Mueller Water Products - Earnings Call - Q1 2018
February 2, 2018
Transcript
Speaker 0
Welcome everyone and thank you for standing by. At this time, all participants will be on a listen only mode until the question and answer session of today's conference. This call is being recorded. If you have any objections, you can disconnect at this moment. May I introduce your speaker for today, Yolanda Kukai.
Please go ahead.
Speaker 1
Good morning, everyone. Welcome to Mueller Water Products twenty eighteen first quarter conference call. We issued our press release reporting results of operations for the quarter ended December 3137, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Discussing the first quarter's results and outlook for the full year are Scott Hall, our President and CEO and Marty Zakas, 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 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 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. 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, which ends on September 30. A replay of this morning's call will be available for thirty days at 60124.
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. I'll now turn the call over to Scott.
Speaker 2
Thanks Yolanda. Thank you for joining us today as we discuss our twenty eighteen first quarter results. I'll give you a quick overview of the quarter and then Marty will follow with additional analysis. I will then provide some further color on key performance indicators later in the call. We will finish up with an updated discussion of our outlook for 2018.
Overall, I was pleased by the 6.6% growth in consolidated net sales. We had a strong 9.4 increase in infrastructure net sales, primarily driven by higher shipment volumes, the addition of Singer Valve and favorable pricing. These factors were partially offset by lower volumes in technologies meter business. From an operating perspective, we benefited from ongoing manufacturing productivity improvements this quarter. However, we continue to experience rising material costs, particularly in brass, which increased 3.6% sequentially and 23.8% year over year.
You have heard much about tax legislation and we will spend time on it this morning. The new tax legislation improved our first quarter earnings and will be an ongoing benefit by providing additional liquidity and earnings. We will continue to balance our capital allocation among strategic investments to strengthen and grow the business while at the same time returning cash to shareholders through share repurchases and dividends. We repurchased $10,000,000 worth of shares during the first quarter and we recently declared a 25% increase in our quarterly dividend. We remain confident in our ability to deliver both strong consolidated net sales growth and conversion margin improvement for 2018, driven by healthy end markets and continued execution of our strategic initiatives.
With that, I'll turn the call over to Martie.
Speaker 3
Thanks, Scott, and good morning. I will start with our first quarter consolidated financial results, then review our segment performance. I will then move on to the current and ongoing impact of the new tax legislation. Consolidated net sales for the twenty eighteen first quarter increased $11,100,000 or 6.6% to $178,300,000 Most of this growth was a $13,800,000 increase from infrastructure, which was partially offset by a $2,700,000 decline for technologies due to lower shipment volumes at Mueller Systems. Gross profit improved this quarter by $3,600,000 to $55,400,000 and gross margin increased by 10 basis points to 31.1%, which we were pleased to see given the inflationary environment.
Selling, general and administrative expenses were $39,800,000 in the quarter and $36,300,000 in the first quarter last year. The increase was due primarily to the addition of SG and A at Singer Valve and personnel related expenses. Operating income improved 45.8% to $20,700,000 and adjusted operating income was $15,600,000 in the twenty eighteen first quarter and $15,500,000 in the twenty seventeen first quarter. Our adjusted results this quarter excluded a gain of $9,000,000 on the sale of an idle facility and expenses of $3,900,000 related to strategic reorganization and other charges. As we discussed before, we expect to report expenses related to our previously announced strategic reorganization throughout 2018.
Operating performance was favorably impacted by price, manufacturing productivity improvements and volume, which were almost entirely offset by higher material costs and higher SG and A personnel related expenses, which includes R and D staff and other engineers. Adjusted EBITDA for the twenty eighteen first quarter increased to $26,000,000 compared with twenty five point five million dollars in 2017. For the trailing twelve months, adjusted EBITDA was $164,300,000 or 19.6% of sales. Net interest expense for the twenty eighteen first quarter decreased by $1,200,000 to $5,200,000 primarily due to higher interest income this year. Now on to tax legislation.
On December 2237, tax legislation was enacted that made significant revisions to federal income tax laws. These changes included lowering the corporate income tax rate to 21% from 35, overhauling the taxation of income earned outside The United States and eliminating or limiting certain deductions. The effective date of the tax rate change was 01/01/2018. Therefore, we are subject to a blended federal tax rate of 24.5% throughout our fiscal twenty eighteen. For the twenty eighteen first quarter, we reported a net income tax benefit of $39,800,000 which was largely driven by a benefit of $42,600,000 related to remeasurement of our net deferred income tax liabilities using the enacted tax rates in effect when we expect to recognize the related tax expenses or benefits.
Other than this remeasurement benefit, income tax expense was $2,800,000 or 18.3% of income before income taxes, which is lower than the statutory tax rate due to the impact of discrete items during the quarter, particularly certain effects of stock compensation transactions. Also under this legislation, we are subject to a one time transition tax on undistributed foreign earnings. The amount of this tax is not reasonably estimable at this time, so we have not yet recorded a provision for this tax. We expect to record tax expense for this transition tax later in 2018. Although we will benefit from a lower corporate income tax rate in 2019 compared with our 2018 blended rate, we also expect to be unfavorably impacted by the elimination or reduction of certain deductions that are currently available to us, such as the domestic manufacturing deduction.
