Mueller Water Products - Earnings Call - Q1 2016
February 4, 2016
Transcript
Speaker 0
Welcome and thank you for standing by. At this time, all participants are in listen only mode. Today's call is being recorded. If you have any objections, you may disconnect at this point. I'll now turn the meeting over to Ms.
Mari Takas. Ma'am, you may begin.
Speaker 1
Good morning, everyone. Welcome to Mueller Water Products twenty sixteen first quarter conference call. We issued our press release reporting results of operations for the quarter ended December 3135, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Discussing the first quarter's results this morning are Greg Highland, 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 from those included in forward looking statements as well as specific examples of forward looking statements. Please review Slides two and three in their entirety. During this call, all references to a specific year or quarter, unless specified otherwise, refer to our fiscal year. Our fiscal year ends on September 30.
A replay of this morning's call will be available for thirty days after the call at 50991. The archived webcast and 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 2
Thanks, Marty. Thanks for joining us today as we discuss our results for the twenty sixteen first quarter. I'll begin with a brief overview followed by Evan's more detailed financial report. I will then provide additional color on the quarter's results and developments in our end markets as well as our outlook for the twenty sixteen second quarter. We saw strong growth in sales of Mueller Company's core products and continued improvement in its operating performance.
Domestic net sales of Mueller Company's valves, hydrants and brass products increased 9.2% year over year in the first quarter. Mueller Company's adjusted operating income increased 17.1% or two fifty basis points and its adjusted EBITDA margin improved to 22.4%. Anvil's net sales for the first quarter decreased $17,500,000 year over year to $79,600,000 primarily due to lower shipment volumes to the oil and gas market as we expected. While the downturn in the oil and gas markets has not yet abated, we believe year over year comparisons should ease through the balance of 2016. Net sales and adjusted operating income for Mueller Technologies were each slightly lower year over year.
However, backlog and projects awarded at both Mueller Systems and Echologics are up substantially. Mueller Technologies focus remains on accelerating growth of its higher margin AMI and leak detection technologies and improving operating performance over the course of the year. We continue to expect growth in demand for our products in our addressed water markets in 2016, driven by both municipal and residential construction spending. Adjusted net income per share for the quarter was $04 versus $03 a year ago, and we believe we are on track to meet our expectations for the full year. With that, I'll turn the call over to Evan.
Speaker 3
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 sixteen first quarter of $242,700,000 decreased $19,100,000 or 7.3% from twenty fifteen first quarter net sales of $261,800,000 due primarily to lower shipment volumes at Anvil, the divestiture of our Canadian municipal castings business in December 2014 and unfavorable Canadian currency exchange rates. Gross profit was 68,700,000.0 for the twenty sixteen first quarter compared with $71,300,000 for the twenty fifteen first quarter. Gross margin increased 110 basis points to 28.3% in the twenty sixteen first quarter from 27.2% in the twenty fifteen first quarter.
Selling, general and administrative expenses were lower year over year due primarily to personnel related expenses. Selling, general and administrative expenses were $53,000,000 in the twenty sixteen first quarter compared with $55,000,000 in the twenty fifteen first quarter. Adjusted operating income for the twenty sixteen first quarter decreased $600,000 to $15,700,000 as compared with $16,300,000 for the twenty fifteen first quarter. Although Mueller Company improved its results by $3,500,000 or 17.1%, This improvement was more than offset by a decline of $3,500,000 at Anvil and $400,000 at Mueller Technologies. Adjusted EBITDA for the twenty sixteen first quarter decreased to $28,700,000 compared with $30,600,000 for the twenty fifteen first quarter.
We again experienced lower interest expense this quarter, down $3,300,000 from last year. We benefited this quarter due to lower interest rates and lower amounts of debt outstanding following the refinancing we completed in November 2014. Interest expense net for the twenty sixteen first quarter declined to $6,100,000 as compared with $9,400,000 for the twenty fifteen first quarter. Income tax expense for the twenty sixteen first quarter of $2,600,000 was 29.5% of income before income taxes and included a benefit of $500,000 primarily related to research and development tax credits. For the twenty fifteen first quarter, the effective income tax rate was 38%.
