Mueller Water Products - Earnings Call - Q2 2015
April 29, 2015
Transcript
Speaker 0
Welcome and thank you all for standing by. At this time, all participants are in listen only mode. At the end of the presentation, we will conduct a question and answer session. This call is being recorded. If you have any objections, you may disconnect at this point.
Now I'd like to hand the call over to Ms. Marti Zakas. Thank you. Ma'am, you may begin.
Speaker 1
Thank you, Ray, and good morning, everyone. Welcome to Mueller Water Products' twenty fifteen second quarter conference call. We issued our press release reporting results of operations for the quarter ended March 3135 yesterday afternoon. A copy of it is available on our website muellerwaterproducts.com. Mueller Water Products had 160,800,000.0 shares of common stock outstanding at March 3135.
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 could cause actual results to differ materially from those included in forward looking statements as well as specific examples of forward looking statements. Please review slides two and three in their entirety. During this call, all references to a specific year or quarter unless specified otherwise refer to our fiscal year.
Our fiscal year ends on September 30. A replay of this morning's call will be available for thirty days after the call at 9042. 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. Thanks, Marni.
Speaker 2
Thank you for joining us today as we discuss our results for the twenty fifteen second quarter. I'll begin with a brief overview of the quarter followed by Evan's detailed financial report. I will then provide additional comments on the quarter's results and developments in our end markets as well as our outlook for the twenty fifteen third quarter and the full year. Our overall results for the second quarter came in about as we expected. We experienced strong net sales growth in our primary end markets, but were faced with harsh winter weather related expenses, a continuing decline in the oil and gas market and unfavorable Canadian currency exchange rates.
Sales to our primary water markets continue to grow as Mueller Company's domestic net sales of valves, hydrants and brass products increased approximately 12% this quarter compared with the prior year. We saw growth in demand for our products in both the residential construction and municipal markets. Anvil's net sales declined 5.9% in the second quarter compared with the prior year. We experienced growth of about 6% from sales into the nonresidential construction market. However, this growth was more than offset by an approximately 40% decline in sales to the oil and gas market.
With that, I'll turn the call over to Evan.
Speaker 3
Thanks, Greg, and good morning, everyone. I'll first review our second quarter's consolidated financial results and then discuss segment performance. Net sales for the twenty fifteen second quarter of $290,300,000 increased 2,200,000.0 about 1% from the twenty fourteen second quarter's net sales of $288,100,000 due primarily to higher domestic shipments of valves, hydrants and brass products, partially offset by reduced volumes of products sold to the oil and gas market and metering products. We were also unfavorably impacted by Canadian currency exchange rates. Gross profit and gross margin were both essentially flat.
Gross profit for the twenty fifteen second quarter was $82,100,000 compared with $82,200,000 for the twenty fourteen second quarter. Gross margin for the twenty fifteen second quarter was 28.3% compared with 28.5% in the twenty fourteen second quarter. Adjusted operating income for the twenty fifteen second quarter decreased 6.1% to $26,300,000 compared with $28,000,000 for the twenty fourteen second quarter. Gross profit and adjusted operating income benefited from higher domestic shipment volumes of valves, hydrants and brass products, higher shipments of Anvil product into the non residential construction market and higher sales pricing at Mueller Company and Anvil. This year's adjusted operating income was negatively impacted by Anvil's lower sales into the oil and gas market, approximately $1,000,000 of higher costs associated with the unplanned plant closures at Mueller Company due to weather and a $1,200,000 unfavorable impact associated with Canadian currency exchange rates.
Selling, general and administrative expenses were higher year over year, which included investments in our leak detection and pipe condition assessment businesses. Selling, general and administrative expenses were $55,800,000 in twenty fifteen second quarter or 19.2% of net sales. Adjusted operating margin decreased 60 basis points to 9.1% for the twenty fifteen second quarter. Adjusted EBITDA for the twenty fifteen second quarter decreased to $40,700,000 compared with $41,800,000 for the twenty fourteen second quarter. Trailing twelve months adjusted EBITDA was $184,600,000 We also benefited from lower interest expense this quarter due to lower interest rates and lower amounts of debt outstanding following the refinancing that we completed in the twenty fifteen first quarter.
Interest expense net for the twenty fifteen second quarter declined $6,400,000 to $6,100,000 compared with $12,500,000 for the twenty fourteen second quarter. Income tax expense for the twenty fifteen second quarter of $7,200,000 on income before income taxes of $19,500,000 resulted in an effective income tax rate of 36.9%. This compares to an effective income tax rate of 24.2% for the twenty fourteen second quarter. Net income per diluted share for the twenty fifteen second quarter increased to $08 compared with $06 in the prior year and adjusted net income per diluted share increased to $08 from $07 There was a weighted average of 163,300,000.0 shares of our common stock outstanding for the twenty fifteen second quarter compared with 161,900,000.0 shares outstanding for the twenty fourteen second quarter. I'll now move on to segment performance and begin with Mueller Company.
Net sales for the twenty fifteen second quarter increased 4.1% to $199,200,000 compared with $191,300,000 for the twenty fourteen second quarter. Domestic net sales of valves, hydrants and brass products increased about 12% due to growth in demand from both the residential construction and municipal markets. These higher sales were partially offset primarily by lower shipment volumes of metering products. Net sales were also negatively impacted by $1,700,000 due to unfavorable Canadian currency exchange rates. Adjusted operating income of $27,800,000 for the twenty fifteen second quarter was flat with the twenty fourteen second quarter.
