Mueller Water Products, Inc. (MWA) Q3 2017 Earnings Report, Transcript and Summary

Welcome, everyone, and thank you for standing by. [Operator Instructions]. This call is being recorded. If you have any objections, you may disconnect at this moment. I'll now like to turn the call over to your host, Ms. Martie Zakas. Ma'am, you may begin.

Good morning, everyone. Welcome to Mueller Water Products 2017 Third Quarter Conference Call. We should our press release reporting results of operations for the quarter ended June 30, 2017, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Discussing the third quarter's results this morning are Scott Hall, our President and CEO; and Evan Hart, our CFO. This morning's call is being recorded and webcast live on the Internet. We have also posted slides on our website to help illustrate the quarter's results as well as to address non-GAAP disclosure requirements and forward-looking statements. At this time, please refer to Slide 2. This slide identifies certain non-GAAP financial measures referenced in our press release, on our slides and on this call and discloses the reasons why we believe that these measures provide useful information to investors. Reconciliations between GAAP and non-GAAP financial measures are included in the supplemental information within our press release and on our website. Slide 3 addresses forward-looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward-looking statements as well as specific examples or forward-looking statements. Please review Slides 2 and 3 in their entirety. As a reminder, we sold Anvil in January, 2017. As a result, Anvil's operating results for all prior periods and the gain from its sale have been classified as discontinued operations. We filed a form 8-K on February 21, which included the reclassified 2016 results by quarter. During this call, all references to a specific year or quarter, unless specified otherwise, refer to our fiscal year, which ends on September 30. A replay of this morning's call will be available for 30 days at 1-866-446-5476. The archived webcast and corresponding slides will be made available for at least 90 days in the Investor Relations section of our website. In addition, we will furnish a copy of our prepared remarks on form 8-K later this morning. I'll now turn the call over to Scott.

Thanks, Martie, and good morning. Thanks for joining us today, as we discuss our results for the 2017 third quarter. I'll begin our discussion this morning with a brief overview of the quarter followed by Evan's more detailed financial report. I'll then provide additional color on the quarter's results and developments in our end markets as well as our outlook for the full year. Overall, we are pleased with third quarter net sales growth of 3.3%, highlighted by 4.5% growth at Mueller Co. Although there were some puts and takes, net sales growth was about as we expected. Operationally, we continue to execute on our productivity plans and realized the resulting cost saving. However, higher material costs represented stronger-than-expected headwinds in the quarter. During the quarter, we completed our $50 million accelerated share repurchase program and also repurchased an additional $5 mil worth of shorts under our existing share repurchase authorization. All in all, we were pleased with the quarter. Progress in the market, progress in integrating Singer Valve and progress in operational improvements all met our expectation. Going forward, we will continue to execute on our initiatives to drive productivity improvement accelerate our product development and deliver exceptional value for our customers. And with that, I'll turn the call over to Evan.

