Mueller Water Products - Earnings Call - Q2 2014
April 30, 2014
Transcript
Speaker 0
Welcome and thank you all for holding. I would like to remind all parties that your lines are on a listen only mode until the question and answer segment of today's conference. Also today's call is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Ms.
Marty Zakas. Ma'am, may begin.
Speaker 1
Thank you, Laurel, and good morning, everyone. Welcome to Mueller Water Products twenty fourteen second quarter conference call. We issued our press release reporting results of operations for the quarter ended March 3134 yesterday afternoon. A copy of it is available on our website muellerwaterproducts.com. Mueller Water Products had 159,300,000.0 shares outstanding at March 3134.
Discussing the second 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 refer to our fiscal year, which ends on September 30, unless specified otherwise.
All operating results discussed in these prepared remarks are from continuing operations, unless specified otherwise. A replay of this morning's call will be available for thirty days after the call at 60386. The archived webcast and 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. Thank you for joining us today as we discuss our results for the twenty fourteen second quarter. I'll begin with a brief overview of the quarter, followed by Evan's detailed financial report, which covers key drivers affecting our businesses. I will then provide additional comments on the quarter's results developments in our end markets as well as our outlook for 2014. We are pleased with 13.4% year over year improvement in our adjusted operating income during the second quarter, especially given adverse weather effects experienced in many parts of The United States.
Mueller Company's net sales increased 1.7% year over year. Domestic orders for valves, hydrants and brass products grew over 20% in the second quarter, which we believe reflects the continued strength of our key end markets. Most of this increase in orders is not reflected in the quarter's shipments due to the timing of Mueller Company's price increase this year compared to last year and to some extent the harsh winter weather. Mueller Company's adjusted operating income increased 18.3% year over year in the quarter with improvement across all product lines. I'll provide more detail later in the call.
Although Anvil's net sales increased slightly, its adjusted operating income declined 6.5 and its adjusted operating margin decreased 80 basis points to 8.9% due primarily to operating challenges during the quarter manufacturing facility. Overall, we continue to believe consolidated results for the balance of 2014 will continue to improve year over year, primarily due expected growth in most of our key end markets and the benefits of stronger operating leverage, particularly at Mueller Company. With that, I'll turn the call over to Evan for detailed discussion of our financial results for the quarter.
Speaker 3
Thanks, Greg, and good morning, everyone. I'll first review our second quarter consolidated financial results and then discuss segment performance. Net sales for the twenty fourteen second quarter of $288,100,000 increased $5,000,000 or 1.8% from the twenty thirteen second quarter net sales of $283,100,000 due primarily to higher prices and higher shipment volumes. Gross profit increased 6.3% to $82,200,000 for the twenty fourteen second quarter compared to $77,300,000 for the twenty thirteen second quarter. Gross profit margin of 28.5 in the twenty fourteen second quarter increased 120 basis points from 27.3% in the twenty thirteen second quarter.
This improvement was driven primarily by higher sales prices and higher shipment volumes. Selling, general and administrative expenses were 18.8 percent of net sales in the twenty fourteen second quarter as compared with 18.6% in the twenty thirteen second quarter. Selling, general and administrative expenses for the twenty fourteen second quarter were $54,200,000 as compared with $52,600,000 in the twenty thirteen second quarter. This year expenses associated with liabilities related to the company's former U. S.
Pipe business and retained by the company are now being included in continuing operations whereas a year ago they were included in discontinued operations. The increase in SG and A is primarily related to these expenses. We believe most of these expenses will decline over time. Adjusted operating income for the twenty fourteen second quarter increased 13.4% to $28,000,000 as compared with $24,700,000 for the twenty thirteen second quarter. This increase was due primarily to higher sales prices and higher shipment volumes.
Adjusted operating margin also improved 100 basis points to 9.7%. Adjusted EBITDA for the twenty fourteen second quarter increased to $41,800,000 as compared with $39,700,000 for the twenty thirteen second quarter. Adjusted EBITDA for the trailing twelve months was $166,500,000 Interest expense net for the twenty fourteen second quarter declined $300,000 to $12,500,000 as compared with $12,800,000 in the twenty thirteen second quarter due to a lower level of total debt outstanding. During the twenty fourteen second quarter, income tax expense was $3,100,000 on income before income taxes of $12,800,000 resulting in an effective income tax rate of 24.2%. Income tax expense for the twenty fourteen second quarter included a benefit of $2,000,000 from an adjustment of deferred state and local income taxes.
The effective income tax rate was 24.8% in the 2013. Adjusted net income per diluted share for the twenty fourteen second quarter compared with an adjusted net income per diluted share for the twenty thirteen second quarter of $05 There was a weighted average of 161,900,000.0 diluted shares of our common stock outstanding for the twenty fourteen second quarter compared to a weighted average of 160,000,000 diluted shares outstanding for the twenty thirteen second quarter. I'll now move on to segment performance and begin with Mural Company. Net sales for the twenty fourteen second quarter increased 1.7 to $191,300,000 as compared with $188,100,000 for the twenty thirteen second quarter. This increase was primarily to higher prices and a favorable mix, partially offset by unfavorable Canadian currency exchange rates.
