Mueller Water Products - Earnings Call - Q1 2014
February 5, 2014
Transcript
Speaker 0
Welcome and thank you all for holding. I would like to remind all parties that your lines are on a listen only mode until the question and answer segment of today's conference. Also today's call is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Ms.
Marti Zakas. Ma'am, you may begin. Thank you, Laurel, and good morning, everyone. Welcome to Mueller Water Products twenty fourteen first quarter conference call. We issued our press release reporting results of operations for the quarter ended December 3133, yesterday afternoon.
A copy of it is available on our website, muellerwaterproducts.com. Mueller Water Products had 159,000,000 shares outstanding at December 3133. Discussing the first quarter's results this morning are Greg Hyland, our Chairman, President and CEO and Evan Hart, our CFO. This morning's call is being recorded and webcast live on the Internet. We have also posted slides on our website to help illustrate the quarter's results as well as to address forward looking statements and our non GAAP disclosure requirements.
At this time, please refer to slide two. 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 three 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 fiscal year, which ends on September 30, unless specified otherwise.
All operating results discussed in these prepared remarks are from continuing operations, unless specified otherwise. A replay of this morning's call will be available for thirty days after the call at 60386. The archived webcast and the corresponding slides will be available for at least ninety days in the Investor Relations section of our website. In addition, we will furnish a copy of our prepared remarks on Form eight ks later this morning. After the prepared remarks, we will open the call to questions.
I'll now turn the call over to Greg.
Speaker 1
Thank you, Marty, and thank you for joining us today as we discuss our results for the twenty fourteen first quarter. I'll begin with a brief overview of the quarter, followed by Evan's detailed financial report, which covers key drivers affecting our businesses. I will then provide additional comments on the quarter's results developments in our end markets as well as our outlook for the twenty fourteen second quarter and balance of the year. For Mueller Water Products as a whole, year over year net sales increased 5% and adjusted operating income grew 86% to $14,100,000 in the quarter. Adjusted net income per diluted share improved to $01 from a loss of $02 Our Mueller Company business unit increased net sales 9.2% in the first quarter with growth across most product lines, especially valves and brass products.
This increase was achieved despite a decline in domestic hydrant unit volume of 13%, which was due to a number of our distributors and end users delaying orders while they waited for further clarity regarding applicability of the reduction of lead in Drinking Water Act for fire hydrants. In late December, legislation was passed specifically exempting fire hydrants from the act. Consequently, we believe the decline in hydrant sales is only a timing issue and we expect to see year over year domestic unit volume improve in subsequent quarters. We are pleased with the year over year operating income improvement at Mueller Company. Adjusted operating income improved 82%.
Adjusted operating margins improved three ninety basis points to 9.7%. In addition, net sales of Mueller Company's Mueller Technology products and services grew about 12% this quarter compared with last year. Although Anvil's net sales declined slightly, income improved 24 and adjusted operating margin improved 160 basis points. Overall, results for the quarter were about as we anticipated. We continue to believe results for the balance of 2014 will improve year over year, primarily due to expected growth in our key end markets and the benefits of stronger operating leverage.
With that, I'll turn the call over to Evan for a detailed discussion of our financial results for the quarter.
Speaker 2
Thanks, Greg, and good morning, everyone. I'll first review our first quarter consolidated financial results and then discuss segment performance. Net sales for the twenty fourteen first quarter of $257,400,000 increased $12,300,000 or 5% from the twenty thirteen first quarter net sales of $245,100,000 due to higher shipment volumes and higher prices at Mueller Company. Gross profit improved 17.5% to $67,100,000 for the twenty fourteen first quarter compared to $57,100,000 for the twenty thirteen first quarter. Gross profit margin of 26.1% in the twenty fourteen first quarter improved two eighty basis points from 23.3% in the twenty thirteen first quarter.
This improvement was driven primarily by higher sales prices and higher shipment volumes. Selling, general and administrative expenses were 20.6% of net sales in the twenty fourteen first quarter compared to 20.2% of net sales in the twenty thirteen first quarter. SG and A expenses for the twenty fourteen first quarter were $53,000,000 as compared with $49,500,000 in 2013. Adjusted operating income for the twenty fourteen first quarter increased 86% to $14,100,000 compared to adjusted operating income of $7,600,000 for the twenty thirteen first quarter. This increase was due primarily to higher shipment volumes and higher sales prices.
