with $214 million for the 2014 third quarter. Net sales at Mueller company's base business were at 1% this quarter with nice growth with brass products at our Pratt and gas businesses and exports outside North America. Domestic net sales of our valves and hydrants were essentially flat this quarter, we believe largely due to the effects of the above average rainfall and flooding in Texas, Colorado and parts of the Midwest which caused both delays in underground construction projects and resulted in the buildup of distributor inventory. Greg will discuss this in more detail. Additionally net sales were impacted by the divestiture of our municipal castings business and $2.3 million due to unfavorable Canadian currency exchange rates. Adjusted operating income for the 2015 third quarter improved to $43.3 million compared with $42.4 million for the 2014 third quarter. Adjusted operating income at Mueller company's base business improved $4.9 million largely due to improved operating efficiencies, lower raw material costs and higher sales pricing. This improvement was largely offset by lower adjusted operating income from our metering products and systems largely due to product mix and additional investments in technology and business development activities related to leak detection in pipe condition assessment. Adjusted operating margin of 20.4% for the 2015 third quarter improved from 19.8% for the 2014 third quarter. Adjusted EBITDA for the 2015 third quarter increased to $54.1 million compared with $52.8 million for the 2014 third quarter and adjusted EBITDA margin for the quarter increased 80 basis points to 25.5%. We had particularly strong margin improvement at Mueller company's base business, which includes our valves, hydrants and brass products with an adjusted EBITDA margin of 30% an improvement of 260 basis points from 27.4% last year. The third quarter's adjusted EBITDA margin was the highest in the Mueller company base business for any quarter since 2007. I will now turn to Anvil. Net sales for the 2015 third quarter decreased $15.3 million to $89.2 million compared with $104.5 million for the 2014 third quarter. Net sales decreased largely due to lower sales of oil and gas related products which as a reminder were about 20% of Anvil's 2014 total net sales. Net sales for this market were less than 10% of Anvil's net sales in the 2015 third quarter. Adjusted operating income for the 2015 third quarter was $7.2 million compared with $9.5 million for the 2014 third quarter. Adjusted operating margin decreased to 8.1% compared with 9.1% for the 2014 third quarter. Although shipment volumes resulted in a decrease in adjusted operating income during the quarter, adjusted operating income benefited from improved operating efficiencies, lower SG&A expenses, lower raw material costs and higher sales prices. Adjusted EBITDA for the 2015 third quarter was $10.8 million compared with $13 million for the 2014 third quarter. Adjusted EBITDA margin for the 2015 third quarter was 12.1% compared with 12.4% for the 2014 third quarter. Corporate expenses for the 2015 third quarter were $7.2 million compared with $9.9 million for the 2014 third quarter. The decrease was due primarily to personnel related expenses. Turning now to a discussion of our liquidity. Free cash flow which is cash flow from operating activities less capital expenditures was $48.8 million for 2015 third quarter compared with $43.2 million for the 2014 third quarter. The quarter ending average of accounts receivable, inventories and accounts payable compared with net sales over the past four quarters increased by about 40 basis points compared with a year ago. At June 30, 2015 total debt was comprised of $495.2 million senior unsecured term loans due November 2021 and $2 million of other. The term loan accrues interest at a floating rate equal to LIBOR subject to a floor of 75 basis points plus a margin of 325 basis points. Net debt leverage was 2.3x at June 30, 2015. Viewed in June 30, 2015 data we had $167.9 million of excess availability under the ABL agreement. I will now turn call back to Greg.