Adjusted operating income for the twenty fourteen second quarter improved 18.3% dollars as compared with $23,500,000 for the twenty thirteen second quarter. This increase was due primarily to higher prices and favorable mix. Adjusted operating margin for the twenty fourteen second quarter improved 200 basis points to 14.5% as compared with 12.5% in the twenty thirteen second quarter. As we discussed last quarter, we have changed manufacturing process for certain sizes of our Iron Gate valves. This change resulted in a $1,500,000 non cash write down of some of our equipment and is expected to deliver cost savings, which will generate less than a one year payback.
Adjustments to operating income include this $1,500,000 non cash charge. Adjusted EBITDA for the twenty fourteen second quarter increased to $37,900,000 as compared with $34,900,000 for the twenty thirteen second quarter. Adjusted EBITDA margin for the quarter increased 120 basis points to 19.8%. Fueler Systems net sales for the twenty fourteen second quarter were essentially flat year over year. However, operating income improved and was positive this quarter.
I'll now turn to Anvil. Net sales for the twenty fourteen second quarter increased 1.9% to $96,800,000 as compared with $95,000,000 for the twenty thirteen second quarter. The increase resulted primarily from higher shipment volumes particularly to the oil and gas market. Adjusted operating income for the twenty fourteen second quarter declined 6.5% to $8,600,000 as compared with $9,200,000 for the twenty thirteen second quarter. Campbell's adjusted operating margin decreased 80 basis points to 8.9% as compared with 9.7% for the twenty thirteen second quarter.
Adjustments to Amble's operating income include a $1,000,000 reserve for the estimated cost for us to withdraw from the only multi employer pension plan in which company had participated. During the quarter, Amble's largest manufacturing facility experienced production issues related to unplanned outages of its melting and heat treating operations. These issues created a number of inefficiencies. The impact was further exacerbated by an ERP system implementation that was completed at this facility during the quarter. We believe the operating issues are behind us, but they adversely impacted Anvil's second quarter results and due to higher per unit cost and inventory associated with inefficiencies they will also adversely impact the third quarter.
Adjusted EBITDA for the twenty fourteen second quarter decreased to $12,200,000 as compared with $12,700,000 for the twenty thirteen second quarter. Adjusted EBITDA margin for the quarter was 12.6%. Turning now to a discussion of our liquidity. Free cash flow, which is cash flow from operating activities less capital expenditures was $600,000 for the twenty fourteen second quarter compared to negative $12,900,000 for the twenty thirteen second quarter. We continue to expect 2014 full year free cash flow to be stronger than 2013, driven primarily by better operating results.
At March 3134, total debt was $600,600,000 and included $420,000,000 of 7.32% senior subordinated notes due 2017, dollars 178,100,000.0 of 8.75% senior unsecured notes due $20.20 and $2,500,000 of other. Net debt leverage was three times at March 3134. Using March 3134 data, we had $171,400,000 of excess availability under our asset based credit agreement. I'll now turn the call back to Greg.
Speaker 2
Thanks, Evan. I'll now elaborate on our twenty fourteen second quarter and end markets, provide an outlook for the third quarter and comment on 2014 expected performance. I'll begin with Mueller Company. Overall, Mueller Company net sales during the quarter grew 1.7% year over year. Net sales from our core domestic iron gate valves, hydrants and brass products grew 7%.
As we discussed last quarter, we expected that several factors would impact shipment comparisons during the second quarter. Specifically, we noted the timing of our price increase this year on valves and hydrants compared to the timing of last year's price increase and that we would have three fewer weeks this year than last year to ship the orders received before the price increase. We also mentioned that severe winter weather could affect the timing of shipments. We believe these factors contributed to domestic unit shipments for valves being up only 1% and hydrant shipments up 5%. Net sales growth at Mueller Company this quarter was also impacted by declines in areas outside of our core valve hydrant and brass products.
Net sales declined $1,300,000 for our Pratt product line as we have not yet seen a rebound in spending for water treatment facilities. Net sales for Mueller Canada declined $1,500,000 primarily due to foreign exchange and international sales declined $1,500,000 Net sales of metering systems were essentially flat from last year and sequentially. We believe demand for our core valve, hydrant and brass product was much stronger than our shipments in the second quarter may indicate. For example, domestic unit orders for iron gate valves during the quarter were up 23 year over year and hydrants were up 20%. We were encouraged by the year over year growth in orders from distributors ahead of our price increase, which we believe suggests a positive outlook as we enter the construction season.
Additionally, even though we have said in the past that backlog for valves and hydrants is generally not a meaningful metric, since these products typically ship within three weeks, we note backlog nearly doubled in the quarter year over year. Given everything we saw in the second quarter, we think the growth in backlog further supports our and our distributors' belief that market demand continues to grow. Mueller Company's adjusted operating income grew by 18.3% in the second quarter year over year. Despite net sales decline, adjusted operating income at Pratt increased $1,600,000 or 43% during the quarter year over year and Mueller Canada increased by $300,000 after the foreign exchange impact. Adjusted operating income for our metering systems improved by about $1,000,000 year over year and Mueller Systems was profitable for the quarter.
