Mueller Water Products - Earnings Call - Q2 2016
April 27, 2016
Transcript
Speaker 0
Welcome and thank you all for standing by. And at this time, all participants are in a listen only mode. Today's call is being recorded. And if you have any objections, you may disconnect at this point. Now, I will turn the meeting over to your host, Ms.
Marty Zekaus. Ma'am, you may now begin.
Speaker 1
Good morning, everyone. Welcome to Mueller Water Products twenty sixteen second quarter conference call. We issued our press release reporting results of operations for the quarter ended March 3136, yesterday afternoon. A copy of it is available on our website at muellerwaterproducts.com. 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 measures are included in the supplemental information within our press release and on our website.
Slide three addresses forward looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward looking statements 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 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.
Speaker 2
Thanks, Marty. Thanks for joining us today as we discuss our results for the twenty sixteen second quarter. I'll begin with a brief overview, followed by Evan's more detailed financial report. I will then provide additional color on the quarter's results and developments in our end markets as well as our outlook for the twenty sixteen third quarter and full year. We were very pleased with the second quarter's results, which overall came in about as expected.
Our adjusted operating income increased 14.8% despite slightly lower net sales. Adjusted net income per share for the quarter was $0.10 versus $08 a year ago. We believe Mueller Company's end markets remain solid as demand for Mueller Company's core products continued to grow in the second quarter. Increased shipment volumes, coupled with better operating efficiencies and lower costs, led to a 9% increase in Mueller Company's adjusted operating income and 110 basis points improvement in adjusted operating margin. Mueller Company's adjusted EBITDA margin in the second quarter was 24.1%, and on a trailing twelve month basis, it was 26.6%.
Anvil's second quarter net sales, excluding sales to the oil and gas market, increased 3.3% year over year. Additionally, Anvil's adjusted operating income increased 14.9% despite overall net sales declining $4,700,000 to $86,400,000 Mueller Technologies remains focused on growing sales of its higher margin AMI and leak detection technologies and on improving operating performance over the course of the year. Backlog and projects awarded at both Mueller Systems and Echologics continue to be up substantially on a year over year basis at the end of the quarter. Mueller Technologies benefited from this transition to higher margin products with adjusted operating loss increasing 300,000 despite a $6,900,000 decrease in net sales. For Mueller Water Products, we continue to expect demand for our products to increase year over year, driven by growth in both municipal spending and residential construction, and we believe we are on track to meet our expectations for the full year.
With that, I'll turn the call over to Evan.
Speaker 3
Thanks, Greg, and good morning, everyone. I'll first review our second quarter consolidated financial results and then discuss segment performance. Twenty sixteen second quarter net sales decreased $6,700,000 or 2.3 percent to $283,600,000 compared with $290,300,000 last year, with increased shipment volumes at Mueller Company offset by lower shipment volumes at Mueller Technologies and Anvil. Gross profit improved to $84,900,000 for the twenty sixteen second quarter from $82,100,000 last year. Gross margin increased 160 basis points to 29.9% from 28.3% in 2015.
Selling, general and administrative expenses were $54,700,000 in the quarter compared with $55,800,000 last year. The decrease was due primarily to personnel related expenses. Adjusted operating income for the twenty sixteen second quarter increased 14.8% or $3,900,000 to $30,200,000 as compared with $26,300,000 last year. The increase in adjusted operating income was primarily due to improved operating performance at Mueller Company and Anvil of $2,900,000 and $1,100,000 respectively. Adjusted EBITDA for the twenty sixteen second quarter increased to $43,300,000 compared with $40,700,000 last year.
For the trailing twelve months, adjusted EBITDA was $189,700,000 Interest expense net for the twenty sixteen second quarter was $5,900,000 slightly down from $6,100,000 last year. For the twenty sixteen second quarter, income tax expense of $7,700,000 was 32.9% of income before income taxes. We recognized an income tax benefit of $700,000 associated with the adoption of new accounting rules related to income taxes for stock compensation plans. Net income per diluted share and adjusted net income per diluted share both improved to $0.10 for the twenty sixteen second quarter compared with $08 last year. I also want you to note that adjusted net income per diluted share would have been $0.10 even without the income tax benefit of $700,000 I just mentioned.