Adjusted EBITDA for the twenty fourteen first quarter increased to $28,800,000 compared to $22,400,000 for the twenty thirteen first quarter, an improvement of 29% from last year. Interest expense net for the twenty fourteen first quarter declined $900,000 to $12,600,000 compared to $13,500,000 for the twenty thirteen first quarter. This decrease was due to a lower level of total outstanding. During the twenty fourteen first quarter, income tax expense was $300,000 on income before income taxes of $1,400,000 resulting in an effective income tax rate of 21.4%. Even if the tax rate for this quarter had been comparable to our previous guidance of 37% to 40% for the full year, our adjusted earnings per share for the quarter would still have been $01 Adjusted net income per diluted share for the twenty fourteen first quarter was $01 compared to an adjusted net loss per diluted share for the twenty thirteen first quarter of $02 There was a weighted average of 161,700,000 diluted shares of our common stock outstanding for the twenty fourteen first quarter compared to a weighted average of 159,200,000.0 diluted shares outstanding for the twenty thirteen first quarter.
I'll now move on to segment performance and begin with Mueller Company. Net sales for the twenty fourteen first quarter increased 9.2% to $165,000,000 compared to 151,100,000.0 for the twenty thirteen first quarter. This increase was due primarily to higher shipment volumes across most product lines and higher pricing. Adjusted operating income for the twenty fourteen first quarter improved 82% to $16,000,000 compared to $8,800,000 for the twenty thirteen first quarter. Adjusted operating margin for the twenty fourteen first quarter improved three ninety basis points to 9.7 compared to 5.8% for the twenty thirteen first quarter.
Adjusted EBITDA for the twenty fourteen first quarter grew 36% to $27,100,000 compared with $20,000,000 for 2013. Mueller Systems net sales for the twenty fourteen first quarter increased by about 10% year over year. Sequentially, we reduced our operating loss due primarily to higher sales. Year over year, our operating loss expanded less than $1,000,000 due in part to an inventory adjustment that impacted the first quarter year over year comparison. For the full year, the inventory adjustment impact is expected to be neutral.
R and D expenses primarily related to development of our fixed leak detection offering were also higher. I'll now turn to Admiral. Net sales for the twenty fourteen first quarter decreased 1.7% to ninety two point four million dollars compared to $94,000,000 for the twenty thirteen first quarter. The decrease resulted primarily from lower shipment volumes. Adjusted operating income for the twenty fourteen first quarter improved 24% to $7,300,000 compared to $5,900,000 for the twenty thirteen first quarter.
Campbell's adjusted operating margin for the twenty fourteen first quarter improved 160 basis points to 7.9% compared to 6.3% for the twenty thirteen first quarter. Adjusted EBITDA for the twenty fourteen first quarter increased 15% to $10,800,000 compared to $9,400,000 for the twenty thirteen first quarter. Turning now to a discussion of our liquidity. Free cash flow, which is cash flows from operating activities less capital expenditures was negative $11,300,000 for the twenty fourteen first first quarter compared to negative $5,600,000 for the twenty thirteen first quarter. We continue to expect 2014 full year free cash flow to be stronger driven primarily by better operating results.
At December 3133, total debt was $600,700,000 and included $420,000,000 of 7.8% senior subordinated notes due 2017, dollars 178,000,000 of 8.75% senior unsecured notes due 2020 and $2,700,000 of other. Net debt leverage was three times at December 3133. Using December 3133 data, we had $138,500,000 of excess availability under our asset based credit agreement. I'll now turn
Speaker 1
the call back to Greg. Thanks, Evan. I'll now elaborate on our twenty fourteen first quarter and end markets and provide an outlook for the second quarter and comment on the balance of the year. I'll begin with Mueller Company. We continue to see strong growth in domestic demand for our Mueller Company core products.
Domestic unit shipments for iron gate valves were up 8% and brass products were up 13%. However, domestic unit shipments for hydrants declined 13% year over year up as a number of our distributors and end users delayed orders where they sought clarity of the applicability of the reduction of lead in drinking water after fire hydrant. As I noted earlier, we believe this first quarter decline was only a timing issue, and we expect to see year over year domestic hydrant sales volume improve in subsequent quarters. We believe the market as a whole remains strong and the volume increase we saw in our iron gate valves and brass products was driven primarily by growth in residential construction, although we also saw some positive activity in municipal spending. Year over year sales of metering products increased about 10% in the first quarter.
Overall, Mueller Company net sales during the quarter grew 9% year over year. Net sales from our core domestic iron gate valve, hydrants and brass products grew 13% year over year, even with the decline in hydrant sales. Handles net sales declined slightly year over year. We saw a drop off in demand for our products from the oil and gas market as we approach the end of the calendar year. Shipments of our products to address nonresidential construction market were mixed.
We saw positive growth in activity from warehouse construction, but other types of construction declined. In total, our shipments driven by non res construction were flat year over year. As Evan mentioned, in spite of the decline in net sales, Anvil was able to increase adjusted operating income year over year, primarily due to lower costs. Turning now to our outlook for the twenty fourteen second quarter. I'll start with Mueller Company.