Anvil's net sales during the quarter improved slightly year over year with the improvement primarily in the oil and gas market, where shipments were up by about 10%. Net sales to the nonresidential construction markets were essentially flat during the quarter. As Evan mentioned, in spite of the improvement in net sales, Anvil's adjusted operating income declined year over year, primarily due to operational issues at its largest plant. Production was interrupted at both melting and heat treating operations, which required unscheduled maintenance. Even though Anvil met its shipment obligations, it was inefficient doing so and incurred higher costs.
Additionally, the situation was magnified by the implementation during the quarter of a new ERP system. We believe these factors impacted adjusted operating margin by about 130 basis points in the quarter. Turning now to our outlook for the twenty fourteen third quarter. I'll start with Mueller Company. Overall, we believe that the fundamentals in our addressed markets remain strong as we enter the third quarter.
Demand for our core valves, hydrants and brass products, driven by both residential construction and municipal spending is expected to be up nicely. As we just discussed, we saw order dollars for our domestic valves, hydrants and brass products increase more than 20% in the second quarter. We believe the bulk of these orders will ship during the third quarter, and we expect to see strong year over year growth in the Mueller Company core valve, hydrants and brass business. We believe some of the growth in Mueller Company's core products will be offset by lower sales of Pratt in the third quarter year over year, where we are continuing to see softer spending in the water treatment market. Pratt, however, is beginning to see an increase in quotations and its backlog has grown throughout fiscal year.
We do not expect to ship the recent projects we have received in 2014. For metering systems, we expect to see year over year net sales growth in the mid single digits based on the timing of our backlog and expected order activity. Considering all these factors, we expect Mueller Company's net sales to increase in the low double digits in the third quarter. We expect both Mueller Company's adjusted operating income to improve and adjusted operating margin to expand significantly in the third quarter year over year. This improvement will primarily be driven by the increase in shipments expected from our core products as well as continued improvement in our metering systems and leak detection business.
As I mentioned earlier, even as Pratt sales are expected to decline year over year, operating income is expected to be essentially flat as margins are expected to continue to improve in that business. We believe Anvil's third quarter net sales will be up low single digits year over year, driven primarily by improvements in its addressed oil and gas markets. Earlier, we mentioned operational issues at Amdol's largest plant. We expect these additional costs will reduce third quarter operating income by 3,500,000 As a result, we expect Anvil's adjusted operating income to decline year over year and to be essentially flat sequentially. For Mueller Water Products as a whole, we believe twenty fourteen third quarter net sales will increase in the high single digits year over year, driven by performance at Mueller Company.
We expect solid increases in our twenty fourteen third quarter adjusted operating income as well as expansion in adjusted operating margin year over year. I will now take a moment and talk about our expectations for full year 2014. As we said on our last call, overall for the Mueller Company based business, which excludes our metering and leak detection products and services, we expect the year over year net sales growth rate to be in the high single digits. In 2013, net sales of our metering products and services grew by approximately 50% year over year. We expect to continue to see nice growth in 2014, but expect the growth rate to be less than half the 2013 rate based on the delivery schedule of our current backlog and anticipated timing of new projects.
In total, our outlook for 2014 net sales growth for Mueller Company remains substantially the same, with the exception that we now believe the growth in our metering business will be slightly less than 20%. The rate of growth in net sales in 2014 for Mueller Company is expected to be in the low double digits, but could be slightly less than last year based on our performance to date. We expect Mueller Company's adjusted operating income and adjusted operating margin to improve over 2013. We also believe our metering and leak detection products and services will be profitable for 2014. For Anvil, year over year net sales are expected to grow in the low to mid single digit rate based on our current expectations of increased demand in our oil and gas and non residential construction end markets in the second half of the year.
Adjusted operating income and adjusted operating margins are expected to contract, primarily as a result of the costs associated with the operational issues we addressed earlier on the call. Other twenty fourteen key variables include corporate spending is expected to be 35,000,000 to $37,000,000 depreciation and amortization is expected to be $57,000,000 to $59,000,000 and interest expense is expected to be about $50,000,000 based on our current debt outstanding. Our adjusted effective income tax rate is expected to be 36% to 39%. Capital expenditures are expected to be 34,000,000 to $36,000,000 For 2014, we continue to expect free cash flow to be stronger than in 2013, driven primarily by better operating results. Additionally, we expect cash income taxes to be minimal in 2014 as we continue to benefit from utilization of net operating loss carryforwards.
We also expect to make only minimal cash contributions to our pension plans in 2014. For the full year, our consolidated earnings outlook for Mueller Water Products remains about the same as we provided on the last conference call, with the exception of the expenses associated with inefficiencies at Anvil that we addressed earlier on this call. Before we open it up for questions, there is one legislative development I would like to address. As those of you who follow industry know, the newly enacted Buy American requirements contained in Congress most recent appropriation bill require that American iron and steel known as AIS be used in water and wastewater projects funded by EPA state revolving loan funds. Although it is still early and like the rest of the industry, we are still working our way through the EPA's recently released guidance on the AIS requirements, we do not have any concerns with meeting the requirements or anticipate any long term impact on demand for our products.