I'll now move on to segment performance beginning with Mueller Company. Net sales for the twenty sixteen second quarter of one hundred and eighty two point two million dollars increased $4,900,000 as compared with $177,300,000 last year. Mule Company sales increased 6.5%, excluding sales of Henry Pratt's water treatment valves, which decreased $4,400,000 in the quarter. We experienced strong improvement in adjusted operating income in the twenty sixteen second quarter, largely due to lower raw material cost and improved operational efficiencies. Adjusted operating income improved 9% to $35,300,000 as compared with $32,400,000 last year.
Adjusted operating margin improved 110 basis points to 19.4% as compared with 18.3% last year. Adjusted EBITDA for the twenty sixteen second quarter increased to $43,900,000 compared with $42,100,000 last year. And adjusted EBITDA margin increased 40 basis points to 24.1% from 23.7% last year. Continuing with Anvil. Net sales decreased 5.2% to $86,400,000 for the twenty sixteen second quarter from $91,100,000 last year as an increase in sales of fire protection products and a large engineered pipe support job were more than offset by a 60% decrease in net sales to the oil and gas market.
Adjusted operating income for the twenty sixteen second quarter improved 14.9 to $8,500,000 as compared with $7,400,000 last year. This improvement reflects lower raw material costs and other cost savings despite lower sales in what have historically been our higher margin products. And now concluding with Mueller Technologies. Net sales for the twenty sixteen second quarter decreased to $15,000,000 as compared with $21,900,000 last year. Despite the overall decline in net sales, sales of our AMI systems increased 26%.
Backlog and projects awarded for both AMI and in total were up year over year by about 30% at the end of the quarter. Adjusted operating loss for the twenty sixteen second quarter was $4,900,000 as compared with $4,600,000 last year. Now turning to a discussion of our liquidity. Free cash flow, which is cash flows from operating activities less capital expenditures, was negative $4,600,000 for the twenty sixteen second quarter, a $17,000,000 improvement compared with the twenty fifteen second quarter. Free cash flow for the first six months has improved $47,500,000 year over year.
At March 3136, total debt was comprised of a $484,800,000 senior secured term loan due November 2021 and $2,100,000 of other. The term loan accrues interest at a floating rate equal to LIBOR subject to a floor of 75 basis points plus a margin of three twenty five points. Net debt leverage was 2.1 times at March 3136. And our excess availability under the ABL agreement was about $180,000,000 I'll now turn the call back to Greg.
Speaker 2
Thanks, Evan. I'll now comment further on our twenty sixteen second quarter results and end markets and provide an overview of our expectations and outlook for the third quarter and full year, beginning with Mueller Company. Second quarter sales growth at Mueller Company was due to demand for our products driven by increased municipal spending and residential construction. We were pleased by the 3.3% increase in domestic net sales of valves, hydrants and brass products in the quarter. On our last call, we pointed out that we would have tough comparisons given the robust pull forward of orders we saw last year in advance of our price increase on valves and hydrants, but we saw a similar pull forward this year, which we believe reinforces our positive outlook for market demand in the second half of the year.
Domestic sales of other water and gas infrastructure products and international sales also increased in the quarter. However, net sales of Henry Pratt's water treatment valves decreased $4,400,000 due to the timing of projects. For the quarter, Mueller Company's net sales grew 6.5%, excluding net sales of Henry Pratt's water treatment valves. Mueller Company again delivered impressive operating results. In addition to the 110 basis point adjusted operating margin improvement I mentioned earlier, Mueller Company's adjusted EBITDA margin for the latest twelve months increased 170 basis points to 26.6% from the prior trailing twelve months.
Turning to Anvil. Net sales into the oil and gas market declined approximately 60% in the second quarter year over year, which was more than we had expected and declined about 25% compared with the first quarter. As we have said in the past, anvil sales into this market have generally correlated with The U. S. Rig count.
Net sales of our fire protection line, primarily from the nonresidential construction market, grew nicely in the quarter. We also benefited this quarter from an engineered hangar shipment to a nuclear plant in Taiwan. Anvil's adjusted operating income improved $1,100,000 as the impact of lower shipment volume was more than offset by cost reductions and lower raw material costs. In addition, we benefited from higher margins associated with our shipment of hangars to the nuclear power plant project. Mueller Technologies second quarter net sales declined due to lower AMR meter shipments at Mueller Systems, primarily to one customer.