Thanks, Scott, and good morning, everyone. I'll first review our third quarter consolidated financial results and then discuss segment performance. I will only be discussing our results from continuing operations. Net sales increased 3.3% in the 2017 third quarter, a $232.2 million as compared with $224.7 million for the 2016 third quarter. Net sales increased due to volume growth at Mueller Company in the February acquisition of Singer valve. Gross profit, excluding a purchase accounting adjustment related to Singer valve inventory was $83.3 million for the 2017 third quarter compared with $83.2 million last year. Productivity improvements were largely offset by higher material costs at Mueller Co. Selling, general and admission expenses were $38.7 million in the 2017 third quarter compared with $39.4 million last year, primarily due to lower personnel-related expenses. SG&A expenses as a percent of net sales was 16.7% or 80 basis points lower than the 17.5% in the prior year. Adjusted operating income increased 1.8% to $44.6 million as compared with $43.8 million for the 2016 third quarter. Lower SG&A expenses were partially offset by higher material costs. As you may recall, 2016 third quarter adjusted results excluded $21.2 million of other operating expenses comprised of a $16.6 million noncash pension settlement charge and charges primarily associated with the demolition of surplus facility. Adjusted EBITDA for the 2017 third quarter increased to $54.8 million compared with $53.6 million for the 2016 third quarter. For the trailing 12 months, adjusted EBITDA was $163.1 million or 20% of net sales, an improvement of 70 basis points compared with the prior-year period. Net interest expense decreased $900,000 to $5.1 million in the 2017 third quarter as compared to $6 million in the 2016 third quarter. Income tax expense was $13.4 million or 35.7% of pretax income for the 2017 third quarter, and $5.6 million or 33.7% of pretax income for the 2016 third quarter. We grew third quarter adjusted earnings from continuing operations per share to $0.16 from $0.15 last year. I will now move on to segment performance building with Mueller Co. Mueller Co. net sales for the 2017 third quarter increased 4.5% to $207.6 million as compared with $198.7 million last year. The increase was largely due to volume growth in both the U.S. and Canada and the addition of Singer valve. Adjusted operating income was $54.1 million in both the 2017 third quarter and 2016 third quarter. Adjusted operating income benefited from volume growth and productivity improvements offset by higher material costs. Adjusted operating margin decreased 110 basis points to 26.1% for the 2017 third quarter compared with $27.2 million for the 2016 third quarter. Adjusted EBITDA for the 2017 third quarter increased to $63 million compared with $62.6 million for the 2016 third quarter, and adjusted EBITDA margin for the quarter decreased 110 basis points the 30.3% from 31.5% last year. However, trailing 12-month adjusted EBITDA margin at the end of the third quarter was 60 basis points higher compared with the prior year. And now Mueller Technologies. Overall, Mueller Technologies' third quarter net sales decreased $1.4 million to $24.6 million compared with $26 million last year. Mueller Technologies' net sales of AMI and leak detection and condition assessment products were higher year-over-year, but we're more than offset by lower AMR and visual-read shipments. Adjusted operating loss was $1.6 million in the 2017 third quarter and was $1.5 million last year. Turning now to a discussion of Mueller Water Products liquidity. Free cash flow, which is cash flows from operating activities of continuing operations plus capital expenditures was $34.2 million for the 2017 third quarter compared with $54.4 million for the 2016 third quarter. Timing of as well as higher interest tax payments resulted in lower year-over-year free cash flow in the quarter. At June 30, 2017, total debt was comprised of a $479.7 million senior secured term loan in November 2021 and $1.5 million of other. The term loan accrues interest at a floating rate equal to LIBOR a spread of 250 basis points. A June 30, net debt leverage was, again, below 1 and our excess availability under the ABL credit agreement was $109.5 million. I'll now turn the call back to Scott.