That said, we have seen in the past where new legislative requirements can create a period of confusion that disrupt buying patterns or cause some delays in projects. To date, we have not seen delays in projects or other adverse impacts in the market attributable to the new requirements. So the bottom line is that we feel good about where we are right now, and we believe that we have the production capability here in The United States to address the new AIS requirements with little, if any, disruptions to our customers. With that, operator, we'll open it up to questions.
Speaker 0
Thank you. At this time, we will begin the question and answer segment of today's call. Our first question today comes from Mike Sir, your line is open.
Speaker 4
Hey, guys. This is Adam in for Mike Wood at Macquarie. Quick question. Do you guys still expect to recognize the 6,000,000 to $7,000,000 in shipments in 3Q that were pushed out given the timing of the price increase?
Speaker 2
Yes. We would expect that those would that would flow into Q3. As I said that we went into our third quarter of this year with a significantly higher backlog than valves and hydrants. Certainly, of that backlog is due to the timing difference of the price increase last year and this year. So yes, we would expect that that $6,000,000 would probably ship early in our third quarter.
Speaker 4
Okay, great. And then just on the Mueller Company side, strong incremental margins. Did you see a benefit in 2Q from the price increases that you had enacted on the lead free hydrants?
Speaker 2
Adam, maybe to some extent, but that wasn't the key driver, I think, the strong conversion margins at Mueller Co. We benefited from improved performance and a more favorable mix actually with our metering systems. Revenues were essentially flat, but operating income improved about $1,000,000 So certainly, our performance at our Mueller system was a strong contributor to conversion. And as I also talked, the revenues for our Pratt product line were down about $1,400,000 year over year, but operating income for Pratt was up $1,600,000 So those two both our Mueller Systems and Pratt contributed very nicely to the conversion margin. And then I think that then in addition to that, we did benefit from higher prices, particularly as shipments of our lead free brass products have grown significantly and now account for a vast majority of our brass product sales.
And I think as well as higher sales prices of valves and hydrants. I think that there were really a number of factors that contributed to the strong conversion margin at Mueller.
Speaker 4
Great. Thanks a lot.
Speaker 2
Thank you.
Speaker 0
Our next question comes from Michael Dagler. Your line is open.
Speaker 2
Good morning, everyone.
Speaker 0
Good morning. And sir, please state your company name as well.
Speaker 2
Green Capital. Taking a look at the balance sheet, I've noticed you've been sitting around $600,000,000 in debt or so now for six or so quarters. Cash has been kind of building up a bit and now you're coming into a seasonally strong free cash flow period. Wondering what your thoughts are in terms of what you're going to do with the cash here in the next couple of quarters? Yes.
Mike, we I'll let Evan go into a little more detail here. Our leverage net debt leverage is three times, you pointed out. And certainly, as we get the stronger stronger and we get into the construction season, we would think that, that would continue to improve. We have we've been pretty consistent the last several years in saying that we would that we're still focusing on bringing down debt over our overall debt. So that our objective was to get our net debt leverage below three.
And once we got below three, then we would look to have a little more flexibility. We are somewhat constrained on what we can do. And I'll ask Evan to go into some of that.
Speaker 3
Flexibility with respect to debt retirement share repurchase and dividends is somewhat limited as long as we have 8.5% notes outstanding. And as a reminder, they are not callable at a predetermined price as of September 2015. We do however have a restricted payment basket of about $65,000,000 which can be used to repurchase the subnotes the 73% notes or for share repurchases or dividends above $15,000,000 annually. Obviously other potential uses of free cash flow could include acquisitions. But certainly over the past several years as you know debt retirement has been a key focus.
We continually monitor our Board continually monitors our cash position evaluate our capital structure and all alternatives to determine the overall best allocation of capital resources over the book.
Speaker 2
Yes. Micah, it's a good question. And we do think that we will certainly continue to generate the cash flow buildup. We'll look to see what we can do on the debt retirement side. We're somewhat limited to what we can do on any stock buybacks or additional dividends.
So that September date of 2015 really is a key milestone for us in terms of giving us a lot more flexibility on what we can do with cash. Greg, do you have any windows opening between now and September 15 on the 08/1975 where you could still pay off some of it?
Speaker 3
We do not. We in the past we had three windows of a certain feature where we could retire about 10%, but that has expired. So we do not have any windows there. And we did take advantage of a couple of those windows and retired right around a little over $45,000,000 of that debt under that certain feature.
Speaker 2
Okay. That's all I had. Thanks. Thank you, Our
Speaker 0
next question comes from Jerry Revich. Your line is open and please state your company name.
Speaker 5
Good morning.
Speaker 2
Good
Speaker 5
morning, It's Goldman Sachs. I'm wondering if you gentlemen can talk about the cadence of orders at Mueller Co. Over the course of the quarter. And I appreciate the fact that you've got the price increase timing in there. But I'm wondering if you could just help us get a broad sense of whether demand accelerated over the course of the quarter as we seem to have heard from a couple of construction materials companies wondering if you're seeing the same underlying trend as the weather improved particularly into March projects really accelerated.
Can you just give us a sense if you can? That would be helpful.