Mueller Systems' sales strategy is transitioning as we are increasing our penetration of the AMI segment of the market and becoming less dependent on one customer. In fact, AMI shipments grew 26% year over year and AMI orders increased $9,000,000 or 200% year over year. Mueller Systems is beginning to benefit from the recent introduction of new longer range radio capabilities, which among other things lowers the cost of investment for end users. Echologics quarterly net sales increased more than 40% year over year as our fixed leak detection technology continues to gain traction in the market. Additionally, we had a greater number of projects under contract at the end of the quarter compared to the prior year.
Turning now to our outlook for the twenty sixteen third quarter, beginning with Mueller Company. Municipal spending and residential construction, our principal end markets, remain solid, which we expect to drive growth in excess of 10% in domestic shipments of valves, hydrants and brass products in the third quarter. We expect Mueller Company's overall net sales percentage growth in the third quarter to be in the mid to high single digits year over year. We also expect Mueller Company's adjusted operating income percentage growth for the third quarter to improve and grow at a greater rate than net sales as Mueller companies continue to benefit from operating leverage. Turning to Anvil.
Net sales for the third quarter are expected to be slightly down year over year. As we have mentioned, Anvil's oil and gas business is closely tied to The U. S. Rig count, which was down 54% in mid April year over year. Consequently, we expect demand from the oil and gas market to decline.
Sales to oil and gas are now less than 8% of Anvil's total net sales, and we expect they will be down about $4,000,000 in the third quarter year over year. Although we expect fire protection net sales to increase in the quarter, we don't believe this will be enough to offset the decline in sales of our oil and gas products. Despite the decline in net sales, we believe that Anvil will generate slightly higher adjusted operating income in the third quarter, driven by ongoing cost savings and lower raw material costs. Mueller Technology's success in diversifying its customer base and winning AMI projects continues to gain traction, and we believe that in the third quarter, growth in our AMI shipments will more than offset the decline in AMR meter sales to a major customer compared to the third quarter last year. We also expect a meaningful year over year improvement in Mueller Technologies operating performance due to higher shipment volumes of both Mueller systems products and a richer mix with more AMI shipments and cost savings.
With this improvement, we expect Mueller systems to be profitable in the third quarter. For Mueller Technologies as a whole, we should approach breakeven or see a slight loss in the third quarter. For the 2016 full year, key variables include corporate expenses, which are expected to be 36,000,000 to $38,000,000 depreciation and amortization, which is expected to be 54,000,000 to $56,000,000 and interest expense, which is expected to be 23,000,000 to $25,000,000 We expect our adjusted effective income tax rate to be 35 to 37% and capital expenditures to be 38,000,000 to $40,000,000 We expect 2016 free cash flow to be driven by improved operating results and an improvement in working capital. We also expect to make only minimal cash contributions to our pension plans. We expect free cash flow to exceed adjusted net income and to be higher than in 2015.
Domestic sales of Mueller Company valve hydrants and brass products grew more than 6% in the 2016, and we remain confident in our full year expectations that we will continue to see growth in demand from our addressed municipal and residential construction markets. In addition, we believe domestic sales of Mueller Company's valves, hydrants and brass products will grow in the low double digits in the second half of the year due to growth in end market demand. Additionally, Mueller Company should have easier comparisons for these products in the second half of the year in light of the excessive rain certain parts of the country experienced in May and June 2015, which negatively impacted construction activity in the 2015. Although we don't expect revenue growth from Anvil in the second half of the year, we should continue to benefit from lower raw material costs and cost savings. Also, as mentioned earlier, the backlogs and projects awarded at Mueller Technologies are up nicely as our mix shifts to our higher margin AMI products.
Most of that backlog remains on schedule to ship in the 2016. For the second half of the year, we expect Mueller Technologies to show year over year net sales growth of about 15% to 20%. We continue to expect Mueller Technologies adjusted operating results to improve 7,000,000 to $10,000,000 for the full year. Consequently, our outlook for Mueller Water Products for the full year remains unchanged. We continue to feel positive about our outlook, our strengthening financial position and earnings prospects.
Taking these factors into account, we increased our quarterly dividend to $03 per share in March. This increase is part of a disciplined capital allocation strategy that seeks to enhance the value delivered to our stockholders. With that, operator, I'll open up this call for questions.