In our base Mueller Company business, which excludes metering, leak detection and pipe condition assessment technologies, adjusted operating income improved $3,700,000 largely due to higher shipment volumes of domestic valves, hydrants and brass products. This improvement was offset by lower shipment volumes of metering products, harsh winter weather related expenses of approximately $1,000,000 the unfavorable impact of Canadian currency exchange rate of about $1,000,000 and investment in technology and business development in our leak detection and pipe condition assessment business. The harsh weather related issues resulted in two plants experiencing a total of six shutdown days. Although we were able to meet most of our deliveries, we incurred higher costs due to overtime and the unplanned shutdown. Adjusted operating margin of 14% for the twenty fifteen second quarter declined slightly from 14.5% for the twenty fourteen second quarter.
Adjusted EBITDA for the twenty fifteen second quarter increased to 38,500,000 compared with $37,900,000 for the twenty fourteen second quarter. Adjusted EBITDA margin for the quarter decreased 50 basis points to 19.3%. I'll now turn to Animal. Net sales for the twenty fifteen second quarter decreased 5.9 to $91,100,000 compared with $96,800,000 for the twenty fourteen second quarter. During the quarter, we saw mixed results from Amble.
We believe we saw growth of approximately 6% into the non residential construction market this quarter. However, this growth was more than offset by an approximately 40% decline in net sales to the oil and gas market. As a reminder, in fiscal twenty fourteen, net sales to Amble's addressed oil and gas market were about 20% of Amble's net sales and less than 7% of Mule Water Products' consolidated net sales. Adjusted operating income for the twenty fifteen second quarter was $7,400,000 compared with $8,600,000 for the twenty fourteen second quarter. Adjusted operating margin decreased to 8.1% from 8.9% for the twenty fourteen second quarter.
The decrease in adjusted operating income and adjusted operating margin resulted from this quarter's product mix as previously discussed. Adjusted EBITDA for the twenty fifteen second quarter was $11,000,000 compared with $12,200,000 for the twenty fourteen second quarter. Adjusted EBITDA margin for the twenty fifteen second quarter was 12.1% compared with 12.6% for the twenty fourteen second quarter. Corporate expenses for the twenty fifteen second quarter were $8,900,000 compared with $8,400,000 for the twenty fourteen second quarter. Turning now to a discussion of our liquidity.
Free cash flow, which is cash flows from operating activities less capital expenditures was negative $21,600,000 for the twenty fifteen second quarter compared to positive $600,000 for the twenty fourteen second quarter. The year over year change was driven primarily by an increase in inventory due mostly to an effort to spread production more evenly between periods in anticipation of the upcoming construction season at Mueller Company. And in the twenty fifteen second quarter, net sales were weighted more towards the end of the quarter, which impacted the timing of receipts. We continue to focus on working capital management and efficiency by lowering the level of working capital needed for sales. The quarter ending average of accounts receivable, inventories and accounts payable compared with net sales over the past four quarters declined by about 70 basis points compared with a year ago.
At March 3135, total debt was comprised of a $496,400,000 senior secured term loan due 2021, dollars 15,000,000 outstanding under our ABL agreement and 2,100,000 of other. The term loan accrued interest at a floating rate equal to LIBOR subject to a floor of 75 basis points plus three twenty five basis points. Points. In April, we entered into a forward starting interest rate swap arrangement to effectively fix the interest rate on $150,000,000 of term loan borrowings at about 5.6% beginning September 3036 and ending on 09/30/2021. Net debt leverage was 2.6 times at March 3135.
Using March 3135 data, we had $172,800,000 of excess availability under the ABL agreement. I'll now turn the call back to Greg.
Speaker 2
Thanks, Evan. During the second quarter, we were very pleased and encouraged by the pull forward of orders that we saw at Mueller Company in relation to the valve and hydrant price increase we implemented in mid February. We estimate that orders our distributors placed ahead of the effective price increase date were up 18% year over year and up 11% for the quarter. This activity supports our belief that our distributors expect to see strong growth in the second half of this year. As we mentioned earlier, even though Mueller Company's plants were closed for a total of six days in the quarter due to weather, we were able to maintain our delivery promises.
Also during the quarter, three major cities elected to install our fixed leak detection technology as part of a program of the National Institute of Standards and Technology or NIST that is designed to promote smart cities. Water loss and energy are key focus areas of this program. Participants in this program include AT and T, IBM among others. Echologics fixed leak detection technology was selected to be utilized for this program. Two of these cities, including Las Vegas, have begun piloting our fixed leak detection technology and OneCity is scheduled to begin its pilot shortly.
We are pleased to be participating in the Smart Cities program and to start demonstrating more broadly the effectiveness of our fixed leak detection technology. We continue to see long term potential with leak detection and pipe condition assessment, especially outside of The United States. As mentioned before, we are investing in technology and business development to better pursue these opportunities. Also during the quarter, as we mentioned earlier, we continue to see growth in sales of Anvil's products that go into the nonresidential construction market. It looks as if the rebound in this market is taking hold.
We saw further deterioration of Anvil's sales into the oil and gas market. We estimate sales of these products were down approximately 40% in the second quarter. During our last earnings call, we noted that we experienced a 25% reduction in demand for these products from mid December to the January. Rig counts are now down 50 year over year, which indicates we may see further deterioration in sales into these markets. For Mueller Systems, we continue to have outstanding quotations on several large AMI projects and we expect to win some of these projects.
However, these utilities have extended their timeline for awarding these projects. I will now provide additional color on our second quarter performance. Net sales at MuellerCo's base business, which excludes meter leak detection and pipe condition assessment technologies, were up about 7%. This increase was driven in large part by domestic shipment of valves, hydrants and brass products, which increased 12%. We also saw strong growth in sales of our water treatment valves.