Speaker 2
We were probably not consistent with others because of the timing of our price increase. If you look at last year, as we said, our price increase was in the third quarter I mean, January. This year, the February. So for us to do a valid analysis, we took the January, February time period of last year versus the January, February time period of this year. And if you look, for instance, at our valves and hydrants, our orders during those that time period, our orders were up 25% on valves and hydrants on a year over year basis.
So clearly, we saw a our distributors deciding to even buy more ahead of the price increase they did last year, which again we think reflects reflects that they're bullish on projects when we get in construction season. We did see, however, since we saw such a nice growth in orders in January and February, we expected that March would fall off year over year. And in fact, we were pleasantly surprised that our March orders actually grew this year over March orders last year for Mueller Co. So in a way, we may have seen that same phenomena. It was just somewhat distorted because of the timing of the price increase.
And of course, with our distributors, they have to get their orders into us before the price increase goes into effect to protect that pricing.
Speaker 5
Okay. Thank you. Greg, would you be willing to comment how April is stacking up as well since that's a little farther out from the price increase? Maybe we
Speaker 3
could get an Yes. Apples to apples
Speaker 2
think right now April is pretty consistent with the outlook that we've been giving.
Speaker 5
Okay. And then in terms of industry's shift towards the lead free products, can you give us a sense for whether there's scope for additional products to potentially shift over as well? Where are we in that process broadly beyond brass products?
Speaker 2
Yes. Good question, Gerry. I'll tell you with the what happened in the industry in October, when the EPA made a preliminary decision that, that legislation would apply to components in hydrant and then subsequently came back and said reverse that decision. But I think that in a way implied that they would prefer if utilities or municipalities would eventually switch to non leaded components. At least in our products and where we compete, I think they have pretty much covered we're now covered all the products that can be affected.
I'm sure we could always be surprised, but I think that we're covered now. So clearly, brass products on January year had to contain no lead. The industry made that because we had three years to be prepared. So that was a pretty smooth transition. As I said, the hybrids caught us by surprise.
I think that we under there's a plan going forward there. Our expectations are that probably by the end of the year, most if not all hydrants will contain components that are no lead. However, the industry does have and can work off its existing inventory. And then from there, I think we're pretty well covered.
Speaker 5
And so on the hydrogen side at this point, what you shipped in the quarter, what proportion was non lead?
Speaker 2
By far, the vast majority was non lead, but we did use this as an opportunity to take down our inventory, get rid of our inventory of leaded any leaded components. So going forward, we will only be manufacturing manufacturing and shipping non lead. I would suspect that there's probably still some distributors that have leaded components in inventory. And for sure, some of our end users have in their inventory those with leaded components. But I would as I said, I would expect and looking at the calendar year that most of those will have gone through the system.
Speaker 5
Okay. Thank you. And Evan, can you just step us through where we are in the ERP rollout? Are there any additional plans scheduled to move forward? And can you just give us a sense for how that process is going outside of what happened this quarter?
Speaker 3
Sure. We're twelve months into the new ERP implementation system at our Anvil business and we implement at the largest facility in January. We experienced normal start up issues during implementation at other locations, but experienced no significant impact on operating results. And what we're doing here is Amble has been operating on a number of systems and we're bringing that down into one to add efficiency overall. But for the largest facility, it's complete, but it did exacerbate the operational challenges that we experienced in the second quarter.
Speaker 2
Yes, Gerry. In fact, me go a little further there, because I don't want anyone to be confused. As Evan pointed out, probably the results at Anvil in the quarter maybe somewhat exacerbated by the ERP implementation, but that really didn't cause our issues. We had two primary issues and probably both of them fall into the category of preventative maintenance. We lost an annealing oven for a month.
Our plant management there thought that this oven could continue operating until the next scheduled maintenance period and it couldn't. The other issue was that one of our melting furnaces where we had a thin spot in furnace lighting, we actually burned a hole in the furnace and that was a several week repair. And probably what impacted us most is that we're somewhat unique. Anvil at this facility is somewhat unique since we run several types of iron at this facility. Generally, our furnaces are dedicated to a single type of iron.
So once we lost this melting furnace, we had to utilize furnaces that were dedicated to other types of iron. In order to do that, that when we switch from one type of iron to another, we had to shut down the furnace, clean it out completely before we could begin melting another type of iron. We incurred a lot of inefficiencies over time. We said that that hit us for about $1,300,000 margin impact on anvil in the second quarter. As I said in my prepared remarks, it's about $500,000 We expect it's in inventory now that will hit us in the third quarter.
That will be behind us then. But we did everything that was necessary to make sure that we didn't miss any of our shipment obligations to our customers. But as Evan said, that we have a little bit to go on the ERP implementation. We've been implementing it before. It really didn't impact the quarter.
And I don't think it would have had much of an impact this quarter if we didn't have those furnace issues.
Speaker 0
Okay.
Speaker 5
Thank you very much. Thanks,
Speaker 2
Drew.
Speaker 0
Our next question comes from Brian Connors. Your line is open. Please state your company name.