Adjusted net income per diluted share improved to $04 for the twenty sixteen first quarter compared with $03 in the twenty fifteen first quarter. Net income per diluted share for the twenty sixteen first quarter was $04 compared with a net loss per diluted share of $0.13 in the prior year largely due to expenses associated with our debt refinancing. I'll now move on to segment performance addressing each of our three reporting segments beginning with Mueller Company. Net sales for the twenty sixteen first quarter was essentially flat year over year. We saw a nice improvement with domestic net sales of valves, hydrants and brass products increasing 9.2%, which was offset by $4,100,000 of lower sales of Henry Pratt's water treatment valves and $3,700,000 related to the divestiture of our Canadian municipal castings business and unfavorable Canadian currency exchange rates.
However, net sales from our ongoing Canadian operations were up about 10 currency. We experienced strong improvement in adjusted operating income largely due to product mix. Adjusted operating income for the twenty sixteen first quarter increased 17.1% to $24,000,000 as compared with $20,500,000 for the twenty fifteen first quarter. Adjusted operating margin for the twenty sixteen first quarter improved two fifty basis points to 16.6% as compared with 14.1% for the twenty fifteen first quarter. Adjusted EBITDA for the twenty sixteen first quarter increased to $32,400,000 compared with 30,200,000 for the twenty fifteen first quarter.
And adjusted EBITDA margin for the quarter increased 160 basis points to 22.4% from 20.8% last year. I'll now turn to Anvil. Net sales for the twenty sixteen first quarter decreased 18 to $79,600,000 as compared with $97,100,000 for the twenty fifteen first quarter. This decrease resulted from lower shipment volumes primarily into the oil and gas markets. Adjusted operating income for the twenty sixteen first quarter was $3,700,000 as compared with $7,200,000 for the twenty fifteen first quarter.
This decline reflects lower net sales and an unfavorable shift in product mix. I'll now conclude with Mueller Technologies. Net sales for the twenty sixteen first quarter decreased 6.1% to 18,400,000 as compared with $19,600,000 for the twenty fifteen first quarter. This decrease resulted primarily from lower shipment volumes as we transition to a greater focus on growing our higher margin AMR and AMI product lines. In fact, during the quarter, sales at Mueller Systems declined 12.1%, but margins improved driven by higher AMI shipments.
We feel confident that Mueller Technologies financial performance will improve meaningfully this year. Adjusted operating loss for the twenty sixteen first quarter was $3,300,000 as compared with $2,900,000 for the twenty fifteen 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 $3,800,000 for the twenty sixteen first quarter, a $30,500,000 increase compared with the twenty fifteen first quarter. Greg will discuss free cash flow for the full year and we expect that free cash flow generation will improve year over year.
At December 3135, total debt was comprised of a $485,700,000 senior secured term loan in November 2021 and $2,300,000 of other. The term loan accrues interest at a floating rate equal to LIBOR subject to a floor of 75 basis points plus a margin of three twenty five basis points. Net net leverage was two times at December 3135. Our excess availability under the ABL agreement was about $144,000,000 I'll now turn the call back to Greg.
Speaker 2
Thanks, Evan. I'll now provide summary comments on our twenty sixteen first quarter results and end markets and provide an overview of our expectations and outlook for the second quarter and full year. I'll begin with Mueller Company. We were pleased with the 9.2% growth in domestic sales of valves, hydrants and brass products, which was driven by both residential construction and municipal spending. As we noted, net sales of Henry Pratt's water treatment valves declined in the quarter.
A substantial portion of this business can be choppy depending on the timing of projects in its backlog. As you may recall, we pointed out on our last call that sales of Henry Pratt's water treatment valves were very strong in the twenty fifteen fourth quarter and we expected to see a drop off both sequentially and year over year in the twenty sixteen first quarter. Mueller Company's net sales during the first quarter were also impacted by unfavorable changes in Canadian currency exchange rates. We will also remind you that starting with our twenty sixteen second quarter, we will no longer have a negative comparison due to the divestiture of our Canadian Municipal Castings business since that transaction closed in December 2014. Mueller Company again delivered impressive operating performance.