Thanks, Evan. Our overall third quarter net sales performance was not what we expected, we believe primarily due to the inclement weather in Texas, Colorado and parts of the Midwest. Additionally as we had expected net sales were impacted by the decline at Anvil, the earlier divestiture of our Canadian municipal castings business and unfavorable Canadian currency exchange rates. We did experience domestic net sales growth at Mueller company for valves and hydrants and those areas that were not significantly impacted by weather as well as nice growth with Mueller company's brass products at our Pratt and gas business and exports outside North America. We estimate the above average rainfall in Texas, Colorado and parts of the Midwest resulted in about $10 million net sales impact at Mueller company due to the delayed construction projects primarily impacting domestic sales o four valves and hydrants which were essentially flat. In fact when we looked at the domestic net sales growth for valves and hydrants in geographic areas other than those affected by inclement weather we saw year-over-year growth of 12% consistent with domestic valve and hydrant growth in the first half of 2015. Also, the Ivy Zelman land development survey from July noted that builders believe the significant rainfall and flooding in Texas delayed development timelines by about three months. Despite this decline in net sales, we delivered solid operating performance at Mueller Co. and improved adjusted operating margin. Greater manufacturing efficiencies, lower raw material costs, increased overhead absorption and higher sales pricing all contributed to this year-over-year improvement in operating results. Adjusted EBITDA margin for Mueller Co.'s base business in the third quarter improved to 30% which was 27.4% in the 2014 third quarter. As Evan mentioned, this was its best quarterly adjusted EBITDA margin since 2007. We believe the fundamentals in our Mueller company end markets are strong because we continue to see positive signs for municipal spending and residential construction. We continue to expect municipal spending percentage growth in the mid-single digits and expect demand for housing to grow at a greater rate. In fact, current forecasts for housing starts in calendar 2015 range from 10% from Blue Chip Consensus and IHS to 15% from Ivy Zelman. State and local seasonally adjusted tax receipts continued to increase during the quarter, and the CPI for water and sewerage rates increased 4% over the 12 months ended June 2015. At Anvil, we saw further deterioration of sales into the oil and gas market, which were down approximately 60% in the third quarter year-over-year. Our sales into this market have generally correlated with rig counts, which were down 59% year-over-year at the end of the third quarter. We believe, in this market, Anvil's sales were further impacted during the quarter by distributors actively reducing their inventory levels. Despite the $15.3 million decline in net sales, adjusted operating income declined only $2.3 million primarily due to the benefits of improved operating efficiencies and lower raw material costs. Turning now to our outlook for the 2015 fourth quarter. I'll start with Mueller company. We expect mid-single digit year-over-year net sales percentage growth. We expect increased domestic demand for our valves and hydrants, although growth levels may be somewhat tempered by the lingering impact of the construction delays we saw in the third quarter due to the weather events we have discussed. We believe distributor inventory levels at the end of the third quarter in parts of the country, primarily in Texas, Colorado and areas of the Midwest, were higher both sequentially and year-over-year as a result of delayed construction activity. However, many of our distributors in these locations indicated they entered the fourth quarter with higher backlog, suggesting the construction delay is likely more of a short-term slow down because the longer-term fundamentals remain intact. We expect net sales growth at Mueller systems in the fourth quarter primarily driven by recent AMI project awards. During the last six weeks, we saw a nice increase in the number of awards we received for our AMI metering systems. On a year-over-year basis, at the end of July, our AMI backlog, including recent awards, is up 2.5x, or about $18 million. We expect year-over-year adjusted operating income for Mueller company in the fourth quarter to increase, driven primarily by higher sales of valves, hydrants, brass products and AMI metering systems. Moving to Anvil. We expect Anvil's net sales to decline in the fourth quarter largely due to the oil and gas market. Rig counts were down about 60% year-over-year in July, and were roughly flat with June. As expected Anvil's adjusted operating income will be lower in the fourth quarter year-over-year due to negative impacts from lower shipment volumes and product mix. However, we expect adjusted operating income to increase sequentially. As a reminder, in the 2014 fourth quarter, Anvil had a $2.5 million gain from the divestiture of its Bloomington, Minnesota facility. For Mueller Water Products as a whole in the fourth quarter, we expect net sales will be essentially flat year-over-year, as growth at Mueller company is expected to be offset by a decline at Anvil. Adjusted operating income and adjusted operating margin should increase year-over-year due to improved performance at Mueller company. Additionally, we will also benefit from lower interest expense year-over-year. I will now highlight our 2015 other key variables. Corporate expenses are expected to be $33 million to $34 million. Depreciation and amortization are expected to be about $59 million. Interest expense is expected to be about $28 million. Our adjusted effective income tax rate is expected to be about 37% to 38%. Capital expenditures are expected to be approximately $37 million to $38 million. For 2015, we expect free cash flow to be driven primarily by 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 have made only minimal cash contributions to our pension plans in 2015. We expect free cash flow in 2015 to exceed adjusted net income. During the quarter, our proprietary fixed leak detection solution was piloted in three cities; Atlanta, Las Vegas and Los Angeles, as part of the National Institute of Standards and Technology Global City Teams Challenge. This challenge was designed to showcase how cities can use the Internet of Things to improve the quality of life and level of services for their residents. The water sustainability project incorporated Echologics' proprietary fixed leak detection technology, AT&T's wireless connectivity and IBM's water management center. We presented the results from the Las Vegas pilot in Washington in June, and are pleased with the greater visibility these projects are giving our leak detection solutions. For the full year, we expect adjusted net income per share to show nice year-over-year improvement due to the benefits of higher adjusted operating income and lower interest expense. In summary, we saw excellent results from our Mueller company base business. On a $1.2 million increase in net sales, adjusted operating margin increased 240 basis points. We continue to benefit from higher operating leverage, improved efficiencies and higher sales pricing. As I said earlier, we have seen a nice pick up in awards recently for our AMI metering systems. We expect to start shipping a portion of these awards beginning in the fourth quarter. We anticipate entering 2016 with an AMI backlog, including recent awards and those we expect to receive by the end of the quarter, of more than double than that of the prior year. Obviously, Anvil continues to face challenges related to the decline in demand from the oil and gas market. We have been lowering headcount at the plants where we produce those products and are looking for opportunities to further reduce costs. For the full year, we expect to see growth in our addressed non-residential construction markets and expect this growth will continue in 2016. Finally, we believe our long-term prospects in our water markets remain strong given utilities' needs to replace ageing infrastructure, monitor and measure usage, and address asset management and non-revenue water loss, all areas where we are well-positioned. Operator, with that we will open the call up for questions.