The tax benefit from the remeasurement of our net deferred tax liabilities was excluded from the adjusted net income per share, which was $06 for the quarter and $04 in 2017. Now I'll turn to segment performance starting with Infrastructure. Net sales for the twenty eighteen first quarter increased $13,800,000 or 9.4% to $160,100,000 primarily due to higher shipment volume, the addition of Singer Valve and favorable pricing. Adjusted operating income for the twenty eighteen first quarter increased $1,800,000 or 6.8% to $28,100,000 primarily due to increased shipment volumes, favorable pricing and manufacturing productivity improvements, which were partially offset by higher material costs. We experienced higher material costs both year over year and sequentially.
Adjusted EBITDA for the twenty eighteen first quarter increased $1,900,000 or 5.4% to $37,100,000 versus $35,200,000 in the twenty seventeen first quarter. Moving on to technologies. In our twenty eighteen first quarter, net sales decreased $2,700,000 to $18,200,000 Echologics net sales increased this quarter. However, this growth was more than offset by a relative decline in Mueller systems metering shipments that was primarily due to a difficult comparison with a year ago. As a reminder, through the first six months of last year, Mueller Systems net sales were up over 20% as compared with 2016 when several large projects were at or near peak deployment.
Given the project nature of the Mueller Systems business, quarter over quarter comparisons are not necessarily meaningful. Adjusted operating losses were $4,600,000 for the twenty eighteen first quarter and $2,200,000 for the twenty seventeen first quarter. This decline in adjusted operating results was primarily due to lower shipment volumes previously mentioned. Now I'll review our liquidity. Free cash flow, which is cash flows from operating activities of continuing operations less capital expenditures, was negative $5,900,000 for the twenty eighteen first quarter and negative $24,100,000 for the prior year quarter.
Free cash flow was higher this quarter largely due to improved working capital management at infrastructure and lower income tax payments this quarter compared with the first quarter of last year. We invested $6,400,000 in the quarter for capital expenditures, largely to upgrade our equipment and manufacturing capabilities to further drive productivity improvements and cost savings across the organization. At December 3137, total debt was comprised of a $478,200,000 senior secured term loan due November 2021 and $1,700,000 of other. The term loan accrues interest at a floating rate equal to LIBOR plus a margin of two fifty basis points. We have interest rate swap contracts that effectively fix the interest rate on $150,000,000 of our term loan borrowings at 4.8% through 09/30/2021.
Net debt leverage ratio was less than one and our excess availability under the ABL agreement was about $96,000,000 I'll now turn the call to Scott to talk more about our results and updated 2018 outlook.
Speaker 2
Thanks, Marty. I'd like to talk now about five key areas for the quarter, the first being net sales growth and then on to operating performance, material cost, pricing and then finally capital allocation. At that point, we'll move on to take a look at our full year outlook. Starting with net sales growth. Infrastructure's first quarter net sales growth of 9.4% was driven by growth across all our major product lines, which includes valves, hydrants and brass products.
We are seeing favorable market dynamics in both our municipal and residential end markets and all indications to us are that the fundamentals are very good for a healthy demand environment throughout 2018. Although Technologies first quarter net sales decreased year over year, we were pleased to see a $2,500,000 increase in sales of our fixed and mobile leak detection solutions in the quarter. This increase was more than offset by a decline in metering volumes and pipe condition assessment services. As mentioned earlier, the decline in metering shipments this quarter was primarily due to a difficult comparison with a year ago when several large AMI projects were at peak deployment. Technologies fixed leak detection solutions continue to win new business and ended the quarter with more business under contract than a year ago.
Technologies is focused on growing sales of its AMI and leak detection technologies and improving operating performance over the course of the year. On the manufacturing front, I continue to be encouraged by the operating performance at infrastructure as we again delivered meaningful cost savings and productivity improvements in the quarter. We are still experiencing an unfavorable material cost environment that more than offset these improvements as first quarter material costs rose about 5.5% compared with the prior year quarter or about 1% sequentially, which lowered our conversion margin in the quarter. We believe the impact from higher year over year material costs to be less in the 2018 compared to the first half of the year, but still higher than a year ago. We expect to offset these higher material costs with additional productivity improvements and improved pricing.
First quarter pricing was up solidly year over year and sequentially, but not enough to fully offset the increase to material costs. As we've stated before, price changes tend to lag changes in input costs. We believe we can satisfactorily address increases in material costs with appropriate pricing actions over time. In December, we announced price increases for valves, hydrants and gas products effective in the second quarter in The U. S.
And Canadian markets. Over time, we expect our pricing yields to exceed material cost inflation. On a sequential basis, we have improved pricing over each of the last three quarters. Moving on to capital allocation. Our capital allocation strategy remains focused on enhancing our position as a water infrastructure company and adding long term value for our shareholders.
We will continue to balance our capital allocation among strategic investments to strengthen and grow the business and returning cash to shareholders. In conjunction with our strategy to enhance productivity and accelerate product innovation, we believe some of the provisions of the new tax legislation will provide the backdrop to realize more benefit from these investments. For example, the immediate income tax deduction related to capital assets placed in service, as well as a lower U. S. Federal corporate tax rate will further enhance our already strong cash position.