Higher shipment volumes, a favorable mix of higher margin products, lower raw material costs and improved operating efficiencies helped drive a two fifty basis points improvement in adjusted operating margin. Looking at our last twelve months, Mueller Company's adjusted EBITDA margin was 26.5%, 190 basis points improvement from the prior trailing twelve month period. Turning now to Anvil. As expected, sales into the oil and gas markets declined approximately 65% in the first quarter. Anvil sales into these markets have generally correlated with rig count, which were also down approximately 65% year over year in the first quarter.
Overall, Anvil's net sales outside of the oil and gas markets were down, although results varied by end market. Sales into fire protection were up, but this increase was offset by lower industrial sales. Anvil's adjusted operating income declined $3,500,000 in the first quarter. The impact of lower shipment volumes was partially offset by cost reductions and lower raw material costs. At Mueller Technologies, first quarter net sales declined primarily due to lower shipments.
Shipments at Mueller Systems declined $2,100,000 during the quarter, primarily due to a decline in shipments of our Visual Read and AMR meters. AMI shipments grew $2,600,000 an increase of more than 50%. Our strategy is to focus on the AMI segment of the meter systems market and we are encouraged with our progress. Mueller Systems is beginning to benefit from its recent introduction of new longer range radio capabilities, which among other things lower the cost of investment for end users. Echologics net sales increased over 20% compared to the prior year as our fixed leak detection technology continues to gain traction in the market.
Wheeler Technologies adjusted operating loss of $3,300,000 for the first quarter was $400,000 higher from the prior year, primarily due to higher spending in Echologics associated with investments in business development. Higher margins at Mueller Systems from increased AMI shipments partially offset the higher spending at Echologics. Turning now to our outlook for the twenty sixteen second quarter. I'll begin with Mueller Company. Mueller Company has announced valve and hydrant price increase for both The U.
S. And Canadian markets. A 7% price increase in The U. S. Is effective as of February 12 and a 10% increase in Canada was effective February 1.
We saw a significant pull forward of orders last year ahead of the effective date of the price increase, a large number of which shipped in the second quarter. We anticipate a pull forward of order dollars similar to last year. With this in mind, we expect low to mid single digit percentage growth in domestic shipments of valves, hydrants and brass products in the second quarter on a year over year basis. This growth is expected to be partially offset by lower shipment of water treatment valves and unfavorable Canadian currency exchange rates. Overall, Mueller Company's net sales for the second quarter are expected to increase only slightly compared to the prior year.
We also expect Mueller Company's adjusted operating income for the second quarter to slightly improve compared to the prior year. Turning now to anvil.net sales for the second quarter are expected to be essentially flat compared to the prior year. While we expect a 40% decline in shipments into the oil and gas markets, we expect this decline will be offset by higher shipments to other markets. The expected decline in shipments into the oil and gas market is less than declines we have seen in the past several quarters. We expect Anvil's adjusted operating income for the second quarter will be essentially flat compared to the prior year.
Anvil should benefit from cost reductions it has implemented and from lower raw material costs, but these benefits should offset by any unfavorable product mix. At Mueller Technologies, net sales for the second quarter should be slightly lower compared to the prior year. However, we expect continue to see year over year growth of our AMI systems. We expect Mueller Technologies adjusted operating loss will improve slightly in the second quarter as it should benefit from a more favorable product mix. Bueller Systems began the second quarter with higher year over year AMI backlog and projects awarded and Echologics has a greater number of projects under contract compared to the prior year.
For the 2016 full year, key variables include corporate expenses, are expected to be $36,000,000 to $38,000,000 depreciation and amortization, which is expected to be 55,000,000 to $57,000,000 and interest expense, which is expected to be 23,000,000 to $25,000,000 We expect our adjusted effective income tax rate to be 36% to 38% and capital expenditures to be 38,000,000 to $40,000,000 We expect 2016 free cash flow to be driven by improved operating results and an improvement in working capital. We also expect to make only minimal cash contributions to our pension plans. Our target is for free cash flow to exceed adjusted net income and we expect free cash flow to be higher than in 2015. Domestic sales of Mueller Company's valves, hydrants and brass products grew over 9% in the first quarter and we remain confident in our full year expectations that we will continue to see growth in demand from our addressed residential construction and municipal markets. In addition, we believe sales of Mueller Company's domestic valves, hydrants and brass products will grow in the high single digits in the second half of the year due to growth in end market demand.