Overall, we believe the fundamentals in our market are stronger entering the second quarter of this year than they were last year. Demand for our products from residential construction and to a lesser extent municipal spending is up nicely. In addition, we believe inventories at some of Mueller Company's distributors are down as we enter the second quarter. There are a number of items that are likely to affect the second and third quarter year over year comparisons relative to timing of shipments. First, as we previously discussed, distributors and end users delayed some hydrant orders in our first quarter as they sought further clarity regarding lead and fire hydrants.
Second, in early January, we announced a price increase on iron gate valves and hydrants to be effective on February 14, three weeks later than it was last year. Consequently, we will have three fewer weeks to ship the orders received before the price increase than we did last year. And this could potentially have an even greater impact on year over year comparisons in the second and third quarter. More of the orders placed in advance of the effective date are expected to ship in the third quarter this year than they did last year. Third, the severe weather in the Northeast Midwest this year has resulted in construction delays that could also impact the timing of shipments in the second quarter.
Considering all these factors, Company's net sales to increase in the mid single digits in the second quarter. We expect both Mueller Company's adjusted operating income to improve and adjusted operating margin to expand year over year for the twenty fourteen second quarter, although at rates lower rates than we experienced in the first quarter. We are in the midst of changing the manufacturing process for certain sizes of our iron gate valve. This change is expected to result in a write down of some of our existing equipment, but it's expected to deliver between 3,000,000 and $3,500,000 in cost savings on an annualized basis. We expect to take an associated $1,500,000 non cash charge during the second quarter.
This expected charge is not included guidance I just gave. At Anvil, while we expect the energy and nonresidential construction markets to improve, we think that these improvements will most likely be in the second half of the year. Consequently, we believe Anvil's second quarter net sales and adjusted operating income will be essentially flat year over year. For Mueller Water Products as a whole, we believe twenty fourteen second quarter net sales will increase in the mid single digits year over year, driven by performance at Mueller Company. We expect solid increases in our twenty fourteen second quarter adjusted operating income and expansion in adjusted operating margin year over year.
I will now take a moment and talk about our expectations for full year 2014. As we said on our last call, overall for the Mueller Company base business, which excludes our metering and leak detection products and services, we expect year over year net sales rate to be in the high single digits. In 2013, net sales of our metering products and services grew by approximately 50% year over year. We expect to continue to see nice growth in 2014, but expect the growth rate to be about half the 2013 growth rate based on the delivery schedule of our current backlog and anticipated timing of new projects. In total, for Mueller Company, 2014 net sales should grow to be comparable to the 2013 growth rate based on our current outlook residential construction, continued growth in municipal spending and continued adoption of smart meter technologies.
We expect Mueller Company's adjusted operating income and adjusted operating margin to improve over 2013. We also believe our metering and leak detection products and services will be profitable for 2014 with growth in net sales and adjusted operating income weighted towards the second half of the year. For Anvil, year over year net sales are expected to grow in the low to mid single digit range and adjusted operating margin should expand slightly based on our current expectations of increased demand in our oil and gas and nonresidential construction end markets in the second half of the year. Other 2014 key variables include corporate spending is expected to be $34,000,000 to $36,000,000 depreciation and amortization is expected to be $58,000,000 to $60,000,000 and interest expense is expected to be about $51,000,000 based on our current debt outstanding. Our adjusted effective income tax rate is expected to be 37% to 40%.
Capital expenditures are expected to be 34,000,000 to $36,000,000 For 2014, we continue to expect free cash flow to be stronger than in 2013, driven primarily by better operating results. Additionally, we expect cash income taxes to be minimal in 2014 as we continue to benefit from utilization of net operating loss carryforwards. We also expect to make only minimal cash contributions through our pension plans in 2014. In total, for Mueller Water Products, our full year outlook remains substantially the same as we provided on the last conference call. With that, I'll open this call for your questions.
Speaker 0
First question comes from Kevin. Your line is open. Please state your name and company name.
Speaker 3
Morning. Kevin Masca, BB and T Capital Markets.
Speaker 1
Good morning, Kevin. Good morning.
Speaker 3
Good morning. First Greg, with the given the hydrant decline, the Mueller co sales and EBIT increase I thought was pretty impressive. You mentioned housing a contributor. You also mentioned muni spend to a lesser extent. Can you just dive in a little deeper on that muni spend piece and talk about what you're seeing there?
How much visibility do you have now that we're into a new year and a lot of these budgets set?