Thank you. [Operator Instructions]. Our first question coming from, Kevin Maczka of BB&T Capital Markets.

Thanks. Good morning.

Good morning, Kevin.

Greg can we talk a little more about this distributor inventory situation. I mean it's very understandable that would be higher than normal in the weather affected areas, but how does it look in the non-weather affected areas? Are inventory levels a little bit higher than you'd like to see here as well?

Actually Kevin when we look to the Northeast and the West inventory levels are about where they have always been. So I will say that a little bit in the Southeast they ended the third quarter I'd say maybe with about 15 days more of inventory than they normally -- when they normally hold. But we look at our Central region as some of our key distributors in our Central region it was up almost double. So as best we can tell some of our major distributors, our key distributors ended the third quarter with about 90 days of inventory. They actually when we just checked recently they got that down to 60 days in July. So some of these projects are now starting to [leave]. They are starting to ship some of that inventory. However 60 days is still probably 15 to 20 days higher than what they would target. So I was thinking in that region that we will probably will still see some little impact in the fourth quarter and we've actually -- we've taken that into account with the outlook that we gave for the fourth quarter.

And you mentioned some lingering affect of that, so it's not just that it stopped raining, the waters receded and we are just going to make up all these sales as these construction projects get going right away. You mentioned three months or more of a lag you are expecting there.