Speaker 0
Thank you. Our first question comes from the line of Mr. Kevin Matzka of BB and T Capital Markets. Greg,
Speaker 4
can I start on Mueller Tech? So just to make sure I understand what you just said. So originally, we were looking for 10% to 15% growth for the full year. We've just had the first half down about 20%, but you think it'll be up 15% to 20% in the second half. Is this I know you've been building backlog and it's up another 30%.
Was this a shortfall in the second quarter and the big growth you expect in the second half? Was that all timing? Was that a surprise to you? Can you just say a little bit more about what happened there in the second quarter?
Speaker 2
Sure. Sure, Kevin. And I think in order to answer that question as fully as possible, I think we got to look a bit talk about what's happening with us at American Water. We continue to provide AMR radios to American Water. However, in the second quarter, our sales on a year over year basis were down about $7,000,000 and we were not able to offset that decline.
I will say that we had about $3,000,000 of AMI shipments that we were expecting to make in late March that went in the April. So that was about the $3,000,000 I think shortfall from our expectations. But in our prepared remarks, when we said that Mueller systems was transitioning, we were referring to actually becoming less dependent on American Water. In the third quarter, for example, we expect to make up more than an $8,000,000 decline in net sales to American Water on a year over year basis, primarily with AMI shipments. So in the second quarter, we were unable to make up that year over year decline.
In the third quarter, we believe we'll more than offset it because of AMI projects in our backlog. But when talking about American Water, I think it's also important to point out that in this quarter, we were awarded a nice AMI contract, for one of American Water Systems, which we believe is the first in several orders AMI orders that we will receive from the system. So in essence, think, Kevin, if I'm addressing your question, we're seeing a transition from American Water being as much as 30% in Mueller system sales to being obviously a much lower percentage. And we think we are now at that point where we are going to be able to more than offset that decline with the AMI businesses in our backlog.
Speaker 4
Okay. So that bar is reset, if you will, on the American Water downdraft. And you think that in Q3, segment revenue will be up and the Mueller Systems segment will be profitable, but not the entire segment?
Speaker 2
We think that we could be approaching breakeven, but we think we could also have a slight loss and more obviously coming out of our Echologics business. Our volume is building nicely at Echologics. We're still in that stage though that we need the more the volume to cover the fixed costs that we've put in the business to support where we think that business can go.
Speaker 4
And again, you still expect the 7,000,000 to $10,000,000 smaller loss in the segment this year, even though the loss was actually slightly worse in the first half. And a lot of that, if not all of that goes back to AMI mix?
Speaker 2
Yes, it goes back to the amount it goes back to the volume of AMI we have in the background and the higher margins that we expect to receive in AMI. If you look at our AMI business is margins of about 700 basis points higher than our non AMI business. So it will be a combination of both the volume that we have in our backlog to ship as well as the higher margins.
Speaker 4
Okay. And then just finally one last follow-up on that. So the backlog up 30%, the orders are similar. What does the pipeline look like? Should we expect more solid trends like that in the second half?
Or was there kind of some onetime type projects in the first half?
Speaker 2
I wouldn't say onetime. We did have, as I said, a very nice order that we got from American Water for an AMI contract. But when we look at our pipeline of our quotation activity, we're pretty confident that we're in that we're making that transition to greater penetration of the AMI market. There's no question, given the nature of this business, it will since it's project oriented, we will we can see some variation from quarter to quarter based on the timing of those shipments. But the overall trend, on what we're quoting, our success rate, what we have in backlog supports the outlook that we just provided.
Speaker 4
Okay, great. Thank you.
Speaker 0
And our next question comes from the line of Mr. Mike Wood of Macquarie Capital.
Speaker 5
In your prepared remarks, you talked a little bit about the benefits of raw materials. Some steel pricing and other materials have been starting to move back up. Just curious when you would see that? And if you've had any success thus far passing those through with higher prices? Or what your expectations are to deal with that going
Speaker 2
forward? Yes. Mike, we have benefited when we look at our cost price ratio. You're right. I'd say during the quarter, we've started seeing those inch up a little bit, but we still expect to see that as a continued benefit when we look at that cost price mix.
So, again, the outlook we gave for increased operating income assumes that we will have a positive price cost of raw material mix.
Speaker 5
Got it. Great. And you mentioned the pre buy this year similar to a year ago. What does that do to inventory levels in your view and where do we stand heading into the rest of the year?