Speaker 6
Thank you. The firm is Jenny Montgomery. I wanted to drill down on this issue of distributor restocking. Greg, you've kind of referred to it a few times. And I kind of want to get your sense because if it is in fact confidence in the rebuilding inventory, I think it's a pretty powerful signal for the end market.
So can you just give us a little more color there on how much you really think that is an indicator of sentiment rather than noise around the price increase? And also whether are there any regional dynamics and differences there?
Speaker 2
Yes. Yes. One, we do think it's certainly a positive indicator. And we base that on, as I referenced a little earlier, that we saw 25% growth year over year in valves and the hydrants tied into that timing of the price increase. We saw orders from distributors on this price increase bringing orders forward that we hadn't seen in the past.
So that certainly told us that they were feeling a lot more bullish. Our distributors, when we go across the country, are generally bullish. They've shared with us that in fact, we look entering this quarter that our distributors and absolute our inventories at our distributors and absolute dollars have increased. And but we see really no we'll say no issues with too much being in inventory because they fully expect to turn it. In fact, a number of our distributors when we followed up on the orders that they pulled forward, said that we already have projects down the road in our backlog that we'll be using these for.
So it was a very right now, it's we're saying it's a very positive indicator from indication from our distributors that they're bullish, both from the context of they're willing to up the amount of inventory that they're carrying. And this is probably the first time certainly in several years we've seen that and their belief that they'll reach the terms that they expect. Relative to what's happened regionally, I would say that we saw almost across the country distributors increasing inventory with perhaps less so in the Northeast. And again, we think that that was related to weather and our distributors in our field sales force tell us that they do expect that business is going to pick up. But as I say that, we've even seen April in the Northeast start off a little slowly and what's coming back to us is that it's still weather related.
So I think that we were very pleased. I think we said on our last call that we'll have a pretty good idea on how sustainable or how strong the recovery is based on the kind of orders or the order growth we see placed ahead of the price increase. And as I said, we were pretty pleased when we saw in that January, February time frame on a year over year basis orders up 25%. And again, seeing orders from distributors being pulled forward that we haven't seen in the last couple of years.
Speaker 6
Great. And then over onto the metering business, Greg, that business has been coming back. You said that there's the outlook there is positive. Can you give us an idea specifically what types of customers and what types of products whether it's advanced AMR stuff or whether it's more of the basic flow measurement? Because you really you had the major customer win last year and I guess what we've seen since then is a lot of smaller fish.
So can you give us some color around exactly what those deals look like?
Speaker 2
Yeah. I would say we're still in the we're still dealing with the smaller utilities and still looking at the we're seeing from a quotation standpoint, we're quoting much more AMI business. I don't know if maybe that's indicative of this market as maybe where we're positioned. We think it's both where we're positioned in that market as well as growth in AMI. But we expect probably in the next I would say within the next quarter to be addressing some pretty large quotations issuing some pretty large quotations to larger cities, so larger municipalities.
So I would say that right now, what we're seeing is probably consistent with what we've seen over the last twelve months. A greater percentage of our quotations geared towards AMI. Probably it's still we're still dealing with the midsize, the smaller size municipalities, but expect to start making some quotations in the next quarter to some larger cities.
Speaker 6
Great. And then last question for me, guess, more for Evan. Following up on the balance sheet discussion, as you have discussions with the rating agencies and so forth, I would imagine they're pretty happy with where the company has come from a leverage standpoint and from a fundamental profitability standpoint. Is there can you kind of update us there? I mean where the latest outlooks are and how those discussions are progressing and whether you think there's any positive trajectory there?
Speaker 3
Well, certainly as you know last year we had improvement in our ratings from both S and P and Moody's and we have frequent conversations with our rating agencies. I really can't project exactly where we'll go from here. But certainly as you saw last year and from the commentary both from our net debt leverage as well as our improving EBITDA position, I would say that they've been fairly pleased.
Speaker 6
Great. Well, thanks for your time today.
Speaker 0
Thank you. Our next question comes from Nick Grendergast. Your line is open and please state your company name.
Speaker 5
Hi. It's BB and T Capital Markets. I just want to make sure I'm absolutely clear on these Anvil inefficiencies and how much flows into Q3. But in your prepared remarks that my takeaway was it's going be a $3,500,000 headwind to Anvil's EBIT in Q3. Am Am I understanding that correctly?
Because I think you mentioned inventory in the Q and A.
Speaker 2
Yes, Nick, that's absolutely right. And what happens, we saw in the second quarter an impact of $1,300,000 but those inefficiencies go into inventory and then hit the P and L as inventory turns. So the bulk of the inefficiencies will hit us in Q3, and we're estimating that it's $3,500,000 So in total between the second and third quarter, it's around a $5,000,000 impact.
Speaker 5
Okay. And then since that's rolling in inventory, that mostly COGS then?
Speaker 3
Yes. That's cost of goods sold. We're on the FIFO method of accounting. So effectively it goes into the per unit cost of your inventory and then flows out based on inventory turns. And so as Greg mentioned that will kind of flow through the income statement that impact of about $3,500,000 in Got the third
Speaker 5
it. Got it. And then you noted the adverse weather impacts in Q2. Did you quantify that?