We are analyzing additional investment opportunities that will help us expand the product portfolio, broaden manufacturing capabilities and efficiencies and support growth initiatives. As I have previously discussed, I expect near term capital expenditures to be higher than they have been historically to help support our strategic growth initiatives. Additionally, we will continue to look for strategic acquisitions to expand our product portfolio and geographic footprint. Since January 2017, we have repurchased $65,000,000 worth of shares and have $185,000,000 remaining as part of our ongoing buyback program. Additionally, we recently declared a 25% increase in our quarterly dividend.
This is the fourth increase to our quarterly dividend in the last three years. As we have repeatedly mentioned, we will continue to take a balanced approach in our capital allocation that will seek opportunities on the M and A front, reinvest in the business, buy back shares and return earnings to shareholders through dividends. I'd like to wrap up the call now with a review of our current full year expectations for consolidated results. I remain confident in our outlook for 2018, which remains unchanged. For our key end markets, we expect residential construction market percentage growth to be in the mid single digit range, while municipal spending growth will be in the low single digit range.
State and local seasonally adjusted tax receipts continue to increase year over year as do water rates, both good indicators of future growth. Our expectations for our operating performance in 2018 remain unchanged. We continue to anticipate that consolidated net sales will grow in the 4% to 7% range. Although we did not see strong conversion margins this quarter, we continue to expect our conversion margin will range from 35% to 40% in 2018. We are on track to deliver the anticipated cost savings from our strategic reorganization, while also increasing investments in new product development, engineering resources and productivity initiatives.
Marty will now provide some final comments on our 2018 outlook.
Speaker 3
Thanks, Scott. Turning to some of the other expectations for our 2018 performance. Corporate expenses are expected to be between 33,000,000 and $36,000,000 We expect depreciation and amortization to range from $44,000,000 to $46,000,000 net interest expense to be between $21,000,000 and $23,000,000 and capital expenditures to range from $40,000,000 to $48,000,000 As Scott outlined, we are evaluating possibilities for additional capital expenditures in 2018. We anticipate that our adjusted effective income tax rate for the full year will be between 2629% excluding the one time transition tax. Based on our current expectations for capital expenditures, we expect free cash flow to be higher than adjusted net income.
With that operator, please open the call for questions.
Speaker 0
Thank you. We will now begin the question and answer session of today's conference. Our first question in queue is coming from Sir Mike Wood from Nomura Instinet. Mike, your line is now open.
Speaker 4
Hi, good morning. Thanks for taking my question. First, maybe to start on the conversion margins. Happy to see that you were able to reiterate that guidance for the year. Can you talk about your confidence in achieving that, specifically the evidence that you're seeing on price hikes announced in December across all those product categories that you called out?
Speaker 2
Yes. I think that we remain confident because we have seen the strength sequentially. We continue through the January booking period to see strength. So I think that we once we see the slowing in brass and steel, and I believe the scrap steel has slowed now, we're confident that we'll continue to be able to pass that along. So I think the spreads with price are good.
I think the actual efficiencies that we're getting in the factories are good. I think Marty kind of pointed to it a little bit in her comments. The SG and A bubble we experienced, those personnel related expenses, take Singer and put it to the side and recognize that we had basically through our first quarter through twelvethirty one, we still had some, let's call them duplicate costs associated with some of the restructuring that we had to get kind of through the system. So as we go into our Q2, all of that is done basically and behind us. So the piece that wasn't adjusted out that while people were working was in that SG and A number.
So price, good volume, good manufacturing productivity, especially at the foundries, especially in Decatur, especially in Chattanooga and especially in Albertville really leave me confident that the conversion margin should line up with our full year guidance in that 35% to 40% range.
Speaker 4
And related to that question, would there be a pre buy here in your fiscal second quarter? How should that impact growth here in this current quarter that we're in now?
Speaker 2
Yes. We would expect that we'll give our important customers their window to make two releases of products before they have to pay the new price. They'll be limited on some formulaic basis. So our order book should swell and they'll be on a timeline to have us get the shipments through. So, I'm a little less excited about that.
I don't want to you'll recall last year when when we went through that process, we weren't sure what the uptake was going to look like from distribution because they had gotten burned before. So we haven't got a huge amount of pre buy in our forecast. And if we get more than we have forecasted, we'll get some manufacturing efficiencies from it. And if we're kind of in this muted level that we were anticipating right now, we'll still be able to deliver the 35 to 40.
Speaker 4
Great. Just finally, can I ask about Technologies? It just sounds like in your remarks, you're attributing the sales softness to the tough large project comps. I think this is supposed to be a pretty fast growing business segment in general. So can you just talk about what you're seeing in backlogs and order activity, what your patience is in this business and your longer term confidence in it?
Speaker 2
Okay. So I knew it's coming. We're not going to talk. Were we disappointed in volume in meters in the quarter? Yes, we were.
We continue to work three contracts right now that are meaningful and will be meaningful to the business that we think we'll be able to announce here in the few next twelve or fourteen weeks. But fundamentally, whether we win these little these contracts or have a little win here or a little win there is not the point. We have to scale the business. And if we can't scale the business, then we have to run the business more efficiently than we've been running it. And I believe in the technology.