Thanks, Evan. As I mentioned before, we are pleased to see the increase growth in our end markets this quarter with our overall net sales growth coming in about as expected. While continue to be encouraged by the operating performance of the company as we delivered meaningful productivity improvements in the quarter. These improvements, however, were not enough to offset the unfavorable material cost environment we are in. It appears that last year at the end of the third quarter, materials had bottomed out. This year, prices of brass and scrap material on the rise, and in the 2017 third quarter, we were up 13% and 20%, respectively, from the second quarter and 25% and 30%, respectively, year-over-year, which unfavorably impacted our margin. We expect material costs to continue to rise, but the impact to be less as we expect to further offset these costs with additional productivity improvements and higher market pricing. With this rising material cost environment, price has been lagging changes in these import cost. However, we were encouraged to see higher pricing in the third quarter versus the second quarter. Moving on to a more detailed discussion on Mueller Co.'s results. Mueller Co. experienced solid net sales growth in the quarter despite a difficult comparison with the year ago. Last year, third quarter sales growth was the strongest in the last several years. This year, net sales were up in the mid-single digits and included growth from both our domestic and international markets. Additionally, we experienced growth from the Singer Valve acquisition, which I'm pleased to report has experienced a smooth integration into Mueller Water Products. Adjusted EBITDA margins remain at roughly 30%, but decreased 110 basis points year-over-year in the quarter due to higher material cost. On a trailing 12-month basis, however, adjusted EBITDA margins continue to improve, up 60 basis points over the last 12-month period. The unfavorable material cost of lead to our decision to announce brass price increases in both the U.S. and Canada during the third quarter. As I mentioned before, we are realizing to improve brass pricing and expect this to partially offset significantly higher material costs during the fourth quarter. The brass price increase announcement also led to a strong quarter volumes in the third quarter. We believe our strong quarter volume in advance of the price increase is a positive signal that our end markets outlook remains solid. Taking a closer look at sales in the third quarter at Mueller Technologies, results were somewhat mixed. You will recall last quarter, we expected growth to moderate as we entered into tougher competition period. We were encouraged to have realized sales growth in our higher-margin product offerings, fixed leak detection, pipe condition assessment and AMI systems, however, lower AMR and visual-read shipments more than offset this growth. As a result, 2017 third quarter net sales decreased $1.4 million year-over-year. To close out the third quarter discussion, I'm happy to report our fixed leak detection business continues to gain interest in the market. As you will recall, during the quarter, we announced the San Jose project, which could be up to 10,000 notes on the strength of that project and due to the success of West Coast trials, we received additional orders from adjacent water authorities in the Bay Area. Now looking ahead to the full year. For our 2017 full year on a consolidated basis, we expect low- to mid-single-digit net sales growth year-over-year. We expect adjusted operating income improvement to slightly exceed net sales growth. We expect higher shipment volumes, productivity improvements and better sales pricing drive this margin expansion. Although, we also expect to face significantly higher material costs. And we'll wrap up now with some other items.

Based on our current expectation for the full year, corporate expenses will be $33 million to $35 million, depreciation and amortization will be $42 million to $43 million and interest expense will be $22 million to $23 million. We expect our adjusted effective income tax rate to be 31% to 30% and capital expenditures to be between $36 million and $38 million. Finally, we expect 2017 free cash flow to be less than the $83 million generated in 2016, primarily due the larger income tax payments in 2017. We expect 2017 free cash flow to approximate adjusted income from continuing operations. Operator, would you please open the call for questions?

[Operator Instructions]. We will go to our first question is coming from Mr. Mike

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

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

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

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

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

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

And our next question is coming from Brian Lee.

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

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

Okay. And then just to be clear that the baseline for the improvement is off of the Q3 or...

Yes. Off of fourth quarter. Year-over-year.

Year-over-year.

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

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

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

It's a great question. I mean, obviously, the demand was fell off on the visual read and the AMR a little faster than we expected, and we're still evaluating that. But I think, long story short, if you were to look at just the meter business, I would say that that's probably going to be a little bit north of $2 million kind of growth instead of 15% at this point. Based on what I've seen in the order book, based on the size of the backlog. We were expecting, frankly, 2 projects to have close in the quarter, where we think we're in good shape to win, and those decisions continue to get delayed. And so I'm not going to sit here and say, the order book is going to be as strong at the end of this year as it was at the end of last year when we had counting and other. So I think, we are - I think, it's realistic that we won't be in that 50% range. We will have some growth, but nearly as much as we had hoped. With that said, I think there is a little offside intact as a result of how quickly we get these nodes - the DX nodes deployed at Echologics. And we're going to be pushing to get as much as out as we can in the fiscal year. But at the same time, want to ensure that we have as much value-add there as we possibly can. So we're going to be kind of trying to balance that. All in all, I expect the technologies business, the kind to be up in the 5% to 7% range. Certainly, well below our expectations at the beginning of the year.

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

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

And our next question is coming from Seth Weber with RBC Capital Markets

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

Yes. It was about 2.5%.

Okay. And then just going back to the last question. Where systems and Echologics' sales in the third quarter about as you expected? Or I'm just trying to...