Yes. That was -- we were quoting an Ivy Zelman survey that she just completed in the month of July and there she was talking -- surveying builders who said in the Texas area that because of the rain that they see some project perhaps being delayed by three months. I think when we look at the overall impact it's going to take several quarters I think to recover. We don't think this business goes away but we do think it will take some time as I said for us to recover. When you look at contractors only have so much capacity. A number of those contractors report that they lost 60 days during this rainy period during the last quarter and when you stop and think about it, I mean a lot of that is during the prime construction period. So it's going to take some time because I think they were probably pretty fully scheduled already for the month of July, August and September. So I think they only have so much capacity to handle this work and I think we hit upon another key point in your first question that, that some of our distributors in these hardest hit areas will have some hangover of products that they have in distribution and that will take probably another four, six weeks to work its way through. Just to remind everyone and we pointed this out on our last call that, on our price increase on valves and hydrants this year we had about 20% more orders in this year than we did last year, which we think fully supports that our distributors were expecting a nice pickup in demand. And then lo and behold we get into the -- we start getting into the construction period and they lose 60 days, and they brought in more inventory this year than they last year. This is going to have a bit of -- it is going to certainly have an impact in those areas like I said and in those areas where they ended the second -- ended the June quarter with 90 days of inventories that's cut down to 60, but that will still impact this we think probably in the fourth quarter in those areas.

Got it. And just one more follow-on from me as it relates to inventory levels and destocking. In the oil and gas market I guess that's very understandable again there will be destocking there, may be that hasn't run its course yet. But is it your expectation that if rigs are stabilizing and may be they bounce a bit then your demand will as well or will you continue to see demand remain very soft or even decline more because there's so much equipment out in the field sitting idle now and that can be reused before you'll ever need to see demand for new equipment?

Yes. That is a good question. And we have been trying to dig in on there. I think we feel reasonably confident that a big portion of our distributors' destocking probably has occurred in the last four months. There still could be some carryover but we don't think to the same extent that we have seen as I said the last three or four months. Rig count has been just an amazing correlation for us with demand for our products. I think that it would indicate that we still have a year-over-year issue and it is as I said in our -- as we said in our prepared remarks it's still down about 60% on a year-over-year basis. But for the last month it has been somewhat stable. So I would think that -- I mean I think right now our view is that we are probably getting close to that point of being stable sequentially, but we still do have a year-over-year issue.

Okay. Got it. Thank you.

Thanks Kevin.

Thank you. Our next question is coming from Mike Wood of Macquarie Security Group.

Hi, thanks. Mike Wood. I agree with your assessment on the fact that we have seen weather issues linger for a couple of quarters. Just wondering, how you manage that through maintaining your own inventory and production levels? I will start there and then I have a follow-up.

Yes. We actually we entered the -- we ended the quarter in our Mueller business with a little more inventory than what we had targeted because of I think we are surprised that we stopped because we do build to a forecast. So we will bring down -- we in our planning process Mike that we have targeted bringing down inventories in the fourth quarter because we expect that we will make some of our shipments in the fourth quarter from products that we have already built.

Great and then on the oil and gas exposure on Anvil, can you just give us a sense on what you can do there to right size that cost structure given the lowered size of that business?

I will tell you on the SG&A side we -- since this market -- we can really target this market, so we don’t have an extensive sales force. We probably have about four or five salesmen that just focus on this market and we really can't afford any disruption there because of our long-term relationships and the knowledge of the marketplace and all. We have taken that and those plans that are focused on manufacturing, products going to oil and gas we have taken down about 40% of that headcount and we are continuing to look to see where we can take out more.

Okay. Thank you.

Thank you, Mike.

Thank you. Our next question coming from Joe Giordano of Cowen & Company.

Hey guys this is Tristan Margot for Joe today. How are you doing?

Good morning.

Good. Good morning.

Most of my questions have been answered. I guess I believe you are adding a few people at Echologics, can you talk a little bit about that and how organic growth is going there?