Additionally, Mueller Company should have easier comparisons for these products in the second half of the year in light of the excessive rain certain parts of the country experienced in May June 2015, which negatively impacted construction activity. Also, as we mentioned, the backlog and projects awarded at Mueller Technologies are up nicely as we shift to a higher margin and mix of AMI orders. Most of that backlog remains on schedule to ship in the second half of the year. We expect Mueller Technology to show year over year net sales growth of about 10% to 15% and for its adjusted operating income to improve about 7,000,000 to $10,000,000 Finally, we believe Anva will see easier comparisons in the second half of the year for sales into the oil and gas markets. Consequently, our outlook for Mueller Water Products for the full year remains unchanged.
With that operator, I'll open up this call for questions.
Speaker 0
Thank you. We will now begin the question and answer session. And our first question comes from the line of Mike Wood from Macquarie Securities Group. Your line is now open.
Speaker 4
Hi, good morning. Just hoping you can confirm what you said about that the price increase in February. Was that the 712% price increase? Is that for 2016? And are you implying that the pre buy would be a negative impact because it will be less than the pre buy that occurred last year?
Speaker 2
Yes, Mike. It's 7% on valves and hydrants effective February 12 and ten percent in Canada effective February 1. No, actually what we're implying is we think that we'll probably see about the same order dollar value that we saw last year. And our expectation is that the distributors will generally not want to at least knowingly carry higher inventory levels than they did at the end of the second quarter last year entering the construction season. As we said in our prepared remarks, we saw a significant year over year increase in the bookings ahead of our price increase last year.
So when we look at it, we think it's probably unreasonable for us to expect that they would even bring have a bring in sales or bring in valves and hydrants that would give them a higher level of inventory. We think what they had last year probably is what the max that they want to have entering the construction season. So that's why we said that we when we look at valves and hydrants for the our shipments for the second quarter domestically, we're seeing that into the mid low to mid single digits. But as we also said, we believe that in our outlook that we believe our distributors will be able to will turn that inventory a lot quicker this year because last year a number of them were impacted by the heavy rains in May and June that certainly curtailed construction activity.
Speaker 4
Okay. And just the guidance for the next quarter of up slightly Mueller Co, that's less than what you had said for the full year mid single digits. And I'm just trying to understand what causes the quarter to be at a lower run rate than your full What
Speaker 2
causes the lower run rate certainly is we think that we're not going to ship a whole lot more in the second quarter this year than what we did last year because of the significant pull forward that we saw last year. We accept a similar pull forward this year. However, when we get to the second half of the year, one, we think there's stronger market growth than we had last year. Two, if you take into account the impact of the rain, as I mentioned, and the curtailment construction activity, that inventory is going to turn a lot quicker, and we're going to replace that inventory in the third and fourth quarter. So in essence, we're saying that, hey, if you look at what we shipped last year and we're shipping what was in the second quarter, we're shipping this going into inventory because in most parts of the country, there's just not a lot of construction activity that we're shipping probably just about a max that distributors want to carry going into the construction period.
We just think that's going to turn a whole lot quicker this year than it did last year.
Speaker 4
Okay. And you'll have the favorable comps against the destock as well, I guess. Yes. The other question, just now it looks like you're on a forward basis, you're under 2x net leverage. I've got to imagine just given your muni more stable business exposure, you can add at least another turn of debt, maybe $200,000,000 or more.
I'm just curious what your views are in terms of your urgency of deploying that capital, how ripe is your pipeline and if you're more likely to invest in technology businesses or more traditional businesses?
Speaker 2
Great question. As you point out, our net debt leverage is down to two times plus given our outlook and our expectations for the business. We expect to see greater cash flow generation this year than what we did last year. I think if we see an acquisition that's a good strategic fit, we would certainly evaluate it. We are particularly interested in expanding in water infrastructure, both I think in terms of the breadth and depth of products and services.
And we would look at emerging technologies also. So it would right now, I couldn't say, hey, we would rather do it in the more traditional products, we'd rather do it in our emerging technologies. It all depends on the opportunity. We've said that we probably it's unlikely that we could add to our gate valve and our hydrant product line. But if we have the opportunity to add our valve product line to give us a broader product line going into water treatment, we think that that's certainly an opportunity.