No. I think, the Echo was I thought. If you think back to what I said in the second quarter, we're not going to talk. I was expecting more black field, but certainly at that time did not wanted to be down. We booked enough that we could have been flat year-over-year. We had a couple of bumps along the way a couple of push outs and. But no, I'm not going to sit here and say that we were expecting to be down $1.4 million. I was expecting it to be flat and slightly up and as the quarterly it was small. What I think a mostly developed I guess, what I think about us once became apparent that we're going to have up to operational there. The challenge to make sure we cover that and that we countermeasure and that we did the things that we had to do as a well operated business to make sure, we meet our commitments. And I was pleased to see the Mueller Co. performance kind of cover what needed to be covered and get us to where we had said we would be. And so, and I think, when you think about an environment, where you are implementing lean manufacturing, where you are focusing margin expansion through productivity initiatives, where you are trying to manage to market and get in front of price and things like that, that you with those levers to make sure you make those commitments. So I would say, the systems business kind of fell below expectations. Mueller Co. and Echo take over there to pick up the slack. And all in all, I think a solid quarter. I think, a real systems is that we did book about $3 million-or-so more than we should, and we couldn't have - we couldn't pulled it over and we hadn't had the quarter problems.

Okay. And then so, Scott, just kind of some math here. I mean, it looks like you're - in guidance, I mean for guidance for Tech, it looks like revenue should be up a little bit sequentially from 3Q to 4Q. And so my question is, that's call it a $100 million kind of run rate into next year based on 3Q, 4Q. Is that a high end of revenue number for that business to be profitable? Is that, let's see, revenues of $100 million next year, can Tech profitable at that level?

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

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

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

Our next question is coming from Brent Thielman.

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

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

Okay. And there was investments, maybe, in new automation or those things you're still evaluating? Are you plan to put those down to action course of next 12 months?

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

Got it. Okay. And then, Scott, it seems like we keep hearing more about activity and residential project kind of up across the country, which should be good for Mueller Co. I know it's difficult to pinpoint exactly where the products are going, but, I guess, I'm a little surprised just given where you hear out there from the developers, construction companies, volumes little bit more momentum behind them. I guess, question here are you still seeing some pullback in municipal repair replacement? Is there maybe an inventory overhang out there with distributors? Is it, actually, it is coming around as much and kind of where the Mueller brands are really strong. Any color there based on context what you're hearing out there?

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

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

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

Our next question is coming from Jose Garza.

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

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

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

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

Yes. That's right. I would say, we're in the evaluation stage, really across-the-board when we look at the capital allocation and specifically, with respect to the Term Loan B, we have about $480 million outstanding with $350 million - a little over $350 million in cash. So we're in a solid position. But I think, that's all tied into this share repurchase debt retirement overall discussion, and I think, will be balanced as we move forward.

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

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

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

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

Yes, from?

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

Our next question is coming from Jim Giannakouros.

Price increases in brass similar magnitude to what there is hydrants and valves? Or how should we be thinking it about magnitude there?

I think, it was - I think, the hydrants and valves back in February went after 7. It was delayed. I can't even remember on top of my head what it looks like right now. I think in brass, we went after 5 and the yield will be something less than that. So I should say, the yield should be around 5. And I think we went after 10 and expect to be 5 or 6 exchange and everything else a little bit, I don't know, choppy. We've used that word for demand. It's uneven. So we've seen an ever improving bookings of brass, but brass cost have continue to grow up. I think if you look at going on top of my head, but if you look at Q3, I think, our average brass was 278. I think, in Q4, we expect that number to be around 287. So another $0.09. So if you think about a yield in the 5 range, and you think about a cost probably going up another $0.09, $0.10 a pound, you'd be kind of right there with where I think the quarter is going to come out. The announced price increase and the yield price increase are always something that moves around for us. And I think, in past, we've guided when we announced a price increase, we generally expect the yield around 50%. And I think that's we're perhaps right now. That's what we think we're going to yield.