Yes. Organic growth is -- can be somewhat misleading because we are still dealing with smaller numbers. But for this quarter sales were up about 15% on a year-over-year basis and relative to our investments there we have really been focusing on increasing the size and effectiveness of our worldwide sales organization. And then on further developing our fixed leak detection technology. We've added sales people in North America, Europe and Asia. We have taken the sales force from 12 to 25 people in the last eight to nine months. So we are making a significant investment because we are bullish about the upside opportunity. On the technology development side we expect to spend about $1.5 million more this year and this is more focused on further development in our fixed leak detection technology for both the domestic and international markets. Prior this year our R&D on our fixed development -- our R&D development for our fixed leak detection technology was really focused on communicating over an RF network as well as cellular network for our transmission lines. We think that there is a significant opportunity to be able -- if we are able to have the communication over cellular networks or if we were able to transmit on distribution lines the leak detection data over a cellular network, we think that opens up a lot more of the market for us. So that's where a lot of our R&D development spending has been going through the last six to nine months. And in fact we will have our first pilot with that technology in August. We have had third-party resources size the leak detection global market at $1 billion. So as I said that we are just in the very early stages of -- I think beginning to penetrate this market and very bullish about our upside.

Okay. This is great color. Thank you so much.

Thank you.

Thank you. Our next question coming from David Rose of Wedbush Securities.

Good morning. Thank you for taking my call. Just two questions. One is, if you can kind of break out the margin improvement, how much was it for material costs versus lower fixed costs on the Mueller Co. side? And then secondly address expectations on profitability for Mueller Systems for next year.

What we look at -- when I say that -- the greatest percentage of our year-over-year increase I think came from operational efficiencies and I will say overhead absorption, followed by I think what we have seen in terms of increased pricing and then raw material costs. So on a percentage basis I mean to say we are probably about 40% from our operational efficiency, 40% to 45% about maybe 30% to 35% from higher pricing and I had say we can lump up the rest in raw materials.

So given that raws are continuing to be depressed, you have got the same sort of manufacturing levels roughly maybe it struck down a little bit, but does this imply this is sort of a new norm for you? Is there anything here that we should look at that suggests otherwise?

Yes. I think when we look at the next quarter, I think we don't see any real change in raw material costs one way or the other. So I would think that in our fourth quarter we should see raw material costs just about the same as we thought we saw in the third quarter. You are right in as we bring down -- in reference to the earlier -- to Mike's earlier question, we may cut back some manufacturing a little bit in the fourth quarter because of our higher inventories as a result of the drop-off in the third quarter. I don’t think that that will be a substantial impact.

Okay. That's very helpful. And then on the Mueller Systems from time to time you do provide some guidance on expectations from profitability and I think you pulled the weight from that win, business was weaker, but now that you have got a growing backlog, at least it looks like a nice backlog. Can you maybe provide some color on expectations for profitability next year?

Given the lumpiness of this business, given the outlook of 2016 I feel a lot more comfortable when we start getting into 2016. But I will say that when we talked about the recent awards and the growth of our backlog, we highlighted AMI Systems and AMI Systems are by far our highest margin product. So I would say sitting here today when we look at the next year based on some of the recent awards and what we have outstanding that -- I mean quotations outstanding that we feel that we are going to see a better year certainly coming out of Mueller Systems because of higher AMI shipments that carry a higher margin.

Okay. That's perfect. Thank you very much. I appreciate it.

Thank you.

Thank you. Our next question coming from Noah Kaye of Northland Capital Markets.

Thanks. Let's pick up right there with the Mueller Systems business. Your comment that you are just going to see higher AMI shipments, can you just tell us what you're seeing in the markets generally and in terms of tenders? Is the market now shifting in a meaningful way towards AMI from AMR? How are you thinking about your positioning in that market? What do you think?