On the other hand, if we do see the if we see an opportunity that makes sense on leak detection and or on our AMI technology, I think that that would be something that we would consider take a very close look at. But and then we then we have other options. We've always said in the past calls that our first alternative is to find ways to grow the business. If we find it acquisitions that just we don't have acquisition opportunities that are value enhancing for our shareholders, then we'll look at other options for the cash that we're generation that we're generating. But certainly with our current net debt leverage and given the cash flow that we expect to generate in this fiscal year, we have a lot more flexibility.
Speaker 5
Okay. Thank you.
Speaker 2
Thank you, Mike.
Speaker 0
Thank you. Our next question comes from the line of Kevin Maxa from BB and T Capital Markets. Your line is now open.
Speaker 6
Thanks. Good morning. Good morning, Kevin. Greg, a couple of questions on tech. I guess with the news the other day that the American Water contract went to a competitor, can you just address that?
I think that may have been an AMR product that you were deemphasizing anyway. It's lower margin than your AMI. I'm just wondering, that all contemplated in your initial guidance? Was that a surprise? Or was that an intentional deemphasizing of a product?
Speaker 2
Yes. Thanks, Kevin. As you pointed out, over the past three years, Mueller Systems has provided meters and what we refer to and American Water refers to as meter interface units or radios. And over the last two years, that's been on average about $26,000,000 in revenue for Mueller Systems. That breaks down roughly about 55% of those revenues were in meters, about 45% of those in radios.
Actually since August 2015, American Water has been engaged in a new RFP process for the next three years. This is our understanding of the status of the RFP based on information we've received directly from American Water. First, American Water informed us that it is its intent to no longer purchase integrated meter and radio units. It appears that American Water is positioning itself and it's positioning its metering and infrastructure. So it has the ability to migrate over time from lower functionality AMR or drive by radio communication to true two way AMI functionality in the most cost effective manner.
Second, we understand American Water has awarded the meter portion of the new RFP. We understand several meter manufacturers will provide meters to American Water going forward, but we will not be providing American Water with meters going forward other than our remote disconnect meters. We decided not to chase the meter portion of the new contract. As we've discussed on previous calls and the view pointed out, we are focusing on growing our meter interface business, primarily our more profitable AMI business. We've seen a clear uptick in our AMI business over the past few months.
And given a limited production capacity, we want to focus on the portfolio of products that is most important to the future of the industry, which brings me to the third point. Our best information is that the meter interface or radio portion of the new American Water contract has not been awarded. We are in contract negotiations with American Water. We are optimistic we will continue to have a relationship with American Water for metering systems that is beneficial to both companies. Given that we are in negotiations, we won't be able to comment further on this until there's a definitive update.
In the meantime, our AMR and AMR radios continue to be improved by American Water for purchase among its utilities as well as our remote disconnect meters. In fact, several American Water utilities are utilizing our remote disconnect meters with both AMR and AMI radios. American Water also utilizes our fixed leak detection system where our AMI radio technology is a key component. This is our long range two way communication system that enables leak detection and other monitoring and meter data to be communicated over the same AMI network. On the radio side, working with American Water, we understand the challenges a large water utility faces both from a business case and implementation perspective in migrating from AMR to AMI.
With input from large utilities, we have developed a unique AMI solution that addresses these challenges, which we plan to introduce on a larger scale within the next six months. The full year outlook we provided on our last call and reconfirmed on this call takes into account our transition with American Water. As I said, American Water started the RFP process for its next three year meter agreement in August 2015. During this process, our sales of meters and radios to American Water were $300,000 in the first quarter compared to about $6,500,000 last year. We were able to offset about half of this difference through higher AMI sales.
As we look to the second half of the year, given our backlog of AMI projects and their scheduled delivery dates, we expect to see improved financial performance at Mueller Technologies. As you pointed out and you put in your question, we have been preparing for this transition. We began taking out overhead costs last quarter. On a year over year basis, headcount at Mueller Systems is down 20%. We've begun to reconfigure our manufacturing operations.
We have more to do, but we expect to realize more of the benefits of these actions in the second half of the year. So as we sit here today, especially in the context of the American Water contract, we feel pretty confident that we can make up for the loss of any American Water business with increased AMI sales.