Speaker 1
Yes. Kevin, I think when you look at the visibility on muni spending that we generally believe, as I said in our prepared remarks, that we see it up year over year. And a lot of that I think a lot of that is based on input that we get from our field salespeople that, as you point out, have the opportunity. They're talking with the municipalities on a day to day basis. And they would say generally, they're seeing budgets freeing up and expanded this year as compared to last year.
Now we know that there can be variability during the year, so it's tough for us to say exactly what percentage growth. But I think as we said on our last call, we still think it's in the low single digit growth that we think that we'll see demand for our products coming from pure municipal spending for repair, replacing or upgrading existing systems.
Speaker 3
And on the housing side, Greg, it doesn't sound like your view there has changed much, if at all, even though there's been we get some spotty data on the housing and non res markets from time to time, including more recently.
Speaker 1
Yes. Kevin, at least what we're seeing now through our first quarter, and again, what we're getting from our field and our distributors, is that we think that in most areas of the country, those excess lots that we have been talking about for several years have been absorbed. So we should see a growth rate more in lockstep with overall growth in residential construction. And so I think that when we feel a little more confident about the outlook from residential construction, primarily because we expect to see a pickup in new lot development. And I think if we even look at some of the other some of the analysts have focused on strictly on housing, I think that at least what we've seen recently, I'd say the overall opinion is demand for new land development or demand for land is still pretty strong.
Speaker 3
Okay. And if I can just ask one more Greg on margins. Hydrant sales were down and I think that's typically one of your higher margin product lines. But we still saw this really impressive margin expansion overall in Mueller co. Can you just dive into that in a little bit more detail?
Is it all utilization? We hadn't really had the price the new price increase yet. What was the what are the big moving parts that
Speaker 1
That's really contributed a good question, Kevin. And I would say we certainly benefited from the increase in iron gate valves and brass products. When you look at those two, unit volume was up nearly 13%. Also, of the benefits we had this quarter and you may remember our first quarter call last year, where we talked about we had a very rough quarter at our Pratt business unit. Well, we experienced this quarter some pretty nice operating income growth there, but it was, as I said, off of an easier comparison in Q1 last year.
I think that we also we benefited from higher sales prices, particularly as our shipments of our lead free brass products have grown significantly on a year over year basis. And when we look at our brass product sales, by far the vast majority of those now are no lead. And we have higher prices associated with those products and higher margins. When we also look at Mueller and Co. In this quarter, we benefited from pricing during the first quarter, both from the January 2013 price increase on valves and hydrants.
And as I just said, higher pricing on lead free brass products. We also had a little benefit. And when we had this the issue that surfaced in the industry relative from going from leaded to no lead, we were able to make that change in a weekend. And we start shipping to the marketplace and offering to the marketplace no lead hydrants. At that time, we also put a price increase, an immediate price increase on those hydrants.
We probably saw a little benefit from that in this quarter, but probably not much. All in all, when we look at it, that a year over year basis, of our on our three ninety basis point improvement in margin, probably about we estimate about two seventy of that or 70% of the margin improvement probably came from pricing. One could argue that the lead free brass products could be mixed. But in essence, when we look at the higher pricing and certainly the lead free brass products being a much higher percent of our sales this year than they were last year, we think that those were the real drivers of our of the margin and the conversion year over year. I should note, because I've talked pretty extensively about the positive impact of no lead or no lead brass products.
That will, on a year over year basis anniversary this coming quarter. And well, not so much I'm sorry, in the third quarter that we started in the second quarter last year, but really in the third quarter, primarily only shipping no lead brass products. I don't know that's a pretty long winded answer. Hopefully, I hit the point you wanted to have discussed. Yes.
That's great, Greg.
Speaker 3
Very helpful. Just one more point. Can you put a number on that lead free mix since that sounds to be one of the key issues here?
Speaker 1
Kevin, we think it probably we think that probably just the higher pricing added about 2,000,000 to $2,500,000 to our revenue with a nice percentage of that dropping to the bottom line.
Speaker 3
Okay, great. Thank you.
Speaker 0
Our next question comes from Walter. Please check your mute please.
Speaker 3
Hi. Thanks. Good morning. I wanted to ask a little bit about the hi, can you hear me?
Speaker 1
Yes. Now we can.
Speaker 3
Okay. Sorry about that. Yes, I wanted to ask about the weather disruptions that you're experiencing and maybe if you can quantify it in terms of days or revenue dollars or percent something like that?
Speaker 1
Well, we wish we could. The it's very difficult. I mean, we're getting reports in from our distributors in Northeast, the Midwest that are telling us that their branches have been shut down a number of days where no one's obviously where no one's getting to work, so no one's answering the phones or shipping products. But on the other hand, there's probably no there's no construction going on. So it's very difficult.