Yes. Great. We are seeing more request for proposals. I would say that we are seeing a greater adoption rate in the smaller and the midsize utilities. For instance, one of our -- the recent award that we just -- one of our recent awards came from Charlotte County, Florida, which will represent about -- represents about 45,000 endpoints so a nice award, nice project. I would say some of the larger cities are talking more and more about AMI, but I will say when we get to the larger cities because you start talking instead of 45,000 endpoints potentially 200,000 endpoints that it becomes a much more drawn out process, because it becomes a larger political decision. So I would say yes that we are seeing interest picking up. We are seeing it more in the smaller and the midsize utilities because I think that they have greater control over the decision making. We are seeing the larger cities getting more interested and we are seeing the request for proposals picking up and I would say certainly what has helped driving that is that we're becoming and I imagine our competitors, we are just becoming a lot more efficient in terms of the range that we can -- that our systems can communicate and as a result we need less infrastructure to do it which brings down the cost points. So I just think it's the -- the natural evolution with new technology and as I said on the last -- several previous calls that, that we would say our biggest disappointment is in how long it takes to make some of the -- to get these decisions made and there's a lot of resources tied up in putting together a proposal, making sales presentations then making follow-up sales presentations. But I would say right now that we think it's moving in the direction that we expected. We would like to see it move faster but I think it's making steady progress.

And we are also hearing from unions in utilities there is a greater desire for even more open platforms, basically something to build off of in the future. I know you are now participating in the LoRa Alliance. Can you tell us -- are you seeing that as well as and what are you doing with their platform to kind of make it; a) more open and; b) more expansible?

Yes. We are and in fact we have been a proponent of open standards. I do think open standards will help move along adoption. So utilities just absolutely I think sometimes are very hesitant deploying a dedicated system that they could only use with one manufacturer's product. So I think open systems will move adoption along. And what we are doing -- and you are right on the LoRa adopting and we have been spending I'd say the last nine months doing what's necessary on the development side to be able to incorporate the LoRa chip into our communication systems. That has been probably the single reason that we've been able to significantly increase our range. We also benefited, that is, we think that it moves us much further along to be able to become a part of the Internet of Things. And in fact the LoRa Alliance is moving I think moving along the adoption of the Internet of Things. It was to LoRa's and I think that when we start getting to the Internet of Things I think that's when we start seeing perhaps an explosion in terms of the adoption of AMI, because then a utility no longer has to have a dedicated RF network. And the last -- I will say the last 12 to 18 months a lot of our development side has been on making sure we are Internet of Things ready and being part of the LoRa Alliance I think positions us well.

Excellent. Thank you.

Thank you.

Thank you. Our next question coming from Ryan Connors at Boenning & Scattergood.

Great. Thank you. Good morning.

Good morning Ryan.

I wanted to talk a little bit about I guess the pricing side of the oil and gas equation and you talked a lot about the demand issues, but I wanted to talk a little bit about pricing. If you could give us some color there? I guess specifically have you seen any instances where Anvil is being asked to re-price or renegotiate pricing on business that's already in backlog?

Yes. Ryan I would say no re-pricing because we don't have in that product a long backlog. We probably will get the order and we will ship it within a couple of weeks and it goes out to our distributors. I think what our distributors have been doing as I referenced earlier, they have been bringing down that inventory, their inventory at a greater rate and not replacing it. We have seen some pricing pressures. I think we have seen maybe a little more of our end user or distributors may be looking a little closer or end users looking a little closer at an offshore product rather than domestic produced. Generally this market is -- it will tend to favor domestic produced products. We estimate for the third quarter that we may have seen about a $200,000 erosion from pricing in the oil and gas market at Anvil.

Then I guess this is a tougher one to answer. I appreciate that there is not too much you are going to tell us on a quantitative basis but the four color -- the 4Q color has appreciated but given the fiscal year obviously 2016 is arguably more important for the stock right now. So I mean recognizing you don’t want to quantify anything how are you -- can you give us some qualitative kind of perspective on how you are looking at 2016? You talked about some of the tailwinds. I mean do you think it's a double-digit type of, is it a significant growth here in Mueller Co. given some of these headwinds we've had and the comps will be relatively easy or is it single-digit? I mean any kind of perspective will be helpful.