Speaker 6
Got it. I appreciate all that additional detail. Just a couple of follow ups on what you just said, Greg. So I mean, the first half in Mueller Tech sales are going to be down, but you still feel like you have good visibility with your backlog and shipment timing such that the full year can be plus 10% to 15% because again after a negative first half, it seems like a pretty high bar.
Speaker 2
Yes. Kevin, as we sit here today at Mueller Systems, our backlog is up about 58% on our AMI. So and as we said today that given the schedules of those projects and we've mentioned on a number of times on our previous calls that they can slip. They can slip a couple of months with moving from one quarter to the next quarter or from one fiscal year to the next fiscal year. But as we look at that backlog today, the schedule of that backlog that gives us our confidence on being able to see the 10% to 15% uptick that the increase that we recognize.
And that's what the mix really drives the 7,000,000 to $10,000,000 margin or operating income improvement. So, we recognize the hurdle that it potentially creates. But as we look at our backlog, the projects that we continue to quote, as we sit here today, that we think we can offset not only offset the loss of the meter portion of American Water, but also grow our overall revenue.
Speaker 6
Got it. And just one last one from me on this topic. Well, I guess, first, you said 58% increase in your backlog. And second, can you just address you mentioned introducing the longer range radios. Guess, where are you in your product development effort there on the AMI side?
Are you to the point where you feel like you have a best in class product offering? Is that why you're winning more business and showing this big backlog growth?
Speaker 2
We do. We think a utility has they'll have a decision whether or not that based on their topography and so on, if they go to, we'll say, a fixed network that is where it's the receivers and the radios are perhaps mounted on towers or on their water their communication towers or their water towers. In that case, there's other technology we think better than ours. However, in a number of applications that we think where the mesh technology is the better choice, Today, we think we are we have the best choice both for large and small utilities. And what's important is some of our wins recently have come from smaller utilities where our previous technology was just too costly.
The infrastructure was too complex. We needed much larger infrastructure than what we do today. So yes, we introduced that in June and I think that's what's contributed in the July, August and September timeframe to our winning of orders and our billing of backlog. So we think as we sit here today, we do have a technology that puts us in a much stronger competitive position in the AMI market. We've also worked on this technology and what I referenced in our prepared remarks is that we see utilities that maybe are not quite ready to make the full scale investment in AMI, but are looking to position themselves to make an easier transition.
And we're calling that almost an AMI light type of radio that would act that in the short term that would have the same functionality as an AMR radio, but then could be moved to AMI. So yes, we think that over the last couple of years as we've learned more about technology, we've made some investments in the R and D side. We've talked in the last in our last call or last several calls, the LoRa technology has made this available made this possible. And we think we're a lot better positioned today than we were certainly at this time a year ago.
Speaker 6
Great. Thanks for all that detail.
Speaker 2
Thank you, Kevin.
Speaker 0
Thank you. Our next question comes from the line of Seth Weber from RBC Capital Markets. Your line is now open.
Speaker 7
Hi, good morning, everybody.
Speaker 2
Hi, Seth. Good morning.
Speaker 7
First question is a big picture question, Greg. I'm wondering if you've heard anything from on the municipal front as far as fallout related to the Flint, Michigan situation, whether you've heard anything about municipalities either delaying projects, reallocating CapEx or if there's anything that you've been hearing through your checks?
Speaker 2
Yes. Thanks, Ed. Good question. We'll look at it both in the short term and intermediate term. On the short term, we haven't heard too much of having a material impact on utilities plans.
That being said, that we think some utilities could switch maybe some projects that were planned to other projects. Because generally, in our discussions with our end users in the water utility, once they have their budget approved and they're in the middle of that cycle right now, they want to spend that money. So we do expect that they could, some cases, decide, hey, until they learn a little more, they may postpone one project. But we expect that they'll put that money into another project in upgrading their infrastructure. On a more intermediate term, that we think that in situations like the one at Flint, it just gets the media attention and it gives greater visibility to the deteriorating condition of water infrastructure around the country.