Additionally, we saw growth in valve and hydrant shipments in Canada, although we were affected by unfavorable Canadian currency exchange rates. For our metering products and systems, as expected, year over year net sales declined in the second quarter, largely due to the tough comparison we had relative to the timing of a large project last year. Mueller Company's adjusted operating income was flat year over year and adjusted operating margin declined 50 basis points. However, Mueller Company's base business, which again excludes metering, leak detection and pipe condition assessment technologies showed a 13.5% improvement in adjusted operating income and adjusted operating margin improved 100 basis points to 18.1%. The strong growth in the base business was driven by domestic shipments of valves, hydrants and brass products, although partially offset by the impact of our unplanned plant shutdowns and foreign currency exchange rates as Evan described.
The outlook for our macro drivers supports our expectation that we will continue to see growth in our key water end markets. Forecast for growth in housing starts in calendar twenty fifteen now average about 14%. This growth rate is slightly lower than what was forecast several months ago, but still much higher than the 8.7% growth in calendar twenty fourteen. It is also important to note improved housing construction also helps bolster the health of municipalities and water systems as local governments benefit from increased property taxes as well as connection fees and other ancillary fees associated with residential and non residential construction. State and local seasonally adjusted tax receipts continue to increase and the CPI for water and sewage rates increased 3.9% over the twelve months ended March 2015.
Turning now to our outlook for the twenty fifteen third quarter. I'll start with Mueller Company. For our base business, which excludes metering, leak detection and pipe condition assessment technologies, we expect net sales percentage growth to be comparable to what we achieved in the second quarter. This growth is expected to be driven primarily by domestic demand for our valves, hydrants and brass products from both the residential construction and municipal markets. We expect Mueller Systems net sales to be roughly flat year over year.
In total, we expect Mueller Company's net sales percentage growth to be in the mid single digits with sales of valves, hydrants and brass products growing at a higher rate. When looking at adjusted operating income for Mueller Company in total, we expect adjusted operating income to increase driven by higher sales of valves, hydrants and brass products. We expect this increase to be offset in part by additional investments in technology and business development activity related to leak detection and pipe condition assessment and continued adverse impacts of unfavorable Canadian currency exchange rates. In total, we expect adjusted operating margin could be flat year over year. Moving to Anvil. While we expect
Anvil sales into the non residential construction market to continue to grow, we expect Anvil's total net sales to decline year over year as previously discussed. We expect Anvil's adjusted operating income to be down in the third quarter year over year due in part to negative impact from product mix. Anvil's oil and gas products are domestically manufactured, but we tend to realize higher margin from sales of those products. Although we expect adjusted operating income to be down in the third quarter, margins should be up slightly. For Mueller Water Products as a whole in the third quarter, we expect net sales will be up only slightly due to declines at Anvil.
Adjusted operating income and adjusted operating margin should increase year over year due to improved performance at Mueller Company. Additionally, we will also benefit from lower interest expense year over year. I will now provide an update on our outlook for 2015. We expect that our consolidated performance for the full year will be comparable to what we outlined on our last earnings call. However, based on developments since our last earnings call, we think we may see a further drop off in net sales and operating income at Anvil as well as a possible drop at Mueller Systems, although we believe that any of these declines will be offset by improved performance at our Mueller based business.
At our Mueller based business, we continue to expect year over year net sales to increase in a range comparable to the 7.3% growth we saw in 2014. However, we expect domestic net sales of valves, hydrants and brass products to grow at a higher rate, driven by demand from the residential construction and municipal markets. However, total net sales growth at Mueller Company could be slightly less than the growth we saw last year due to potential delays in the awarding of project orders for Mueller Systems. We expect Mueller Company's adjusted operating income and adjusted operating margin to increase in 2015 compared with 2014 as we expect to benefit from a favorable mix of our higher margin valve hydrants and brass products. We expect Anvil's net sales to be lower in 2015 on a year over year basis.
We also expect adjusted operating income and adjusted operating margin will be lower in 2015 excluding the non reoccurring $2,500,000 gain we recorded in the 2014. As we look at the full year, we expect that the growth in non residential construction will not be sufficient to offset the decline in the oil and gas market. For Mueller Water Products as a whole in 2015, we expect net sales growth in the low single digits with stronger growth at Mueller Company offset by a decline at Anvil. On a year over year basis, we expect higher growth in adjusted operating income and adjusted operating margin compared to 2014 due to a more favorable product mix. So again, in total, we expect full year profit performance to be consistent with the outlook we presented last quarter.
We believe any potential deterioration at Anvil and Mueller Systems will be offset by a stronger mix at Mueller Company. I will now highlight other twenty fifteen key variables. Corporate expenses are expected to be $34,000,000 to $36,000,000 Depreciation and amortization are expected to be 58,000,000 to $60,000,000 Interest expense is expected to be about 27,000,000 to $28,000,000 Our adjusted effective income tax rate is expected to be 37% to 39%. Capital expenditures are expected to be $36,000,000 to $38,000,000 For 2015, we expect free cash flow to be driven primarily by improved operating results and lower interest payments, offset by cash income tax payments as we have substantially exhausted our federal NOLs. We expect 2015 income tax payments to approximate our reported income tax expense for the year.
We also expect to make only minimal cash contributions to our pension plans in 2015. Our expectation is for free cash flow to exceed adjusted net income. Subsequent to the end of the quarter, we announced an increase in our quarterly dividend. We also announced yesterday that our Board of Directors has authorized a share repurchase program for up to 50,000,000 of our outstanding common stock. The stock repurchase program is part of a disciplined capital allocation strategy that seeks to enhance the value delivered to our shareholders by investing in both organic and external growth opportunities as well as returning cash to stockholders through dividends and with this program repurchasing outstanding shares.