Okay. That's helpful. And things were on that, and puts and takes on Mueller Co. margin progression, obviously liking that prices there offsetting inflation. Can you frame for us or size-based incremental margins on volume growth? And how much in productivity benefits you may be thinking annually? And what you guys targeting there?

Lot of questions. I think Mueller Co. full year, I'm expecting somewhere to be little south to $20 million total productivity. And if you were to do that math, what they delivered so far versus what left to be delivered, I think, there's probably there is $2 million in the quarter, in Q4. As some of the bigger projects, like project come off the year-over-year comparison, because we were implemented in Q3 of last year. So probably $2 million more to come from Mueller Co. and cost out. Probably, think about it in the context of maybe a $2 million in price and the quarter. And so all in all, that 30 basis points I was talking about improvement on a consolidated basis, I think, that Mueller Co. could be anywhere from up similar numbers to kind of down 40 basis points depending on what you assume for steel scrap and brass. So if you hold this flat, kind of that 278 number, we will be up. If it runs all the way to 278 in the quarter or 290, we could have a few more headwinds, and we're not contemplating that all of the price yield will come in one great here in August. That's kind of the best way I can dimension it for you, Jim, is that it's going to be a range of outcomes, but where we think we are right now is that there's a $2 million left to get and price of $2 million left to get to productivity, there will be a little bit of volume absorption. And depending on what happens with scraps deal and brass, we're kind of the determining.

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

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

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

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

Our next question is coming from Joe Giordano.

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

How do I answer that? They don't. They give you some point-of-sale information. They have their financial targets, our 2 largest and supply. supply has just been purchased by of But what we focus they have their cash metrics that they're trying to manage. They have their terms that they're trying to manage. So it's a negotiated discussion region-by-region based on what sell-through looks like. So our visibility quarter-to-quarter is relatively short.

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

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

I appreciate the comments, Scott. When I was talking about share take, I guess, I was just referencing to you implementing AMI technology where may be some of your competitors have a visual-read that's sort of saying. With that being said, are you seeing any buckets of strength different locations in the U.S.?

No. I don't - I can't answer that. It's nothing but I can't answer but I'm happy to get back to when we look at the original data. But I think, it's pretty broad based. I know the West Coast Southern probably had the greatest adoptions so far, kind of the early adopters. But I can't answer because I don't have the data in front of me. But certainly, it's not something we will be unwilling to share. So I'd be happy to get back to you.

Our next question is coming from Seth Weber.

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

So the answer to that question, I know, this came up on another call. China is not a focus for Echo right now. I mean, it is something we're interested in and something we will be following up. We do have feet on the ground in China. We actually have access capable of having the discussion in Shanghai, in Beijing, in But right now, as we think about where Echo is in its deployment and especially as it relates to piping assessment and fixed leak detection, China has not been one of the Southeast and Asian cities that have been focus for us. I think, the biggest thing has been kind of that Malaysia, Singapore, the Island nations that have relatively limited access to fresh water and extremely high marginal cost water. That's kind of how we focus the Echologics businesses around that marginal cost for gallon of water is more than kind of digging another well and well positioned for people to willing to be spend for fixed leak detection. But to answer the question directly, Seth, it's not a focus area for us at this time, but it could be in the future. I see with you. What I would like to kind of summarize, Seth, is look, I was pleased with the quarter between the growth that we were able to show from shipments along with the increasing backlog, which I said here in the here Q&A was around $15 million, along with the improvement we saw in performance from the plans offsetting what was pretty stiff headwinds in the material environment along with an improving sequentially price environment, I was happy. And as some will tell you that's difficult. So I thought, we had a solid quarter and I thought the team responded well through the challenges that they have in the quarter. I thought, operationally, we were on point, and I was happy with the sales team's ability to put price increase and deliver the volume. So all in all, I'm positive, and I thought it was a good quarter and be happy to talk any of you after the back but we have some balls lined up. But in summary, pleased with Q3. And with nothing left, I think, Martie, we're good. Operator, I think we can...

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