We've quoted in the past that the EPA estimated $384,000,000,000 of additional investment in drinking water infrastructure is needed through 02/1930. So we believe these types of events are catalysts for increased spending as the public becomes more aware of the issues. In fact, when we talk more specifically about Flint about six months ago, they contacted our Ecologics Group to come in and do perform a condition assessment on certain pipe in their system. So I think relative in the short term, we don't expect to see a material impact as we've had discussions with other. That's not to say that you may see a project here or there that's delayed.
And again, I think that the most of the response has been, hey, our budgets are approved. We may shift it from one project to the next as they learn a little more. So in the short term, we think very little. In the long term, we think just making the issues aware to the public is going to make it, I think, funding that much more readily available.
Speaker 7
That makes sense. And then I guess just more specifically on the business. The on Anvil in particular, so you reaffirmed the outlook for the year. You're starting in a pretty deep hole here and I'm just wondering what you see. It sounds like you're kind of expecting a pretty big hockey stick here in the back half of the year.
I recognize comps get easier on the oil and gas side, but are you expecting the fire protection business or industrial or maybe just give us some color where you think the strength comes from Yes. Outside of oil and
Speaker 2
look at the when we look at the second quarter, we've always as we talked about our business, about 10% of our business historically has come from a product area of engineered we call it our engineered pipe supports or engineered hangers. We were awarded last year a nuclear plant that's being built in Thailand. We were awarded those engineered pipe support. We'll be shipping that in the second quarter. So that certainly helps us make up a little bit of what we saw in the downfall in oil and gas.
Secondly, when we look at the first quarter, fire protection orders revenue was up about 5% year over year. I said Thailand, it's Taiwan. Sorry. But our as I said, our fire protection revenues were up about 5% year over year. However, we were disappointed because we saw our mechanical actually down.
And some of that most of that was because we saw a falloff in the industrial segment, which we think it was affected still by oil and gas that we think general industry in The U. S. Those tentacles go deep on the oil and gas market and does impact manufacturing in a lot of areas and we saw downturn in industrial spending. So when we look at the second quarter and then the impact of the rest of the half, certainly, we think the project in Taiwan helps make up some of that downfall. We do see positive momentum on the fire protection side.
I would say right here, as we sit here today, still some questions on how much impact on the mechanical side. So when we look at those all all those factors right now, we feel comfortable. And I think a big help will be when we get to the second half of the year, the comparisons do become easier and we don't expect to see anywhere near the drop off drop off in the oil and gas. But I would we look at the full year, the forecast for Anvil, what could change that our expectations or the guidance we gave is are we going to see a continued fall off on in our industrial side or our mechanical business? And right now, I think that's a question mark.
Speaker 7
Okay. If I could just ask one other quick one. On the Technologies business, it sounds like you're you should end the year at about a low $30,000,000 run rate for revenue, maybe a little higher. I mean, would you expect to be profitable at that revenue level?
Speaker 2
I'm sorry, Seth, would you repeat that? You're talking about for the quarter of $30,000,000
Speaker 7
Yes. Your kind of run rate coming out of the fourth quarter for the Technologies business is Yes.
Speaker 2
It's going to be yes. Obviously, it will be it will always be lumpy depending on what percent of our revenue comes from AMI. But at a $30,000,000 level, especially with what we expect in AMI, that would be a profitable that business will be profitable.
Speaker 0
Thank you. Our next question comes from the line of Firasah Mojo from D. A. Davidson. Your line is now open.
Speaker 2
Good morning. Good morning. I
Speaker 8
just got a quick question here. On the treatment of valve products, really, how do we think about the impact of margins from lower sales this quarter? Did it really help you guys out in the margin front?
Speaker 2
I'm sorry. I wonder if you could maybe just speak a little louder and repeat the question.
Speaker 8
Basically, did the lower sales numbers help you out on the margin front, on the segment margins?
Speaker 2
For Mueller Co?
Speaker 8
Yes.
Speaker 2
Yes. Actually, no, what helped us out there is we had our Pratt, as we talked about our Pratt business, which is our treatment valves, it was down year over year. That certainly is a lower margin product than our valves and hydrants. And our valves and hydrants had nice 9% growth. So that is a much richer mix for us.
We will have much higher conversion margins when we have a stronger mix of our valves and hydrants. So that certainly was one of the drivers for our improved year over year performance as well as just some of the our efficiencies and our manufacturing improvements that we always focus on as well as overall lower raw material costs.