This program reflects confidence in our strong financial position, long term business strategy and growth prospects. With that operator, I will open up this call for questions.
Speaker 0
Yes, sir. Thank you. We will now begin the question and answer Our first question is coming from Mr. Mike Wood. Sir, your line is open.
Speaker 4
Hi. Good job managing to several headwinds this quarter. First, just would like your thoughts in terms of how Mueller's business might be impacted by the drought in California and other states. I understand there's a bill in the Senate there that requires the municipalities to conduct annual water loss audits and reduce leak. So wondering if you're seeing any of that opportunity come yet?
Speaker 2
Mike, yes, good morning. I think that right now we think that California could affect us in a couple of ways. We think in the long term probably more positive than negative. In the very short term, we're seeing more and more talk about it will be very difficult for builders to get permits to build new housing so as not to deplete the water supply any further. But I think as we think longer term, we do think there's probably more opportunity.
Interestingly, in the last quarter, we've had two major cities in California sign contracts to do pilots for our fixed leak detection. I think that this certainly ties in to they're possibly getting prepared to be able to perform these water audits and to be able to report. I think that also part of that is obviously to report on what they're losing, what potentially are potentially losing. So I think that when we look at where our technology is evolving on the leak detection both from a fixed standpoint as well as pipeline condition assessment and the other field work that we do, we think that there's a we think that this represents a real opportunity. And as I said in the last ninety days, we had two major cities sign contracts with pilot technologies and we have appointments from several other cities in California that want to come in and talk specifically about our leak detection.
So when you look at the over the $7,000,000,000 that was approved in November, I think by two to vote of two to one by the voters in California to have money available to spend to upgrade water infrastructure. We think that our suite of products that we have in the technology that this will be a benefit for us. Probably not something that we would be able to point to of any substantially in 2015, because as I said, think that the technology that may be most applicable to the situation out there, we're going into the pilot phase. But it's very encouraging that we now have these major cities wanting to do these pilots.
Speaker 4
Great. And then have you seen yet or entered into that rush of projects coming to bid on the advanced metering side? Any early indications of success particularly on the large city projects there?
Speaker 2
As we said in our prepared comments, when we go back about nine months ago, we had a I'd say a nice uptick in the number of large projects for AMI that we quoted. Some of those including fixed leak detection and of course that's where we've been spending a fair amount of our R and D money. Unfortunately, none of those have been decided. And quite frankly, we're past the point where four or five months ago we thought they would have made a decision. So from our perspective, we haven't lost any of those.
A little disappointed that the process is taking this as long as it is. But we still are optimistic that we will win some of those, but nothing specific that we can report as of now.
Speaker 4
Thanks. And final question for me. The buyback authorization any indication how quickly you might use that? And is this part of an ongoing capital return strategy even after this authorization is complete?
Speaker 2
Mike, I think it is part of our ongoing I think an ongoing program on I think certainly when we look at initially, we think the repurchase of stock could be used to offset any dilution from our stock compensation program. At this juncture, we don't anticipate implementing a formulaic repurchasing plan. I think we will approach it on a quarter by quarter basis as we consider all capital allocation options. But given I think the confidence that we feel with our balance sheet, given the confidence that we feel relative where the direction and demand is going for our end markets, our Board authorized us we said to look at repurchasing stock as again an option of our for our capital allocation how we allocate capital. And we'll disclose obviously disclose any activity in this program in our quarterly reports to the SEC.
Speaker 4
Great. Thank you.
Speaker 2
Thanks Mike.
Speaker 0
Thank you. Next question is coming from Mr. Noah Kaye. Sir, your line is open.
Speaker 5
Thanks so much. Nice job on the quarter. If we could first touch on the pull forward that you mentioned in the base business for valves and hydrants. Is your expectation now it probably isn't implied by the guidance, but is your expectation now that kind of any drag after the price increase as distributors have stocked up in advance. Has that sort of been worked through now?
Do we expect to see for this next quarter and for the rest of the year kind of a normalized growth rate? Maybe you could just touch Yes. On that a
Speaker 2
Yes. No. In fact, when we look at our distributor inventories at the as we exited this quarter for our Mueller business, inventories were up at our distributors year over year. They typically will hold between thirty and forty five days and we think a number of them were approaching sixty days. I think a combination of that some of our distributors obviously in the Northeast I think saw delays in construction, due to the weather.
But I do think that we believe it is indicative of as we said in our prepared remarks that our distributors are pretty bullish about the activity they expect to see in the next couple of quarters. So we would expect in the April time period that some of this inventory would to move out before we start seeing replacement orders. Our orders in April, when we look at valves and hydrants actually are up slightly year over year. So we think that that's positive especially since they went into the quarter with additional with higher inventory levels. We'll have to see how it plays out.
It could have an impact depending on how quickly they move it. But right now, we think it will be it will smooth out during the quarter and we should not see a disruption to our orders and shipments.
Speaker 5
Okay, great. The next question. In the past quarters you've commented on where capacity utilization is at in kind of your core product lines valves and hydrants. Can you give us an update where that was this quarter?
Speaker 2
In the second quarter in our Mueller business, we were about 70%. As though probably slightly under 65%. There may have been even a slight drop in our capacity utilization because of the slowdown in our plants that the manufactured products go into the oil and gas market. So when we look on a year over year basis, we used more of our capacity in the second quarter of this year at Mueller than we did last year. And as I said about 70% and we think slightly under 65% at Anvil.
Speaker 5
Does that as you look in relation to your forecast for annual for the rest of the year, does that continue to be the case? I mean, obviously, rig counts are where they are. Do you kind of think you maintain that utilization level throughout the rest of the year? Or do you see that ticking up?