It's frustrating for us not to be able to come and say that, boy, we think it's going to affect a specific dollar amount. At this time, we just see and get the reports in the field, the construction activity that was taking place last year had just been shut down this year. So we know it's going to be some kind of an impact, but it really is difficult for us to put a dollar value on that. Who knows if the weather you're both of you are getting in New York today, is that going to continue into March? Or are we going to suddenly spring come early?
But I know that when we look through alerts first the first five or six weeks of this quarter, clearly, the reports we're getting from our field is that the weather is impacting construction activity.
Speaker 3
Okay. Okay. I think that's clear. With how should we think about this though? Is this a temporary timing issue where you think that whatever happens in the first quarter gets made up in the second I mean in the March gets made up in the June?
Speaker 1
We would certainly expect that would be the case because it gets back to the macro drivers. We are bullish about still bullish about the housing market as we talked about. As Kevin asked, we're seeing positive signs on municipal spending. So we don't think that demand goes away. Now, if I would have to say that if we see such a significant cutback in construction work in the second quarter, when we look at our third and fourth quarter, we may get to a point where crews just aren't available to do all the work to catch up.
I don't we certainly don't know enough right now to say that could be the case. So I think as we look at it, we think it may be a timing issue. And as we look at it today, we think for the full year it should watch out.
Speaker 3
Okay. Okay. That's a good point. And then just a last one would be a follow-up to that first question about the muni spending. Do you track number of projects that you're seeing from municipal customers?
And if you do, how can you quantify those in terms of number of projects or dollar amounts?
Speaker 1
It's well, it is difficult for us to, I would say, get a decimal point accurate handle on that, primarily because so as we've said in the past, so much of what we have of what we ship goes through our distributors and it can get lost. But we do direct make direct quotations on public works on a number of public work projects. So if we look on that on a year over year basis, a number of our quotes up 20%. So that's in the number of quotes we made to public projects. And if you look at that on a dollar volume year over year, it's up almost 13%.
So our conclusion there is, well, obviously, we're seeing more projects. And though on in total, they may just be slightly smaller projects, because the dollar value of the quotes are not up as much as the absolute number. But all in all, we're looking at it as both very positive indicators.
Speaker 3
Right. Okay. Those are good data points. It's good visibility. Okay.
Thanks so much.
Speaker 1
Thank you, Walt.
Speaker 0
Next question comes from Mike Wood. Your line is open. Please state your name and company name.
Speaker 4
Hey, guys. This is Adam in for Mike Macquarie. A question on Mueller Systems. Do you guys still expect that to be profitable for the year?
Speaker 1
Yes. Adam, at this time, we do expect it to be profitable for the year. And as we said in the prepared remarks, weighted towards the second half of the year. This is based on several factors as we're sitting here looking at it today. Certainly based on the shipment schedule of our existing backlog, orders that are either in the quotation stage or about to be quoted we're about to issue quotations, we expect to win.
Also coupled with, we think, some benefit that we'll see in the second half of the year on cost reductions we've implemented. Certainly, when we look at our backlog, we have a positive weighting of our backlog to our AMI offerings, which will improve our mix. On the cost side, we expect to start shipping the second generation of our radio, which has both improved performance and are cost less to manufacture than our current design. I think it's also important when we look at the second half, a factor that contributes to our belief that we think that this business will breakeven is that we expect to start seeing lower deployment costs than what we're currently experiencing. We've developed an installation tool that now verifies the proper installation is done before the installer leaves the site.
Before, if an installer made a mistake and left, it would cost us more to come back and fix the problems. Now we can do it while the installer is there. Secondly, we've automated some of the processes to configure the network, which will reduce our labor costs and error rates. So when we look at it, the deployment costs can be the variability of deployment costs can be a big impact. And we think that in the second half of the year that our deployment costs will be reduced by about 50% from what we're currently experiencing.
So I think, Adam, when we look at it in total, I think given the volume that we expect to see in the second half of the year, and that's based on our current backlog and the orders we expect to win, we expect to see a greater mix of AMI and coupled with lower costs and deployment costs that we think that all these factors as we view them today will make this business profitable. But as we pointed out in our call when we talked more specifically last conference call that we know that we are exposed and this business today given the project nature is exposed to any slippage in the project installation. And so if we go a couple of months and it moves from our fourth quarter into the 2015, that could impact the profitability of our business. Business. But as we look at it today, we expect these businesses to be profitable.
Speaker 4
Okay, great. And in your current backlog in that business, what's the mix of AMI versus the sort of legacy AMR?
Speaker 1
We do have that our backlog is about 22% year over year and that's about $5,000,000 And I'm going to say that probably 50 to 60%, 70% of that is AMI.