Let me preface my remarks and I am making an assumption that we are not going to have to build any arcs next year because of 40 days of rain. But when we look at the drivers, certainly I think that from the housing and municipal spending we think that looks to be at least as strong as we saw in 2015. And if we don't have -- as I say we don't have the weather disruption certainly we are not meteorologists, we would think we should see nice continued growth on the Mueller Co. side. On the Anvil side I think we continue to expect to see growth in nonres construction and when we start getting into the middle of the year, next year we are going to have a lot easier comps on the oil and gas side. I think when we look at Echologics, a lot of our big investment will be behind us and the investments that we put in sales people as well as I referenced earlier the development of cell technology for our fixed leak detection for water distribution systems and we expect to be going into 2016 at Mueller Systems at least on the AMI side with backlog and awards double of where we were. So I'd say right now that again difficult for me to put percentage growth but I would say that with the exception of the question mark on oil and gas with the further deterioration we feel pretty comfortable in what's happening in our end markets. And as I said that if we don’t see further deterioration in oil and gas in the second half of the year we should have easier comps.

And then on the -- down the P&L a little bit also looking at 2016, you had made some -- going back a year or more you have talked about kind of where you saw Mueller Co. margins kind of getting to in the peak of the cycle and I think I recall hearing 20% would probably be kind of as good as it would get. And here we are kind of there at I think an earlier point of cycle than we expected. So can you comment on the kind of margins outlook longer term for Mueller Co. and then I will add to that any outlook you can provide on the corporate unallocated line because it has come down and should we expect those savings to continue into next year?

Sure. Yes. I think that when we look at the results especially this quarter of Mueller base business I think that we continue to see the benefits of increased operating leverage. But we are also seeing the benefits of our Lean initiatives. We are in our fourth year of Lean initiatives, so we are just getting much more productive. So when we look -- I will say when we look at our Mueller base business we have said we always felt comfortable with that getting back to 25% EBITDA margins, we hit 30% this quarter. So I think that we should be able to do better than the 25% that we have previously said for Mueller Co. Then when we add Systems and Echologics again as I have said that we are confident that we will going in with a much higher backlog, so we should see better performance on those businesses and our investments in Echologics should be behind us. So the big investments that I talked about, so when we look at that, that we said yes, we continue to see the demand that we expect we should perhaps do better I think than what we have guided in the past. And I am sorry Ryan your other question?

Just on the corporate expense line?

Yes. We are -- we always strive to streamline corporate operations. Sometimes we will have some quarter to quarter variability based on a project that we may have done here at corporate. We did one a year ago in the third quarter that didn’t repeat this quarter and that helped contribute down. Evan any comments there.

I will just say that last year corporate expenses were just a little over $39 million and we expect corporate expenses to be $33 million to $34 million in fiscal 2015 and going forward. As Greg mentioned we are always focused on improving our efficiency here, reducing costs and I would say wouldn’t see anything -- any significant movements in corporate, perhaps a little inflationary impacts but in that $33 million to $34 million to $35 million range is about the run rate for us now.

Okay. It's very helpful. Thanks very much for your time.

Thanks, Ryan.

Thank you. Our next question coming from Kevin Bennett of Sterne Agee Capital.

Good morning everybody.

Good morning.

Greg, last quarter we talked about the California drought and how near term that could negatively impact you guys as homebuilding slows down. I was wondering, if you had an update on that front in terms of kind of what you saw in the quarter and what you are hearing now?

Kevin, I don’t think yet it has impacted us positively or negatively. On the positive side we're having a lot more discussion about leak detection. We referenced earlier that we have a pilot in Los Angeles, we have a pilot that's going on East Bay MUD, which is outside Oakland. So we are seeing more and more interest there. But when we look at our year to date in California on our water side our sales are up about 6% and they were 7% through our first six months, they were up 5% in the third quarter. So I would say we really haven't seen too much movements either way from the drought yet.

Okay. Great. Moving to Anvil, can you give us some commentary on what you are seeing on the nonres side? Maybe what it did in this quarter and kind of what kind of growth you are looking at going forward?