Speaker 2
Yeah. As I look at it, I think that there is a chance that in aggregate our capacity utilization may go up at Anvil because we do expect continue to see growth in demand from the non res construction. And but I would say right now looking at it, it probably will be around that capacity utilization rate for the rest of the year. Could be up slightly, but pretty difficult to tell right now.
Speaker 5
Okay. And finally, think I ask this every other quarter or so, but where are you seeing opportunities right now from kind of a technology addition or a lateral addition on the water technology front? What areas are really getting your focus right now?
Speaker 2
Yeah. I would say that we're getting as Mike asked on the in the initial in the very first question, we're seeing more and more cities we're having discussions with more and more cities and seeing a greater interest in piloting our fixed leak detection technology. Most of this right now has been driven on the transmission line side. But we're also moving into distribution. Our first big order from American Water in West Virginia on the distribution side, we're just about finished installing that.
And so I think when we look at the California especially, we've seen much more interest, but across the country too. And we're also focused outside increased our focus outside The U. S. Part of the higher SG and A costs that Evan referenced are due to the some of the sales resources and business development resources we've added outside The United States. We're particularly very bullish about the opportunities that we will have that we could have in The U.
K. As we've said on previous calls, The U. K. Seems to be much further along in monitoring leak detection and in fact applying penalties to water systems whose leakage rates start to increase and they set certain targets having more and more discussion in France. And in fact, we just received some initial results from a nice project that we were awarded in Malaysia.
And the good news for us is that we started finding some leaks that they were unaware of. And that's good news for them, though I'm sure they're disappointed they had those leaks. So I would say we're seeing more and more interested more in fixed leak detection both domestically. And I would say that as compared to six months ago, we're having more discussions and getting more interest internationally. Internationally.
Speaker 5
Okay. Thanks so much. Nice job in the quarter.
Speaker 2
Thank you.
Speaker 0
Thank you. Next we have Mr. Ryan Connors. Sir, you may proceed.
Speaker 6
Great. Thank you for taking my question. First, Greg, just wanted to ask you about kind of the California situation. You mentioned the longer term aspects of this and how it will obviously spur some investment and opportunity. But in the near term, is this you talked last quarter about some headwinds in the Southwest on the residential side.
And I wonder whether that's in the short term this isn't as much of a headwind as a tailwind given that the negative impact it could have on new home construction. There's been some talk about lack of water availability and tough problems getting zoning for new water resources for new development things like that. So can you talk about kind of the shorter term ramifications of that situation?
Speaker 2
Sure. The best I can Ryan. And just for last quarter in perspective, we still saw growth in our West Region last year. It was though the growth was less than what we had forecasted. Actually in this quarter, we saw our greatest growth for our valves, hydrants and brass shipment dollars of any of our regions in The U.
S. And was up 20% year over year. So that was back to more of a rate that we expected to see last quarter, but we came in I think around 5%, 6%. So it is I think that as I mentioned earlier, our hypothesis is in the very short term, it could be a bit of a we could see a bit of a slowdown in the growth rate we have been seeing in the West, if in fact we start seeing a cutback in housing developments due to water availability. We don't have enough visibility to say, hey, in the next six months how much of an impact this may be.
I'm not familiar enough to know if land that's already under development where they've gotten the permitting and haven't put our equipment in yet, if that's going through and it could be an impact maybe three or four quarters down the road. But I that there is that possibility in California that we could see in the very short term a little bit of a cutback in land development for residential development. So but I think that we're still in a wait and see mode. I know that the builders are countering that saying that the homes that they're building today are so much more water efficient and it would be a mistake not to add. That may be a good argument.
We'll see how successful it is. But I think in the short term and probably not in the next six months, I don't think, but it could be a bit of a negative if the builders don't get permits to put in new housing developments.
Speaker 6
Great. Those are some good points. Over on the Anvil side, this oil and gas issue, I just wonder if you could expand on it just because I'm trying to understand what's happened in the last few months. I know you talked about a 25% decline rate in orders on the last conference call. And if I recall correctly, part of what you were saying was that some of that was due to inventory destocking and so that it might have actually overstated the decline in end user demand.
So we were a little taken aback by the sticker shock on the 40% decline. So I guess if you could just give us any color you can on what happened? How much of that is destocking versus end user demand? And at what point we might see stabilization there?
Speaker 2
Yes. Just to go back what we said on our call last earnings call, we talked about the 25% decline specifically. We said that from mid December to the January, we saw a 25% decline in our shipments from Anvil into oil and gas. And we said if that continues, here's the kind of impact it would have on us. And I'm sorry if that was taken as a forecast because at that point we sure weren't in a position and we're not in a position now to forecast what's going to happen in the oil and gas business in general.
And I'm not sure there are many are that are in a position to forecast what's going to happen in oil and gas. But what happened is if we look at the last quarter rig counts dropped. They're down now about 50% to 55% on a year over year basis. We correlate our demand for our products correlate reasonably well with rig counts. And because when they're putting in the new wells and start production, that's when demand for our products.
So that's what drives demand for our products. So in fact, the 40% we saw for the quarter, if we look at our March orders and our March shipments and month to date in April, we're down about that 50% range. So we are correlating with the rig counts.
Speaker 6
Okay. Great. That's helpful. And then just one last one for me if I could. On the leak detection business taking that global, I think it's a it makes a lot of sense and it's strategically compelling.
Can you give us any more kind of granularity on that program and that investment program? What exactly those investments entail? Is it sales, distribution? What exactly those investments are? And what specific regions you're targeting?
And maybe the magnitude of the dollar spend on those things?