I continue to believe in the strategy. I think we have to do a better job with our selling proposition. I think we have to do a better job with larger cities so they understand why it's advantageous to go the open architecture way. But there are still lots of things we can do with the business from a cost structure point of view to not have these results. I think the problem with volume was part of the problem, but we could have done a better job containing cost given the volume problems we saw in the quarter.
So I don't want to duck on it. I still love the technology and I still love the selling proposition. I think it is a winning combination. And I think that if you think about large cities then you think about midsize cities, then you think about rural areas and the need for a water authority to actually address all of them and the need to have both fixed networks and open networks like wide area networks. So in your densest populated areas, your wide area network, in your kind of your burb areas, you've got kind of a proprietary network.
And then when you're out in the kind of farmland rural areas, you're interconnecting through a cellular network. We are the only people that can provide an umbrella over all of it and have software integrate to all of it and all at the same time integrate leak detection. So I still believe in it. You'll know when we don't because we'll take the engineering out, but I believe we're going to continue down this path. We're having wins, certainly not at the rate I would like them, But I believe the team is on the right path and I'm encouraged by some of the signature wins that they have had.
So we're not giving up yet.
Speaker 4
Okay. Appreciate your comments. Thank you.
Speaker 0
Our next question is coming from Sir Bill Newby from D. A. Davidson. Bill, your line is now open.
Speaker 5
Good morning, guys. Bill Newby on for Brent, Theo Monday. Thanks for taking my questions.
Speaker 2
Hi, Bill.
Speaker 5
Just hoping to get a little bit more color on the price increases you guys are implementing. Are you seeing competitors respond to similar price increases across the market?
Speaker 2
We don't really comment on what they're doing and I'm not in a position where I can say, I know even how they've responded. We went out with our lists in December. We've not seen a lot of pushback and distribution seems to understand what's going on. So I would imagine if they had some other options, they would, but we try not to comment one way or the other.
Speaker 5
I think
Speaker 2
though that everybody is experiencing higher material costs. And so unless anybody wants to see margins shrink, they're going to have to take some pricing action by definition in order to cover the higher material costs.
Speaker 5
Okay. And I mean, it sounds like from I mean, earlier comments that you're comfortable just being able to fully recover the materials increases with the recently announced price increase. Is there a chance you guys might like entertain a further price increase later this year? Are you guys pretty comfortable with where you stand there?
Speaker 2
It's tough to answer that one. I mean, we would come back with more pricing if we're wrong and the forward markets are wrong about where brass alloys look like they're going to be. If you look at the copper content and you look forward, we think we've taken appropriate action given our timing and the position in the market. But if that were to change materially, yeah, we would have to make some changes as well because we're not going to let this run away from us. Right.
Speaker 5
I'll jump back in queue. Thanks guys.
Speaker 2
Thank you.
Speaker 0
Our next question is coming from Sir Brian Lee from Goldman Sachs. Brian, your line is now open.
Speaker 5
Hey, guys. Thanks for taking the questions. Maybe first one on infrastructure. This is a second straight quarter of pretty robust year on year growth. So you got some forward momentum here heading into fiscal twenty eighteen.
I know, Scott, you're maintaining the overall growth targets of 4% to 7%, but just in the context of infrastructure seeming to be on its foot, how should we be thinking about sort of the progression through the year because it would suggest maybe you're anticipating some moderation in the cadence or maybe there's some implication here that you think Mueller Technologies continues to not grow, but just wondering how we should take that into context because infrastructure just seems to be doing better than we would have anticipated.
Speaker 2
Right. Well, think in the infrastructure, the organic growth is right where I've guided you. Singer will drop off in our comps in February. So we'll have this quarter partial this quarter and then we're back to pure organic. We don't have any pickup from the acquisition.
So I think well guided. Obviously, I'd like to see us kind of be at the top end of that and then nothing I'd love more than to come back in the June timeframe and guide you to a larger number than seven. But we're not there yet and we're not seeing it in the market. So I think we expect that growth rate to moderate once you see Singer drop off the comp first and foremost.
Speaker 5
Okay, fair enough. Maybe secondarily, just on the growth topic. Are you expecting Mueller Technologies to grow this year versus fiscal twenty seventeen? You talked to some of the Echologic strength here, which has persisted for a couple of quarters. But can you also talk to what you're seeing in AMI mix and also the growth trends there?
Speaker 2
Yes. So the AMI mix continues to be good. All of our new wins continue to be in that technology. And yes, I expect it to grow. I think we've got targeted at a couple more areas that we should win.
We will need though pretty much flawless schedule maintenance on the projects we have in house in order to hit that growth number. So nobody can push or we'll have to pull in some things. So if you think about the way this business works, everything I'm negotiating right now probably will have zero revenue in this fiscal year. Basically in contract negotiations on two or three right now, when you look at all of the shipments, they will be basically in my fiscal 'nineteen. So what I have in front of me, I have to execute on perfectly, which also means the municipality has to not push dates or push funding because we're right around.
So the growth that I anticipated when we started is going to be a little less due to some of these projects changing. So we're going to have to go out into the market, into the distribution market and try and hustle some more orders in order to provide the growth. I think that's where we are with the business right now.
Speaker 5
So just to maybe drill down on that a bit more, if we're thinking about a return to growth in Mueller Technologies, is it fair to say we're talking pretty much into the back half of fiscal twenty eighteen, if not sort of toward the very end of it?