Speaker 2
No, we didn't. And Nick, I'll tell you, we just don't know how to quantify it. But we know we've had distributors that were shut down for a couple of days at a time. We know that there were just a lot of areas that we just weren't able to do work outside. So we really don't know what the impact was.
So clearly though, we knew we know that our shipments were reduced as a result of it.
Speaker 5
No, that's fair. That's fair. And then finally, it sounds like you're actually expecting a little bit of lift in non res construction in the second half. Is that true? And then I guess what gives you confidence that, that may occur?
Speaker 2
We said that last we mentioned that on the last quarter that we thought that we might see it in the second half of the year. We're hearing discussion in the marketplace that more talk about project activity, but we're not seeing it yet. So I think that we're probably making those comments a little on the come. If you look at the ABI index, it's been bumping up and One month, it's above 50, which indicates it's positive territory. Next month, it's below 50 and so on.
So we think it's certainly mix. We haven't seen any growth in the first half of the year. We think we may see modest growth in the second half of the year, but it I would say that we're not saying that with a lot of confidence.
Speaker 5
Got it. Okay. Well, that's it for me.
Speaker 6
Appreciate it. Thank you. Thanks.
Speaker 0
Next question comes from Seth Weber. Your line is open and please state your company's name.
Speaker 3
Hey, good morning. It's RBC.
Speaker 2
Good morning, Seth.
Speaker 1
Good morning.
Speaker 3
So just going back to the Anvil production hiccups. Mueller historically has been a company with relatively low CapEx. I mean does this suggest that we need to start raising maintenance CapEx here going forward to prevent some of these issues that might occur?
Speaker 2
No. Seth, we were all over that as you would expect and we looked at it and we start looking on a year over year basis, total maintenance spending at this facility to try to determine if in fact that that's what was happening and it's not. We found that the number of people dedicated to maintenance, the spending on maintenance was consistent year over year. I think what happened was the plant management on the one furnace thought that they can wait till the next outage scheduled outage. And as I said, they didn't.
And then the thin lining spot, it's unusual, but not necessarily uncommon. So but that's a very good question. And we looked at the very we looked at that had that very same question. And not so much on the capital, it would have been an expense issue, but we looked in the nothing unusual at this plant in terms of the expense maintenance expense dollars over the last couple of years.
Speaker 3
Okay. That's very helpful. Thanks. Maybe just switching gears to the MuellerCo business. On the residential side, we're starting to hear some mixed messaging around new housing development.
I'm wondering are you still seeing an uptick in raw land development? And how should we how are you thinking about the residential market this year or into next year?
Speaker 2
Said that right now, our outlook and certainly, we pay close attention and we've seen some of the analysts becoming a little less bullish. But we have not seen anything that alters the outlook we're providing for the last six months. And we think that what at least supports our outlook is the development of raw land. We've just had some of our distributors report some developments going in their territory And the size of development, they said, goes back to the time when in 02/2006, when that industry was booming. So right now, it looks like land development supports our expectations and outlook for the year.
But our antenna is certainly up based on, I would say, some of the reduced reductions in forecast over the last couple of months.
Speaker 3
Right. Okay. If I could just slide one more in. I think after the last quarter, we had talked about MS and E growth of about 25% for 2014. It sounds like maybe that's going to be a little bit below 20% this year.
I mean is that I know this is a business that's hard to handicap. And did something just slide around on you? Did something get pushed out or Yes.
Speaker 2
We've adjusted that outlook a little bit. When we look at and we meet pretty regularly, as you would expect, with our largest customer in that business. And the current outlook is that our largest customer believes that they will not need as they will be installing fewer meters this year than what they did last year. So probably the biggest impact biggest driver of ours bringing down the outlook a little bit is reduced expectations from our largest customer. So I think other than that, the market and orders are playing out as we expect.
On our Jackson, Mississippi, the biggest order that we have in our backlog. Through six months, we've shipped about 50% of that and still expect to be able to ship the remaining the second half of the year. So just we're making a slight adjustment in orders that we expect to see from our largest customer.
Speaker 3
Okay. That's very helpful. Thank you, Greg.
Speaker 2
Thanks, Seth.
Speaker 0
Next we have Kevin Bennett of Stern AG. Your line is open and please state your company name.
Speaker 2
It's Stern Agee. Good morning, everybody. Good morning. Greg, two questions for me. First, I was wondering if you've seen any impact from higher raw material costs and how that's going to play through as we go throughout the year or if it's still kind of benign?
Yes. I think that we would put it in the benign category. We have seen maybe a little movement on grass and a little movement on scrap. But right now, nothing of what I would say that's material. And as we look over the next the remainder of our fiscal year, we don't think that we will see a negative much of a negative impact if any at all from higher raw material costs.
Okay. That's great. And then one last question for me on the leak detection business, which we haven't really talked about much. I know you've been doing a lot of pilot programs around the country and was wondering how those were going? When do you think we're really going to start to see the impact from this business on the P and L?