Yes. When we look at the nonres side at Anvil sales of our fire protection products were essentially flat in the third quarter year-over-year and sales for our mechanical products were slightly down. We believe that there may have been some negative weather impact but we just don't feel as comfortable making an assessment on that impact on the Anvil side as we do with the Mueller business. Our mechanical products are more widely used and we go across -- that was -- we have talked in the past institutional hospitality industrial applications. We actually think that our sales were down on the industrial side, which could -- we may be having an indirect impact from oil and gas because oil and gas has to cross a lot of manufacturing industry and that we may have seen a bit of an impact there. But we think it's more timing. Through our first six months we believe we were up about 5% to 6% year-over-year. We have seen a little bit of a pickup in our July daily shipments up between 4% and 6%. So I think when we look at the fourth quarter we still think that we are going to see growth from nonres construction and as we said a little earlier it looks like that the indicators are that we should see some growth in 2016. But what we are seeing with the exception of what we saw this quarter is still looking like mid single-digits.

Okay. Great. That's helpful. And then last question for me. On the M&A front I mean you can't comment on anything specific but any color you could provide there and whether you are having more conversations than you had in the past or if you are not really focused on that or what are you thinking about M&A?

I can't really say we are having more conversations. I mean we continue to look to see where are the strategic fits. We have said in the past that as we have the opportunity to grow on our water side that's obviously our priority. If we have a chance to enhance our competitive position on the -- outside the technical side on the smart metering, smart systems, on leak detection that would be an opportunity for us we think to enhance our international exposure. But I would say that right now that we are -- there's probably not much change than where we have been in the last 12 months other than we feel more comfortable in talking about it because our balance sheet is in a lot better position.

Got it. Okay. Perfect. Thanks, Greg.

Thanks, Kevin.

Thank you. Our next question coming from Seth Weber of RBC Capital Markets.

Hey, good morning everybody.

Good morning, Seth.

So most of the questions asked and answered. But just going back to Anvil, can you give us an idea where you are at with capacity utilization there? I am just wondering, I mean, margins in that business have been kind of 8% here for three or four quarters, three quarters I guess. Is this the new normal for Anvil assuming that energy, oil and gas prices don’t inflect higher from here? And is the margins in the business from 2012 to 2014 were double digits but is 8% a kind of better range to think about going forward?

Seth, I'd say certainly as we pointed out that when we are down in the oil and gas, even though it's 20% of available sales, those products carry about an 800 basis points higher gross margin. So, yes, we are unduly -- we are impacted more on the gross margin line than perhaps the sales line when we see a downturn in that market. I think as we -- if we increase our capacity utilization and in total Anvil's about 55% but when you are -- when we look at our oil and gas those -- we have two facilities in primarily manufacturing for oil and gas. They are well down -- they are well below the 50% level. So if oil and gas stay flat and we are seeing some growth in nonres construction I think we will see some margin improvement because the capacity utilization at our largest facility is dedicated to manufacturing those products. But I would say on the other hand if -- the oil and gas will have an impact [that] keep it down I will think margins below what we have thought several years ago.

That's helpful. Thanks Greg. In the past you guys have given the margin drag on Mueller Co. for the Systems and Echologics business or dollar drag, is that something you can update?

Yes. If you look from an adjusted operating margin, it was about 300 basis points this quarter.

Terrific. And then just lastly, the share buyback of 0.5 million shares or so, I mean that was good to see, is that sort of run rate we should think about going forward?

I don’t know if there's a run rate, as we have said in our prepared remarks we will certainly -- we don’t anticipate implementing of formulaic repurchasing plan. I think we will approach it on a quarter to quarter as we consider all of our capital allocation options. But it's something that, you know obviously we have the authorization from our Board and that's something that we look very closely.

Okay. Appreciate it. Thank you very much guys.

Thanks, Seth.

Thank you. At this point there are no further questions.

Well again thank you very much for your participation today and look forward to seeing you all soon.

Thank you. And that concludes today's conference. Thank you all for joining. You may now disconnect.