Speaker 2
Yes. In technologies, I would expect you to see continuous growth quarter, quarter, quarter in the Echo business. I think we have another tough comp this quarter with the meter business And then I would expect the meter business to grow in my Q3 and Q4. That's how I think about the business. It's why I didn't want to get into this.
If you recall, I didn't want to get into quarterly guidance because I knew it was going to be lumpy. And I knew where we wanted to be from a cost structure point of view and we still have to get there.
Speaker 5
Okay, fair enough. Last one for me. Just I know you haven't delineated a specific margin target per se, but it sounded like last quarter when you gave the initial guidance, obviously, you're maintaining the metrics of the growth rate and conversion margin expectations. What should we be thinking about as it flows through to operating margins here? What sort of expansion can we see on that line item?
And then if you could just maybe detail a bit more on the specific productivity gains you're targeting across the two segments here moving through the year? Thank you.
Speaker 2
I'm not sure.
Speaker 3
Think, Brian, part of the question is the way that we've addressed operating margins that you're thinking about is just from the standpoint of conversion margin. So what we said is as we see the incremental growth that we're projecting year over year, it's what do we think that will benefit from that growth on an operating income basis.
Speaker 2
Yeah, right. So you'd have to look at the accretion if I'm making I can't even remember the numbers. But if I'm making, let's say, ballpark 20% EBITDA margin and then all my new stuff comes in at, let's call it 37.5%, then your accretion would say that you're going to be at 20.2% or 20.3%. So I think you'd have to do that math. To answer your other question, yeah, I'm still kind of in that, you'd see flow through of somewhere between somewhere right around 50 basis points from productivity.
And as we add new product development skills and assets and people, part of that dilution takes place. But we think in terms of 50 to 100 basis points every year of productivity, some breakage along the way and then some reinvestment in the business and then some falling back to the bottom line. And we're going to continue with that model.
Speaker 5
All right. Thank you. I'll pass it on.
Speaker 0
Our next question is coming from Joe Giordano from Cowen. Joe, your line is now open.
Speaker 6
Hey guys, good morning. This is Tristan in for Joe. Thanks for taking my question. If we can talk about your hydrant business for just for a little bit, are you more or less likely to gain share at small municipalities or larger municipalities? Guess in other words, how sticky is that business at different muni sizes?
Speaker 2
Yeah, I don't think we think of it that way. I mean, we think about the top 25 MSAs, where is our spec position, where do we have to get spec position, where is it on open spec. We tend to think of it in terms of how our spec position is positioned. It easy to break? Is it a generic?
Is it very specific? And then focusing our selling proposition, our efforts around making sure we have tight positions. And that goes basically for all of the large MSAs. We're dependent on all the really small MSAs on distribution. That's where our partnership comes in.
We're present on the big ones. We're building relationships with the largest cities and water authorities in the country. But then distribution handles, you know, there's 50 something thousand water utilities in the country. And so basically distribution handles the smaller ones and we rely on them and we work with them territory by territory as do our competitors. So I don't like to think of it as stickiness or anything like that.
I will say that there is a notion out there around some kind of volume discounting and I don't know how to say it other than to say, if you look at the quarter and you look at the last three quarters, in each of them, price has been north of $2,000,000 $2,500,000 And so there is no discounting going on around account target. We're getting price in the market because we're increasing prices, not because we're doing some kind of volume discounting.
Speaker 6
Thanks for the detail. And then if I can just ask about the contribution from Singer Valve during the quarter?
Speaker 2
Yes. Singer was as expected, not accretive. We had some purchase accounting expectations associated with performance of the business and it came in right on target. And I think our revenue was for the quarter right around $3,700,000 Might have been a little tad less than like $3.6 or something, but let's call it 3,700,000.0 So if you're thinking about organic growth for the infrastructure business, that was more like
Speaker 3
It was probably about 4%, 4.5% on a consolidated basis.
Speaker 0
Next question is coming from Mr. Jose Zargas from Gabelli. Jose, your line is now open.
Speaker 7
Hey, good morning guys.
Speaker 2
Good morning Jose.
Speaker 7
Just following on that infrastructure side,
Speaker 4
could you kind
Speaker 7
of just delineate in terms of maybe volume, just hydrants versus hydrants and valves versus maybe some of the products that you guys have going into wastewater markets?
Speaker 2
Sure. The strength in the infrastructure business, if I were to kind of segment it out without giving you specifics, I would say that the brass and the gas business led the way in growth. Part of that was very much a result of price increases. And so the combination of volume and pricing in the brass, predominantly brass business is why we had the largest growth there. That was really followed by the Pratt business with Singer.
So if you think about the specialty valve business we have, that business was up the next most amount, just under double digits. And then the slowest growth would have been in the gate valve and hydrant business. So in infrastructure, it kind of went RAS and gas, then specialty, think about the project driven business and then hydrants and valves, which would have been below the average growth for the segment.
Speaker 7
Okay. That's helpful. And then I guess this is for Marty. Marty, just kind of the puts and takes on kind of just the tax rate maybe looking beyond, I guess, 2018 and even maybe 2019? What's kind of a reasonable assumption for us to kind of utilize?