Speaker 8
All right. And also, just one quick one here. Really for Mueller Co, what portion of the product portfolio are you seeing favorable price cost tailwinds?
Speaker 2
Well, we're seeing we're certainly seeing favorable price cost tailwinds on our valves and hydrants and our brass products. And our I would say that certainly when we look at our water treatment, our water treatment products, those sometimes can be large projects that go out for quotation and the pricing can vary project by project. We're seeing positives there in that business also from lower raw material costs. But depending on the project may not see as much benefit from pricing.
Speaker 8
All right. Thank you.
Speaker 2
Thank you.
Speaker 0
Thank you. Our next question comes from the line of Walter Liptak from Seaport Global. Your line is now open.
Speaker 5
Hi, thanks guys.
Speaker 2
Good morning, Walt. Good morning.
Speaker 5
I wanted to ask about the oil and gas business and now that you got, I guess, more than a year of declines under your belt. If you could size the business for us, how much has it is it down now kind of on a twelve month basis? And maybe talk about cost reduction too. Is it are you at breakeven level for it, etcetera?
Speaker 2
Yes. Well, let me go a little bit of history. If we look back in 2014, it was about 7% of total Mueller Water Products sales were about $80,000,000 When we look at our fiscal year 2015, that was down to 4% of our sales or about $50,000,000 So we saw about a $30,000,000 decline in 2015 over 2014. Certainly, talked about the decline we saw at Anvil this year that was another I mean, this quarter, sorry, was another about 12,000,000 I'm rounding that around $12,000,000 And we expect another further decline at Anvil in the fourth quarter. So if you look at 2014 when that market was stable and where it is where it's running today, it's down from probably about on an annual basis $80,000,000 to about $35,000,000 And so it's obviously down substantially.
If it does this market is leased on a year over year basis stable for the second half of the year, we should be at that around that level of sales on an annualized basis. We have been taking cost reduction throughout the last several quarters. Our headcount in Anvil in total is down over 11% from a year ago, but most of that headcount has come out of our oil and gas related businesses, about 50% to 60% headcount in our manufacturing facilities in those facilities that manufacture oil and gas related products. When we look at the SG and A, especially on the selling side, we have a very small sales force that focuses on this product, I'd say four or five salespeople. We really don't want to touch those.
We still think it's important to maintain relationships because history has told us when this market comes back, it comes back very quickly. And we want to maintain those relationships. I would say any further manufacturing activity let me say any reduction in cost on the manufacturing side would be we would have to close or combine factories. And right now and I think I said this on one of our previous calls, the only option for us right now would be move that factory, those factories from Texas up to the Northeast. And that doesn't make sense to manufacture oil and gas products in the Northeast.
So I'd say right now that we've probably taken most of the cost reduction actions that we can.
Speaker 5
Okay. Good. I appreciate the answer. Thank you.
Speaker 2
Thank you.
Speaker 0
Thank you. Our next question comes from the line of Joe Giordano from Cowen and Company. Your line is now open.
Speaker 5
Hey guys, this is Tristan for Joe this morning. I believe this is the second quarter in a row that we don't see any buybacks. Is there any reason for this?
Speaker 2
When we you point out we did not purchase shares. We still have remaining board authorization for about $45,000,000 of share repurchases. At this point, we have not implemented repurchasing plan. Rather, we are approaching it quarter by quarter as we consider all capital allocation options. But we are evaluating if we should put in place a 10b5-one plan.
And if we do so, we will disclose that in when we do so.
Speaker 5
Perfect. Thank you, guys. Thank you.
Speaker 0
Thank you. And our next question comes from the line of Seth Weber from RBC Capital Markets. Your line is now open.
Speaker 7
Hi. Sorry, just a quick follow-up for Evan. Is it possible to give us the impact from currency to both revenue and operating income?
Speaker 3
Yes. Seth, it's really related to Canadian currency. And on the revenue side, it's roughly about $2,000,000 in the quarter and just a little over $05,000,000 on the operating income side.
Speaker 7
Perfect. Thank you, Eric. Thanks very much.
Speaker 2
Thanks, Seth. Well, I see we've gone about an hour. So we will end the call. We are available in our offices as always for any additional questions. So again, thanks for your interest in Mueller Water Products.