Speaker 4
Okay, great. And then just on Anvil, I'm not sure in the past you've given sort of the oil and gas versus non res growth. Is there a mix benefit or sort of tailwind from either of the two? Or are they sort of similar margin?
Speaker 2
The
Speaker 1
margins are close enough where I don't I wouldn't characterize it as a headwind or tailwind for each. It's just that I think the absolute growth rate that we're seeing in that market has and not so much mix related.
Speaker 4
Okay, great. Thanks.
Speaker 0
Our next question comes from Brent Thielman. Your line is open. Please state your name and company.
Speaker 4
Yes. D. A. Davidson. Good morning.
Speaker 2
Good morning.
Speaker 1
Yes. Greg, have you seen
Speaker 4
some evidence of the hydrant orders returning here subsequent to December and into the second quarter?
Speaker 1
Yes. We actually saw a nice pickup in orders the last couple of weeks in December. So now I wouldn't say, Brent, that that's across the board from all of our distributors. But I think those who were concerned about their inventory levels, we did see a pickup in orders. We're sort of mixed on when we think those will ship.
We think the majority of those will ship second quarter, but we think it's possible we'll see some of those even slip into the third quarter. We know some distributors, and especially in that November time frame, when there was a lot of uncertainty, we're concerned about possibly getting bedding stock with leaded hydrants in their inventory. And they were pretty aggressive in discounting those. So we think some municipalities took that opportunity to bring them into their inventory. So all in all, we believe we saw orders picking up in late December that were probably we would have normally expected to get in November if we didn't have this issue.
And we expect the majority of those, as I said, to ship in Q2 with some possibly going into Q3.
Speaker 4
Okay. That's great. Helpful. On the price increases in Mueller Co, can you give us some degree of what those numbers are?
Speaker 1
Yes. When we look at our iron gate valves, it's a 7% price increase. When you look at our hydrants, between the price increase that we announced immediately put in effect in December for going to no lead and the price increase that we announced here effective on February 14, that amounts to about 10%.
Speaker 4
Okay. And then just lastly the margin drag from the tech business I'm not sure if you called that out in terms of Mueller Co.
Speaker 1
We did. When you look on when you look at Mueller Co. In total it was a little over about the 300 to three forty basis points this quarter.
Speaker 4
Okay. Great. Good luck. Thanks.
Speaker 1
Thanks, Brent. Next
Speaker 0
we have Jerry Revich. Your line is open. Please state your name and company name.
Speaker 2
Hi, good morning. It's Jerry Revich from Goldman Sachs.
Speaker 1
Good morning, Good morning, Jerry.
Speaker 2
Greg, can you talk about further opportunities you have for production process optimization along the program that you mentioned for the select product lines in Mueller Cove that will add $3,000,000 Any other similar opportunities that we should be thinking about? And where are we in the optimization process broadly?
Speaker 1
Yes. I think, Gerry, when we look over the next eighteen months, we think that beyond the project that we specifically referenced, we think that the productivity improvements and the cost savings and all will come just from the continued implementation of the lean initiatives that I would say that we're probably between year three and year four. We continue to see and it's contributing to our margin improvement headcount per unit go down. And now we're always looking, I think, more on is there a way to also bring in automation. But we weigh the benefits of bringing in automation versus where we are in our current manufacturing processes and how long it would how quickly the payback would be if it makes obsolete some of our current systems.
Again, and I would say our biggest contribution to the bottom line will be the increased utilization, especially on our foundries. Foundries that we've discussed in the past have high fixed costs. We were if you look at our in our Albertville foundry in our for our hydrants, a year ago in the first quarter, we were at about a 45% capacity utilization rate. This quarter, we were at 50%. If you look at our around 50%, if you look at our Chattanooga facility, where we do our iron gate valves, we were in the last year between 4050% this year and this quarter we're between 5060%.
So relative to improving our overall performance, I think our number one opportunity is the increased capacity utilization. I think we will continue to see over the next eighteen to twenty four months year over year an improvement just from the lean initiatives we have implemented. And we do think that we will have some opportunities on just changing the process together as we pointed out here. But I think that when you look at it, I think that that I've ordered those in the order where I think they will have the greatest impact for us.
Speaker 2
Thank you. Greg, you spoke about lead versus lead free products for a couple of your product lines. Can you just take a step back and tell us if there are any other product lines that will be impacted and what the opportunities are for your business? Sounds like there might be a sustainable shift here.