Speaker 2
Yes. Yes. When you look at that, we are targeting and at a point where if we look at both in North America, Europe and Asia, we're looking to double the size of our sales force or business development people. And to put that in perspective, we're looking to increase from 12 full time dedicated people to 25. A lot of that spending has we've already hired a number of those people and we're now seeing the expense of those people hitting us on a year basis.
Over But we think that we are locating them in markets that have a we think a real need and a positive disposition to using the latest leak detection and The U. K. Was one that I referenced a little earlier. On technology development, we look like we're spending probably in the range of 1,000,000 point dollars to possibly $2,000,000 more this year. Most of this is focused on our fixed leak detection technology for both domestic and international markets.
And a lot of that is on the in addition to the I'd say the core technology on the acoustical technology, but more on probably more on how we communicate that data and extend battery life and be able to operate on frequencies around the world. So it's really on the adding to the sales people will help us across adding our number of sales people will help us across the board from our field pipe leak detection that we do in the field, from our field pipe condition assessment and also promoting our fixed leak detection. And more on the development side, R and D, it's more on further developing our fixed leak detection, taking what we're learning from these initial pilots and incorporating what we learned to that into the technology. And as we've said that we think that in total that will impact us by about $5,000,000 year over year.
Speaker 6
Okay, great. Well, that's exciting stuff. We look forward to hearing more about it in the future. Thanks for your time.
Speaker 1
Thanks, Brian.
Speaker 0
Thank you. Our next question is from David Rose. Your line is open.
Speaker 4
Good morning. Thank you for taking my call. A couple of questions on one is just housekeeping. What was the net earnings drag from the Anvil LNG decline? Would you ballpark it?
Speaker 2
Kevin, go ahead. Yes. If we
Speaker 3
look at our Anvil business on a year over year basis,
Speaker 2
our
Speaker 3
operating income declined by about $1,200,000 and that was about $2,400,000 down from volume. We saw a 6% increase in non residential construction, which is roughly about 80% of Anvil revenues. And then for the other 20%, which is oil and gas related, we saw a decline of about 40%. And I will say that the margin difference between our non res and oil and gas business is about 800 basis points. So for the non residential business, we manufacture domestically as well as source
But our oil and gas business is all domestically manufactured product. And so we do experience a higher margin of about 800 basis points.
Speaker 4
Okay. So I'll back into the number then. But that's helpful. And then how many production days would you estimate that you lost last year due to weather?
Speaker 2
Actually we did not lose any production days last year. Our production that we lost this year was in the Southeast, actually five in Chattanooga, Tennessee, one in Albertville, Alabama. So we thought that was a pretty valid year over year comparison. We didn't make an attempt to try to determine how much revenue we may have lost year over year because certainly we know that there was a revenue impact last year also. And we think that this year that the weather impact from a revenue standpoint probably impacted Mueller Systems and Echologics more than it did Mueller because Mueller did make shipments to our distributors.
Speaker 4
Okay. That's helpful. And then lastly, if we can go over to Echologics again, can you maybe just touch upon maybe the significance of the relationship with the Las Vegas Water Center of Excellence?
Speaker 2
Yes. We're very excited about that relationship because as we look around the country Las Vegas seems to be, would say, one of those early technology adopters. They certainly they have tested a number of we think a number of leak detection technologies. They tested technology for some time before they made the commitment that they did. Plus, we think that Las Vegas, the water authority there and the water people are very proactive proactive and looked at as leaders.
So we think that they're that what they do can influence not only other utilities in The United States, but also I think water systems outside The U. S. So it was I think that it's been a longer term relationship. They have been one of the first to test a number of our leak detection technologies both from our fieldwork and the fixed leak detection. And we're pretty excited I think because again I think they're generally viewed as being much more proactive in addressing and applying new technologies into managing their system.
And do
Speaker 4
you have any other plans similar to Las Vegas that we might be seeing soon?
Speaker 2
Yes. As I mentioned as we mentioned in our prepared remarks about the National Institute of Technology Smart City program, Las Vegas was one of those cities that are participating with our leak detection. There were two other major cities that one we have already installed the pilot. The other I think is being installed this week. A lot of those results are expected to be made public in June.
So I think that we'll be able to talk specifically about what those cities are doing. And as I said that we're getting more and more inquiries about the fixed leak detection and hopefully we'll be able to we'll have permission to share with everyone what those cities are doing.
Speaker 4
Okay, great.
Speaker 2
Thank you, Greg. Thank you.
Speaker 0
Our next question is from Kevin Bennett. Sir, your line is open.
Speaker 7
Hey, good morning, everybody.
Speaker 2
Morning, Kevin.
Speaker 7
Greg, I wanted to dig in on metering a little bit if I could. Can you potentially quantify the decline in sales in the second quarter?
Speaker 2
Yes. Kevin, on a year over year basis sales approximately down $4,000,000 somewhere between 3,500,000.0 and $4,000,000 A lot of that was due certainly to as you recall the big project that we had in Mississippi. We were in full shipment mode in the second quarter last year to that project. And as we sit here today, we don't have a project of that size to replace it though we have several quotations outstanding that for projects larger than that one.
Speaker 7
Got you. And then are we still I think last quarter you talked about you were looking for 20% growth in the back half of this year. Is that still a good number? Or is it probably a little bit lower than that?
Speaker 2
Yes. I would say right now that's cloudy. Our 20% when we were on our earnings call three months ago, we knew what projects, what quotations we had outstanding. And at that time based on the best information we had, we had an estimate of what time that those projects would have been awarded. And on some of those or at least one of those large ones, we expected it to be awarded during this last quarter.