Speaker 3
Certainly. First of all, I want to point out, as we look at our fiscal twenty eighteen, we gave you an expected range of 26% to twenty nine percent. But one thing I want to make sure everybody is clear on is when you look at when the, tax legislation was enacted effective January 1, because of our fiscal year, we have a blended rate that is in effect for us for our entire fiscal year, which is 24.5%. So that sort of forms the basis for our outlook for fiscal 'eighteen being 26% to 29%. We don't have specific guidance yet on tax rate for 2019, but just to help you think about it, we will in our fiscal 'nineteen, we will be subject to the corporate tax rate of 21%.
I will point out that there are some deductions that are available to us, and I've talked about these before, primarily the domestic manufacturing deductions, and those will go away in fiscal twenty nineteen. So that's a benefit that we've had in the past that is eliminated as part of the tax legislation. So we would expect to be probably a little bit lower as we go into fiscal twenty nineteen, but probably not benefiting for the full difference between the blended rate and the corporate tax rate because of some of these deductions that will go away.
Speaker 2
And something else I'd chime in on there, Jose, that supplement, Marty, maybe you can talk about it a little bit. I've read some things recently that would indicate that there's a lack of understanding of how much state income taxes are being collected. So if you think about our guidance, we have every year, if you look in our 10 ks, there's a rate wreck in there. I think last year, the rate reconciliation was about 4% state tax, I guess, added to your federal tax. And then you take your deductions from there.
So there was a lot written around these things. But I think if you look at our if you go to our 10 ks and you look at our income tax rate reconciliation, you'll be able to start to see some of the puts and takes.
Speaker 3
Yes, we're probably 4%, 4.5% as you look around state tax rates.
Speaker 2
And that's in our guidance as well.
Speaker 7
Okay. Actually, continuing on the taxes, is there anything that customers are saying, I guess, positively or negatively, just in terms of the SALT elimination?
Speaker 3
I would say on a corporate basis, I
Speaker 5
don't know
Speaker 3
if you're asking that question. From an end It's not user. An end user?
Speaker 2
It's not something that the industry is talking about. I think from municipality perspective too, it's not really going to be topical because of their non tax status. But it's something we should think about, I guess. But no, it's not being talked about today, Jose. And you said solved, right?
Speaker 5
Yes.
Speaker 3
Thank you.
Speaker 2
Our
Speaker 0
next question is coming from Seth Weber from RBC Capital Markets. Seth, your line is now open.
Speaker 8
Hey, good morning.
Speaker 2
Good morning, Seth.
Speaker 8
I wanted to just make sure, I guess, first to clarify what your comments are on the tech business, revenue ramp. Scott, are you were you saying that you think that the business grows at some point this year or do you think it's up for the full year year over year?
Speaker 2
I think it's up for the full year year over year. So we recover this $2,400,000 and be up slightly. In order for that to happen, as I mentioned earlier, we need perfect execution on the rest of the outstanding projects that we have to ship. We can still achieve growth and the expectations for the team is that given some of the pushbacks we've had and some of the project delays we've had as a result of this first quarter, the challenge to the team is to get into the distribution market. It is to get into some of these other areas and cover off some of the miss from Q1.
Is that in my outlook? Right now, is not. I still think we can get to some growth, but we've got some work to do.
Speaker 8
Okay. And so just backing into the numbers, it sort of suggests like a mid-twenty million dollars kind of run rate at some point, right, probably by the end of the year. So my question is, is that a level is that enough scale for you for that business to start to at least have a visibility towards profitability? And are you still adding engineers and sales and marketing? Or how should we think about you called out scale.
And so I'm just trying to understand what you think the right number is that to kind of reach what's the scale number you're targeting here?
Speaker 2
Okay, so let me kind of break this up into two answers. Yes, the meter business at $25,000,000 in a quarter has to make money. That kind of scale, it has to be profitable. No, the Echo business is not going to be finished with engineering software development and frankly new product development. That if it were to hit its goals completely this year, would I expect it if it would, it be good if it was kind of a breakeven performance.
Does that answer it?
Speaker 8
Yes. Well, can you just remind us what the revenue mix is between Echo and Systems?
Speaker 2
Think it as about 80% to 20% or 75%, 25%. So With meters being the bigger piece.
Speaker 8
Right. So but you called out a $25,000,000 systems revenue run rate, but it doesn't seem like if that's it doesn't seem like you're going to be there this year based on kind of flat to up growth for the whole business, right?
Speaker 2
I think we should have one quarter in that profitable range. I think if you're trying to get to where I think you're trying to get to, then yes, I think we have to have a quarter of profitability in that business at a 22,000,000 or $23,000,000 volume number.
Speaker 8
Okay. That's exactly what I was looking for. Okay. Thank you, guys. I appreciate it.
Speaker 2
Our
Speaker 0
next question is coming from Mr. Ryan Connors from Boyni Scattergoods. Ryan, your line is now open.
Speaker 9
Great. Thanks for taking my question. I wondered
Speaker 2
if
Speaker 9
you could expand a little bit on the residential and land development homebuilding side. You've talked a lot about the municipal market and you touched on residential. But can you talk expand there a little bit on what you're seeing there in terms of order backlog and outlook?