Speaker 1
Jerry, as we sit here today, we don't see any imminent change. But I will tell you, in September, we didn't expect there'll be any disruption on the hybrid market either. But if we look relative to the lead, no lead issue, the act that we were referring to actually was introduced in January 2011. The industry had to January 2014 to change the named products from that to contain lead, to no lead. And for us, the biggest impact is in our brass products.
So those are our Curb Soft and a number of smaller products. We made the change in the hydrants. Quite frankly, from a lead standpoint, I think that we've made all the changes that there are to be made. And we don't see anything really changing in the base material for our valves or our hydrants. So I think that most of the changes that we can think of have are now in effect.
I'm sorry, Jerry. I didn't hear your call there. You broke up a bit, your question.
Speaker 2
The press release. Jerry, we're not able to hear you at this point in time. I think you're breaking up.
Speaker 0
We'll go on to the next question sir. Next question comes from David Your line is open. State your company.
Speaker 4
David Rose, Wedbush Securities. Most of the questions have been answered, maybe a couple of quick follow ups. Maybe on the annual side in particular, you commented on the non residential construction side. I think you'd given some broad color, but maybe you can give a little bit more color in terms of specific end markets that are a little bit stronger and some regional context as well. Think you did that in the last call if I'm not mistaken.
Speaker 1
Yes. Actually, we saw if we look at our different product lines in the market, our fire protection our products going to fire protection were up year over year, almost 7%. And as we said in our prepared remarks, we think that that was the big driver there was we did see an uptick in warehouse construction. And as you would expect, warehouse construction, fire protection is very, very important. So when we look at our others, on the industrial side, when we look at the industrial, when we look at even we were seeing a couple quarters ago, were we talking about we saw a nice uptick in hospitality construction.
We didn't see that this quarter. And we also, I think, the institutional side, continue to see that flat or maybe just down very, very slightly. So when we look out to our Q2, as we said that we see overall, we think that Anvil is probably going to be flat year over year and think that that's probably both our energy markets as well as our non residential construction being flat. We do think that we'll see the second half of the year pick up, but that's based that we had a number of months in 2013 where the Architectural Billing Index was moving in the right direction that was that would certainly indicate that construction would follow and we would expect construction to follow in 2014. So I would say that all in all, we were a little disappointed in what we saw out of the non res structure markets in the quarter, because we had had a couple of quarters where we saw some year over year growth.
This one was spotty, as I said, with the growth in warehouse construction and flat or down slightly in some of the other sectors. And this quarter, I don't think we necessarily saw any one particular region strength in any one particular region like we did out of the Southwest in the last quarter.
Speaker 4
Okay. Thank you. And then on the water side, was there any particular benefit from year end spending on the municipal side where you have to ease up your budgets? Any sort of anomalies on the volume side that you might want to call out aside from the fire hydrant side?
Speaker 1
Nothing that we saw. As I said, we had we think most of our growth came from residential construction. But on the municipal side, we saw we think a stronger first quarter this year than what we did a year ago.
Speaker 4
Okay. And then lastly, just to be clear on the impact of the fire hydrant sales on the margin side, just run through 40% contribution roughly a little higher on 13% of sales. Is that kind of the way we should be thinking about it as a drag?
Speaker 1
Yes. I think that when we look at the fire hydrants that we feel very comfortable that we should at least see a 40% conversion margin.
Speaker 4
Okay. Great. Thank you very much.
Speaker 1
Yes. Thank you.
Speaker 0
Next we have Seth Weber. Your line is open. Please state your name and company.
Speaker 5
Hey, good morning. It's RBC.
Speaker 1
Good morning, Seth.
Speaker 5
Was your comment about dealer inventories being down. I mean, we've over the last couple of years, it feels like the dealers have been willing to at lower inventory levels kind of run more just in time. Do you feel like there's some restocking that's happening now? Or is that just a seasonal uptick that you're starting to see here?
Speaker 1
Seth, we think that we will see a restocking. Not sure that we have been in the certainly have begun to see the restocking yet with the weather. I do think that we'll see a restocking as a result of our price increase. As we have as we've said many times that when we announce our price increase, that we allow our distributors to give us orders ahead of the price increase so they can protect their price. And so that they do the pull forward, we'll ship those to the more towards the end of the second quarter.
That will certainly help on the restocking because they place larger orders ahead of the price increase. But I did mention that when you look on a year over year basis, the timing of our price increase this year being three weeks late gives us three weeks obviously, three weeks less time for shipping. And we're estimating that we believe that, that probably on a year over year basis means that 6,000,000 to $7,000,000 of shipments of orders that were placed before the effective date of the price increase will ship in the third quarter. And again, on a year over year comparison basis, if our price increase this year would have been the same time as last year, those 6,000,000 to $7,000,000 worth of shipments would have occurred in the second quarter. So I do think we will start seeing inventories.