It was not. So that's still so that's being stretched somewhat. So our shipments, the second half of this year, to get any real growth in our shipments, we will have to be awarded and to be able to start shipping those. So our outlook right now is for our full year shipments be flat as I said for the full year, though we would still expect to see greater shipments in the second half shipment growth second half year over year, while in the first half of this year we had a decline. The 20% growth I think it depends on our being awarded these and be able to start shipping.
And I think that if we don't get the if these aren't awarded in the next six to eight weeks then I think that we probably won't have time to be able to ship them this year.
Speaker 7
Sure. That makes sense. And then Greg can you remind us about the big contract you have with American Water for meters? When does that come up for renewal? And then how is that business going?
I think last quarter we talked about how they were potentially pushing out some of the meters, but just an update on that? Yes.
Speaker 2
That project that arrangement runs through the end of this calendar year. At this point, we don't know if it will just be extended or how they'll handle that. I think the push out that the push out we saw a I'd say this time last year, we believe based on the order pattern that we've seen now that we're in the construction season so far in April and March that they're back to procuring or releasing what they have historically. So we think that that business should play out as we expect for the rest of the year And sometime between now and we think the end of this calendar year, we'll have a handle on whether or not the current contract or the current arrangement will be extended or how they'll handle that. But through the end of the the arrangement runs through the end of this calendar year.
Speaker 7
Great. Thanks for that. And then last question for me. Moving to Anvil and more specifically the non res piece, you said we had 6% growth in the quarter. I was wondering if you could elaborate on that a bit maybe talking about different verticals or different geographies that you're seeing strengthen?
Or is it a broad based recovery or still spotty?
Speaker 2
I would say that we didn't see anything that would suggest that one region is stronger than the other. But when we look at protection shipments were up over 9% and our mechanical just slightly under 5%. And so that fire protection goes through a number of obviously a number of verticals from warehouses to high rise building. I would say that what we can interpret it is that we probably saw more of the traditional non residential construction and less industrial construction because then we tend to see a bigger spike in our demand for our mechanical product when it's driven by industrial spending versus the I'd say the more traditional non residential. So Kevin, I'm not sure if that gives much help.
Tough for us to say anything regionally, but we saw even a greater increase in our fire protection products than we did on the mechanical side.
Speaker 7
No, that's great. That's all I had. Thank you.
Speaker 2
Thank you. Thank you.
Speaker 0
Thank you. Our next question is coming from Mr. Joe Giordano. Thank you.
Speaker 8
Hi, guys. Thanks for taking the question. Quick on Mueller Co. I mean you talked about the 12 in hydrants and valves and brass products. Can you maybe parse that out price versus volume?
And I was wondering what kind of impacts you're seeing on the cost side lower raw materials?
Speaker 2
Yes. On the volume side, it was and again, it was probably in the volume side of the face in the 8%, 9% and the rest of that would have been pricing. And then when you take
Speaker 3
a look at raw materials, we are seeing lower purchase prices for scrap steel and brass ingot. However, we are seeing our purchase component cost being slightly higher. So overall net for raw material purchased components, which account for about 50% of cost of goods sold for Mueller Company, I would say in looking at it from a full year perspective maybe a slight tailwind, but the significant tailwind from scrap steel and brass ingot a little bit eroded due to purchase component costs being higher.
Speaker 8
Okay. That makes sense. And then just a question in California just to kind of build on what we've been talking about. The decline that you're looking at potentially in new residential construction, how much of that do you think can be offset by increased spending at the municipality level to combat some of this?
Speaker 2
Yeah. And just to put it now, I don't when we look at our next couple of quarters, outlook here, we don't think we'll see a decline. We think that there's certainly more and more discussion that could creep into this six months. But it was I think it's a little more speculation right now. And that's a good question.
When you look at the $7,000,000,000 that was approved by the voters, a lot of that obviously going to maybe some new infrastructure, but a lot of it's repair and replace the existing infrastructure. But looking at it right now that we could say if it plays out this way and builders are unable to get permits to put in new developments, we're pretty confident given the money that's been approved and the need and the focus on reducing leakage rates and upgrading the existing infrastructure that demand for those products could in fact offset it. But right now, would be premature for us to, I'd say, make that specific comment because we're still learning on what's happening out there.
Speaker 8
Great. Thanks a lot guys.
Speaker 2
Thank you.
Speaker 0
Thank you. Next we have Mr. Walter Liptak. Sir, you may proceed.
Speaker 2
Hi. Thank you. I wanted to ask about the anvil business with exposure to oil and gas. And specifically, I think you addressed the volume part of it pretty well. But I think a lot of these companies that they sell to are also trying to get prices down.
I wonder what your view is of price and if there's more deterioration what's the breakout of price versus price? Yeah. Well, I would say we really haven't seen price deterioration yet, but it would be reasonable to expect that we could. Right now, we're not forecasting it. We haven't seen it.
But I think certainly when you get into markets like this those types of you start seeing some negative movement on pricing. Okay. Got it. Thank you. And then just a follow-up on the weather issue during the quarter.
And I'm not 100% sure on how we should be taking the six days where you had unplanned shutdown. Is it it sounds like you maintained deliveries so you didn't lose revenue? Or is there some revenue that pushed out into this quarter? No. I think that that's right.
I think that we really didn't lose revenue, because we wanted to make sure we as I said, we made our delivery promises. The distributors had it in inventory entering the construction season. I think the impact we saw was in the we earned less margin in the second quarter than what we would have expected on that revenue because of the unabsorbed overhead when the plants were shut down as well as the overtime that we had to work in order to make those shipments. So Walt, we don't think that that impact flows into anyway into Q3. We think that we saw the impact in Q2 and it impacted somewhat on our margins.
Okay. Thank you. Thank you.
Speaker 0
Thank you. Next we have Seth Weber. Your line is open.