Speaker 2
Yes. I mean, so to be clear, when I say the dynamics are good, I think that land development dynamics are even better than housing starts. And that's why I remain bullish for the year. I think that if you look at the land development numbers, you can see that they could realistically be in that kind of double low double digit kind of 10% number. I think right now the forecasts are right around nine percent.
And we really need land development for hydrants and valves. I mean, if you think about it, a house gets started, there's already curb and sewer in when the house gets started. So we're kind of at that front end of the cycle. And that number, you know, I think looks like 10%. On top of that, home inventories are low and house formations are running right around 1.2, 1,300,000 a year.
And so if you think about all of those factors, I think that the fundamentals on 30%, 35% of the business are really, really good for continued growth. Then on the other side, we have seen the census data would indicate, Ryan, I know you watch this, the waterline business and the sewer line business has actually been shrinking spending. Even though water spending has been up, infrastructure in waterline and sewer line has actually shrunk through November. And that this pause is really because too much of municipalities money has been spent on pumping stations, disaster recovery, dewatering pumps, you know, things associated with Irma and Harvey, the California flooding. And so we saw a lot of increase in spending, but not all of it kind of in our power alley.
We're starting to see that turn as they neglected those areas, we're starting to see O and M dollars come back in, especially in December and I think again in January. We're seeing good O and M activity. So I think we had a pause last year in O and M spending and it's returning. And at the same time, we see a fairly favorable land development number along with housing starts, with home formations, which would indicate that the houses will be taken off the market. So I feel pretty bullish about demand.
Speaker 9
Got it. Now on the land development side, does new development and the new infrastructure associated with that, does that create a pull through opportunity for technologies and Ecologics in particular because rather than having to retrofit it onto an existing infrastructure, it's a greenfield and they can put in some leak detection condition assessment upfront or is that just sort of immaterial?
Speaker 2
I would say it should be true, but my experience so far would indicate that a lot of developers are not willing to spend the money unless dictated to by some water authority. And so they're trying to put that in as cheaply as they can and they're not interested in it. The water authorities on the other hand tend to be really using leak detection to focus on their non rep water, which their new installations tend not to do. So I'd love to bundle it and we've had the idea. It's just hard to execute because nobody's willing to spend the extra money yet to have, kind of a future proofed system in place.
Speaker 9
Makes sense. Now, last question, going back to the scale discussion with the prior questioner there. A lot of talk about the internal cost improvement and what the right revenue run rate is of the existing business to get there. What about acquisitions as a means of adding scale? Is that just sort of something that's okay if it comes along?
Or is that something that's more of a real focus and a key part of getting there?
Speaker 2
Well, we try not to comment too, too much on acquisitions and try and keep it so that not everybody's aware of what we're doing. But let me say this, there's a really big drop off between number three and number four in the meter market. If you think about three big guys and then the drop off, You would have to do a ton of consolidation at the bottom of the market to have a meaningful presence. And so if you were, you'd to buy up. And it's not something we would say we would or wouldn't do.
I wouldn't comment on that, but we're aware of the structure of the meter market.
Speaker 9
Got it. Okay. That's helpful. Thanks so much for your time.
Speaker 2
Thank you.
Speaker 0
Our next question is coming from, Sir Jim Janikoros from Oppenheimer. Jim, your line is now open.
Speaker 5
Hi, thanks. Good morning.
Speaker 2
Hi, Jim.
Speaker 5
Quick one for Marty. I believe you took up CapEx for FY twenty eighteen. Sorry, missed it, Marty, as you touched on it in prepared remarks. But what drove that? You took it up a few million dollars versus last quarter's guidance?
Speaker 3
We did take it up a little bit, and that's largely because as we looked at what we think are some of the opportunities that we have as we evaluate some of the internal projects, it's a matter of looking at some projects that we think will further enhance some of our productivity, our manufacturing capabilities. We're seeing pretty good payback on them, and it's those that we're taking a look at. So yes, I'd say our expectation is higher than it was at the end of the quarter. And I think I'll point out as well that Scott referenced that we are continuing to look at capital expenditure opportunities. And if we see additional opportunities, you could see those numbers change again.
Speaker 2
Right. One of the things I have asked the team to do is to look at what we can get in service while we have the favorable treatment associated with 100% bonus depreciation. If you think about our blended rate tax situation, you get 24.5% on that versus in 'nineteen, you'll get 21. So let's be smart and let's think about let's not just spend money stupidly, but let's be smart and let's spend money on other things that will make us more efficient, that can open new product avenues for us and that can improve our quality and throughput.
Speaker 5
Got it. Okay. And then on the productivity initiatives, I caught your that you reiterated 50 to 100 basis point margin improvement target in plant. I mean, what has your moves or leaning out your facilities? And what has that done to your capacity utilization?
I recall a 65%, 70% or so kind of number being thrown out there in the not so distant past. So curious if it's moving the needle there, just given that you are still you are at very high levels from a volume perspective and you just our subscription to the notion that you have margin expansion runway just on fixed cost leverage? Thanks.
Speaker 2
Yes. So I think that it's a you've hit on something that's a it's a lot of fun around here about where everybody stands on it. But long story short, I think we're running the foundries on ten hour shifts four days a week. So I would argue that unless we have full ovens on every load, we're probably sub 50% capacity utilization, that we have a ton of growth. Now with that said, would I need to put in some more paint lines so I could take away the castings?