Yes, the pilot a lot of the pilot we're moving from the pilot phase into those turning into real orders. We've had a number of those actually the last I would say the last four or five months. Probably the one business that was impacted impacted even more so in the last quarter was our leak detection business from the weather. But no, when we look to the second half of the year, we think that we will see a very nice uptick activity in our leak detection business. You've heard us talk in the past about we were in the pilot stage on our fixed transmission leak detection and distribution leak detection.
That's moving nicely. We're getting closer to commercialization there. And so I hope to be we're in a position in the next couple of months actually to make a few announcements about some nice project work that we're winning at Mueller Systems.
Speaker 3
That's great. Best of luck.
Speaker 2
At Echologics. Sorry, yes. Thank you.
Speaker 0
Our next question comes from Walter Liptak. Your line is open and please state your company name.
Speaker 4
Hi, thanks. Good morning. Good morning. Good morning. I wanted to ask about the MuellerCo business and on the guidance.
You talked a little bit about the third quarter operating profit and the margin. But given the strong leverage that you had this quarter, I wonder if you could talk a little bit about what you're expecting from leverage for the third?
Speaker 2
Yes. We've paid in total for Mueller Co. That we would expect the leverage to be at least 35%. I think as we look out that we're very confident with the 35%. And certainly, if you look at the last couple of quarters, we've been doing better than that.
So we would expect it's reasonable for us to do better than the 35%. We look like we should have a good valve and hydrant mix certainly given our increase in backlog. So Walt, I would say that we would expect to be in the 40 plus range in our conversion margins for Mueller Co. In the third quarter.
Speaker 4
Okay, great. Is there anything that we should be concerned about? You'll be shipping quite a bit of product. Are there capacity issues? How do you ramp up?
Speaker 2
No. Capacity, we're fine. We're working two shifts in our Chattanooga facility and our Albertville facility. As many of you know that probably a year ago and for quite some time, we've been only working one shift. So we've been able to ramp up.
We've been able to staff those shifts. So if we can dodge any of all of these tornadoes the next day because our plans happen to be in the past that they're projected, we feel pretty confident that from a manufacturing standpoint, we have the capacity to be able to make the shipments.
Speaker 4
Okay, got it. All right. Let's hope so. Thanks.
Speaker 2
Thanks, Blake.
Speaker 0
Next we have David Rose. Your line is open and please state your company name.
Speaker 4
Good morning. Wedbush Securities. Most of my questions have been answered. The last one though is, if you could provide a little bit more color on the fire hydrant sale decline last quarter was I believe 13%. How do you think about what happened to those orders?
Is that baked into your bookings numbers up over 20% for the period? Do they go away? Should they be higher?
Speaker 2
Yes. David, great question. Actually, the 13% yes, I think the 13% you're referring to were the decline in shipments? Correct. Yes.
And we actually we think that, that fall off or that occurred from mid October, probably the October through November when we had all the conversation and the disruption in the marketplace discussion about lead free hydrants. We actually saw our bookings pick up later in December. We think we saw some of that shipment growth shipment impact in the third in the our second quarter here because as if you recall, we said that on a year over year domestically, our valve shipments grew 1%, but hydrants grew 5%. So we think that so often valves and hydrants move in tandem. We think that the higher growth rate in shipments in hydrants this quarter was probably we were shipping some of those orders that were delayed and we didn't receive to the end of the first quarter of our first quarter.
But we do think that also we still didn't see all of that flow through yet because of weather. So I think that in the third quarter, we do expect to see from a shipment standpoint, we'll still be we still expect that we will be shipping probably some of those orders that came in, in late December that were delayed during the uncertainty of the no lead hydrant.
Speaker 0
That's I very
Speaker 2
hope I got your question there. I don't think it played too much in the increase that we saw in orders because we did we do believe we saw most of those orders come in at the end of our first quarter. But we do think we will still have some of those in our backlog to ship in the third quarter.
Speaker 4
Yes. No, that does help. Thank you very much.
Speaker 0
You're welcome. Thanks. Next we have Sean Wondrack. Your line is open and please state your company name.
Speaker 4
Hey, good morning. This is Sean Wondrack on for Phil Volpicelli at Deutsche Bank. How are you?
Speaker 2
Fine, Sean. Good morning.
Speaker 4
Could you just remind me please the size of your price increases on which individual products? And how much of that price increase was able to stick, please?
Speaker 2
Yes. Increased our valves 7% the there in early February and our hydrants 5%. But the difference there was in December, we had a price increase on hydrants as we switched to the unleaded components. So on valves up 7%, hydrants probably about the eight nine percent range. Typically, we expect to see 50% to 60% of that pricing stick.
Speaker 4
Okay. And when you said so you said plus 5% on hydrants in early February, but then you said 8% to 9%. So is that the compounded price increase considering December and February?
Speaker 2
Yes. That includes, as I said, we had a price increase on hydrants in December when the industry when there was when we shift from leaded components in the hydrant to unleaded components. So that was a couple of percentage points. So then we, in February, had another price increase. So the combination of that price increase in December and the February price increase puts it in that 8% to 9% range.
Speaker 4
Okay, great. That's all for me. Thank you very much.
Speaker 2
Thank you.
Speaker 0
And at this I have no further questions.
Speaker 2
Well, again, thank you all for your interest in Mueller Water Products.