Speaker 9
Hey, thanks. Good morning and thanks for extending the call.
Speaker 2
Sure. Good Ken.
Speaker 9
Good morning. So I just wanted to go back to the Systems and Ecologics business. The path to profitability, it seems like it was not EBITDA positive this quarter. Is that correct? And are you still expecting that to be EBITDA positive this year?
And then bigger picture, as you kind of make a lot of these investments, can you just talk about how we should think about the trajectory of the margin for that business going forward? It sounds like maybe the cost and the investment is a little bit higher than where I was thinking it would be six or twelve months ago kind of does that change the ramp on the margin that you see ultimately getting to?
Speaker 2
Yes. And I'd have to break it down break down the answer by systems and ecologic. So let me talk about because the investment that we pointed out going into this year is really all on the ecologic side. We did a lot of work on looking at the leak detection market, the global leak detection market about a year ago. And there's a looking at outside sources that they size this market around the world somewhere around $1,000,000,000 $1.1 I think that we have some debate, but if that's the exact number.
But anyhow, it's pretty big given that we had $10,000,000 of sales 10,000,000 to $12,000,000 of sales last year. So we think there's a lot of upside. And as we look at the leak detection market in the leak detection market, we've seen no clear leader. In fact, we've seen no clear technology no technology taking a clear lead. Some are putting meters at two different points and they're measuring what the water loss between those points, but then they have no idea where they're losing that.
So Seth from that trajectory, I'm going to say that right now that we're certainly in the investment phase in 2015. We think when we get in 2016 that we're going to generate more revenue. We think a lot of those investments will be behind us. But I would expect right now that Echologics could be breakeven to slightly positive in 2016. And then it's beyond that that I would expect to see this business really ramping as we make the inroads in international markets as well as domestic markets.
And what gives us confidence that we do see this ramping up is the pilots that for instance on the two major cities in California in the last several weeks that have signed contracts to do the pilot. Mueller Systems, I think we're in a different place. Mueller Systems, we've developed a lot of technology we've invested. So we're not really investing in that much in the R and D and business development on Mueller Systems. I think at Mueller Systems where we are is we need additional volume and we need the additional volume on AMI because that's the higher that's our higher margin product.
And if you look at we said if we look nine months ago, we've seen a nice pickup in our quotation activity and we have and we're bullish about winning several of those large projects. I think that as what we said earlier on our call, ninety days ago, we would have thought we would have been at least awarded one of those and start shipping those in 2015. I think right now that that's a cloudy and we may not. For us to be profitable with the operating income line for Mueller Systems this year, we will need to win at least one of those. We'll know in the next six to eight weeks we whether or have a chance of doing that.
I think on Mueller Systems again when we look at beyond 2015 that we expect these projects to be awarded and we'll start seeing some pretty significant upturn in the performance of that business. I think that we're still as we've said I think the last couple of years that we think in a three or five years that business can be anywhere between 130,000,000 and $160,000,000 in revenue. We currently last year we were about $95,000,000 of revenue. And when we get to that 130,000,000 to 160,000,000 we think that we can be in that 20% EBITDA margins for that business. So that was a long winded answer.
I think that this year for us to be EBITDA positive on these combined businesses will be based on what happens we think in the next six months on these major projects relative when we look out in the next several years. We think that both of them should provide some very nice growth for us.
Speaker 9
Okay. That was actually very helpful. Thank you. And then just going back to the three pilot cities that you have going, are those single sourced? And can you just what's the expectation on timing?
I'm just trying to get some more color. I think you mentioned maybe June there would be some feedback to you. Is the expectation then it goes out to another RFP? Or is that basically just revert back to you to get a contract going forward?
Speaker 2
And let me go back. We have more than three cities right now doing pilots. What we referred to in our prepared remarks is this is a program that's being spearheaded by the National Institute of Standards and Technologies out of Washington D. C. IBM, AT and T, I think GE GE Lighting was selected to participate on the energy side.
We were selected to participate on the water side, water loss side. So this is a very specific pilot where a number of cities are participating. All of them are participating on leak detection. Some are doing it on the lighting. Some are doing it on leak detection.
And then there will be a report out by the National Institute by NIST on what they found on smart cities. And so that is I will say that's one group of pilots. I would suspect since those pilots at that time will have only been going on for about three or four months with e cities that they'll continue to run those pilots for a few more months before they make a decision on what they want to on how they want to move forward. So I don't want any confusion. The one we referenced on those three cities was part of a much bigger program, a smart city program and our technology was selected to be part of that.
And we're running other as I said, we're running other pilots. So I can put it in perspective that for instance at American Water, we received our first big order for distribution leak detection in the October 2014, we have been running the pilot there for six, seven months. So I would say that when I look at when we look at our pilots that we have installed that it will probably those pilots will run through the end of our fiscal year. And then I would suspect that we would start seeing that some cities it will vary. Some cities may go out for an RFP.
Some cities will say, okay, here's what I want to monitor. What's the cost to do that? So, right now I'd say it's a little more speculative. But what I can say is that the feedback that we've received from our pilots is those that are using them that are participating are pretty impressed with the technology and we're finding leaks that they were unaware of. So but it's going to be a, I would say as I said earlier in my answer that I don't think this is a big growth for us that we're going to see in 2016.
But we sure think we're putting in the foundation. We'll see growth in 2016 and would expect we'd start seeing much greater growth in 2017 and beyond.
Speaker 9
Okay. That's terrific. Thank you very much.
Speaker 2
Thanks, Seth.
Speaker 0
Thank you. At this time, there are no further questions.
Speaker 2
Well, that concludes our today's call. Thank you for your interest in Mueller Water Products and for joining us this morning.
Speaker 0
Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.