Might I need a bit more machining so I could finish more faces? Yeah, that kind of thing. But you should take the front end of your production process and you should make it your pacing item. We should be able to pull away from the foundry basically what it can produce. And so we have lots of room to grow.
We have lots of areas that we could expand into. We could melt more brass, we could melt more steel. I think we have tons of growth potential with our existing footprint. We can even improve its efficiency. So I think that from a melt capacity and a forge capacity perspective, we have maybe 50% to 60% capacity utilization that we could grow from.
It would take some downstream investment, but we're I think that's not going to be an issue.
Speaker 5
That's extremely helpful. Thank you. And your price cost comments or just how you get to parity. I didn't understand, is it exit rate FY twenty eighteen that you think you can get to fully offsetting? Is that a full FY twenty eighteen comment?
Just as far as the timing there, take was that you can get to price cost parity by midyear. And for the full year, you will have fully offset. Am I understanding it correctly?
Speaker 2
Well, if you're taking price cost, what I take is price cost, you include performance and price, we're offsetting it completely right now. I mean, you look at price of around $2,500,000 in the quarter, I think our productivity net number was around $1,900,000 and I think the inflation was somewhere around 3,000,000 right, Marty? Have I got it wrong? Yes. So I think we were
Speaker 5
could be north of 40% incrementals if pricecost wasn't a headwind. And so just trying to get Yes, yes.
Speaker 2
Like if I had gotten my performance and let's say I got no price and I got no material inflation, I would have picked up $1,900,000.02000000 dollars in my conversion. As it was, inflation was like 3,100,000.0 or something like that and I only got 2,500,000.0 of price back. So I lost $800,000 of my performance between price and but when I say price cost, I combine performance price and inflation. So it may be just a terminology thing. Price was not enough to cover inflation.
Our manufacturing performance was not enough to cover inflation. But the reason we had expansion at the gross margin line is because the combination of price and performance did cover inflation.
Speaker 3
And expectations are in the second half of the year, based on where material costs go, we certainly see an easier comparison because of the rate of rise that we saw throughout 2017 with respect to our material costs.
Speaker 5
Understood. Thank you. Very helpful.
Speaker 2
Good.
Speaker 0
Our next question is coming from Walter Liptak from Seaport Global. Walter, your line is now open.
Speaker 2
Thanks
Speaker 10
for being straightforward about the tech segment. But I wanted to just ask, I don't it sounds like you've got these three metering contracts that you're working on. And I just wanted to see if I can clarify, did one get delayed? Or was there some sort of a timing issue? And I guess the question is, what's causing the metering business to have a timing issue?
What is it going to take to book these sales?
Speaker 2
Well, I wish I could tell you. To answer the question, yes, we had delays in several thousand kind of pushed out of the quarter. Part of it is the deployment schedule and part of it is the customer. But I would observe that we have to increase our booking rate and have more than just three in if we want this to be a scaled business. Because once you get your foot in and you have a position with the water authority, there is a follow on business, replacement business, damage, things that it just kind of builds and then it gets into distribution and so on and so forth.
So we have to be aggressively pursuing all of these bid contracts so that we establish a position for the follow on business. So when the big, all of these bid contracts so that we establish a position for the follow on business. So when the big thing, but then once it's in there, it's almost like the brake business. It's, you want to keep replacing the pads kind of thing. So you've got to make sure you have the incumbent position with the water authority.
And that has been a tough nut for us to crack. And I think the other answer to your question, Walt, is that we understand our selling proposition. I am not sure that we have done a good enough job in making the customer understand the selling proposition and why it's in a city's best interest to put in a wide area network and when it's in a city's best interest to put in a dedicated network and when it's in a city's best interest to use proprietary bandwidth or open bandwidth. I think we have a lot of people that understand all this stuff and certainly I've come to understand it over the past year and it makes sense to me now. But I don't know that we've done a very good job at making the customer understand it.
And I think that has to be one of our focuses over the coming nine to twelve months. And so I think the combination of being a little more aggressive along with getting the message out there about why MuellerNet, why my net, why my node, why our products will help the selling proposition, will help our volume. But we have to all, at the same time we do all of that, we still have to run our factories efficiently. And so, you know, it's not all about volume. There were things we could have done to improve the loss position a little bit in the quarter and we have to do those things.
I get on these calls and, you know, we tend to get into the negative part of the call. Overall, was pleased with the quarter. Overall, I was very happy to see infrastructure growth, very happy with manufacturing's performance around productivity, very happy with the sales team, driving price, very happy. So all in all, you know, it was for me a good quarter. I like the execution and I like how the team responded and the countermeasures and things that had to happen.
So, you know, it was a positive quarter for me, but I think that, you know, technologies is something we have to continue. We're going to be held accountable for and we have to continue to work on.
Speaker 10
Okay, great. Thanks again for the candor and it sounds like you identified the problem. So good luck with fixing it. Thank you.
Speaker 2
Thank you.
Speaker 3
And operator, thanks. We will end the call at this point. Thanks, Seth. Thanks, everyone.
Speaker 0
And that concludes today's conference. Thank you all for your participation. You may disconnect.