They'll start restocking. And I think that we'll see that really when we start shipping the orders that came that are being placed ahead of the price increase.
Speaker 5
Okay. Okay. That's actually very helpful. Thanks. On the systems and Ecologics business, do the revenues for the quarter include the Jackson, Mississippi contract?
Or is that still part of what you're expecting for the second half?
Speaker 1
No. When we look at the Jackson contract, it is it's on schedule. We've actually begun shipping in the first quarter shipping the commercial and industrial meters. We've also begun installing some of the AMI infrastructure. So we estimate if you look at that project that of the total order, we shipped about 15% of it in the first quarter, so that was in our revenues.
And at this time, we estimate by the end of fiscal year fourteen that we will ship about 90% of that order with 10% sliding into fiscal year twenty fifteen. So we still see 75% of that order being shipped between Q2 between the second, third and fourth quarter.
Speaker 5
Okay. And could you earlier in the call you had kind of framed your quote or your inquiry levels for the core Mueller business. Could you do a similar exercise for the systems and ecologic business kind of just frame for us what's your project pipeline or your inquiries pipeline looks like for that business?
Speaker 1
Yes. That's we're up year over year. And it's I will say it's a little more difficult for us because we know a number of those quotations are for budgetary purposes and they may not yet be real projects if that so it's Sure. And so we're seeing it up nicely in the 5060% rate, but we're not sure how many of those are yet ready to be real projects or just in the very early stage for a municipality to start determining, hey, what do we have to budget maybe a year or two from now. But we're pretty confident, as we said as I said earlier, that we're seeing more and more utilities interested in AMI.
Speaker 5
Great. That's very helpful. Thank you, guys.
Speaker 1
Yes. Thank you, Seth.
Speaker 0
Next question comes from Joseph Grisno. Your line is open. Please state your name and your name.
Speaker 3
Hi. It's Joe Giordano from Cowen. How are you guys doing?
Speaker 1
Fine, How are
Speaker 3
a quick, I think you said this earlier and I just couldn't pick it up. What was the Mueller Systems margin drag on overall Mueller Co? And how does that compare to the margin drag in last first quarter of last year?
Speaker 1
Yes. When you look at margin drag, Joe, said it's about three forty basis points.
Speaker 3
Okay.
Speaker 1
If you look at our fourth quarter, it was a 400 basis we're seeing sequential improvement. But back to the factors that Evan mentioned, in the quarter a year ago, it was about 200 basis points. So we had that inventory write down and as well as some higher R and D costs, which should be associated with future revenues that impacted this quarter and it was about three forty basis points.
Speaker 3
Okay. Similarly, you said you're still expected to breakeven on the year, which you had previously said. Are you tracking on that as if are you tracking now where you thought you'd be maybe a quarter ago? Or do you or has that assumption become even more back weighted?
Speaker 1
No. I'd say that I would say that right now, we haven't seen any real slippage in the schedule of our backlog. That will have the biggest factor. As I just mentioned, if a project moves from fourth quarter into first quarter, given where we are and currently the size of this business, that could have an impact. Right now, we haven't seen any real slippage.
Question relative to Jackson, as I just answered, it's on schedule. So and based on the quotations that we have outstanding, if they convert to orders as we expect and ship when we expect, we that supports our belief that we will this business will still breakeven. But I'd say that those are the factors and we haven't seen much change since our last call.
Speaker 0
Okay. And how much of
Speaker 3
Yonkers do you expect to have this year?
Speaker 1
The Yonkers of the we began shipping that and I would say that the vast majority of that will also will go this year. So I think that at least we think 80%, 85%.
Speaker 3
Okay. Great. The rest of my question has been answered. So thanks a lot.
Speaker 1
We do have one more question that Jerry was breaking up Jerry Revich at Goldman Sachs and he was able to e mail his question. And his question is, when do you expect to deliver the hydrant shipments that were delayed in the December? And we expect we estimate we try to determine how many of how many orders were delayed. And the best proxy we had was using the growth rate we saw year over year on our small diameter valves. Quite often, small diameter valves are installed at the same time a hydrous installed.
So using that as a proxy, it's not always exactly the same. But as I said, it gives us a ballpark estimate. We estimate it was probably 4,000,000 to $5,000,000 of hydrants that we would have expected to book and ship in the first quarter based on the growth rate that we saw in large diameter on the small diameter valves I referenced. Of that 4,000,000 to $5,000,000 we expect probably a majority of that will ship in the second quarter with some of it going into third quarter. Well, with that, if there are no questions, again, we thank you for your interest and thank you for your questions and see you all soon.
Speaker 0
That does conclude today's conference. Thank you all for joining.