Speaker 2
Yes. Right now when we look at our Mueller Company distributors, we believe that inventories are in that $45 to $50 range sorry, five to fifty days. And we think that's about where they target this time of the year right after the pre buy going into construction season. I think that we are optimistic. When we look at our order intake so far in April and we're just about done with the month, our hydrant and valve orders are up pretty nicely through the first three point five weeks.
So that leads us to believe that our distributors are beginning to turn the inventory that they pulled forward in February. So again, outlook what we're seeing relative to distributor inventory orders in April supports the outlook that we provided this morning.
Speaker 5
Great. And finally, I know it's tough to parse out, but most of the residential trends have been very positive. A lot of the building product companies have been talking about benefits and weather though as well at the start of the year. Curious if you can give any color on what you're seeing on that residential end market?
Speaker 2
Yes. We're seeing very positive growth in the residential market. We're seeing higher growth rates on the residential side than what we are seeing on the municipal side. And again, I think that our expectation is that we will continue to see that nice growth rate through the end of our fiscal year and supports the outlook that we provided. You mentioned weather and I don't know in the second quarter, may be tough for us to say that we saw any unusual benefit.
We don't think there were any significant projects that were pulled forward into the quarter. We may have seen some repair work that could have been scheduled on a short notice that utilities may not have been able to do if the weather was not as nice as it was. But we did see a where we did see a benefit was at our cost efficiency at our Chattanooga Gate valve plant. Last year, Chattanooga lost two days of production due to weather. We had to work overtime to make up that production.
This year, we were able to work all scheduled days and reduce overtime. So but I think the weather certainly was a plus when we look at residential construction, which I think continues to support our outlook that we will see nice growth from that market segment through our fiscal twenty fifteen.
Speaker 5
Thank you.
Speaker 0
Thank you. And our next question comes from the line of Mr. David Rose of Wedbush Securities. Sir, your line is now open.
Speaker 6
Good morning. Thank you for taking my call. Good morning, David. Just a couple the cost savings you highlighted in Anvil and Mueller. Maybe I guess it was more on Anvil, but if you can articulate what were the particular cost savings that you're expecting?
Where are they coming from?
Speaker 2
Yes. Well, we continue to take headcount down at Anvil. When you look at our Anvil's overall headcount down about 12% on a year over year basis. When you look at those manufacturing operations, we do manufacture our oil and gas products, headcount is down 50% to 60%. So certainly, we think that with the headcount, I think that we have improved some of our manufacturing efficiencies at our largest anvil plant in Columbia, Pennsylvania.
And relative to our earlier question, we are seeing the benefit of lower raw material costs. And at Anvil, we're not having to give up all of those lower raw material costs and lower pricing. So we're keeping some of the benefit of lower raw material costs. So it's overall efficiencies in our larger plant. I think a lot of that driven by reduced headcount on a year over year basis.
And I think expected tailwinds from lower raw material costs.
Speaker 6
Okay. And in terms of cost savings in the MuellerCo side, should we see anything, any incremental improvements from I mean, operations are pretty leaned out in Mueller code?
Speaker 2
I think, again, we expect to still benefit from lower raw material costs because we're not having to give it all back or give it back with pricing. And I think as our capacity utilization increases, we'll get better flow through rates just from overhead absorption. So but I would say that, that would be the biggest drivers of cost opportunities at Mueller Co.
Speaker 6
Okay. And then lastly, if I may, on Mueller Tech, I mean, guidance is closing the gap for the back half of the year. But is this going to be linear? Or should we expect continued volatility? You obviously have a good pipeline of projects from what you've articulated.
So I would assume that profitability continues to improve nicely or, again, this going to be lumpy?
Speaker 2
Well, when we look through the rest of fiscal year twenty fifteen, it will be linear and that's based on our scheduled backlog. So we expect the fourth quarter well, it will be lumpy too. So I can use both, because we expect a much better fourth quarter than what we expect in the third quarter from Mueller Systems based on the timing of the backlog. So I think there will always be an element of lumpiness because the AMI business really is project oriented. But as our backlog in as our backlog continues to increase, we think we'll continue to see year over year increases.
It just may increase better in one quarter versus another quarter.
Speaker 6
And I'm sorry, was really trying to get a little bit more guidance without necessarily guidance in the 2017. I mean, are your thoughts that in the 2017 that continues to improve nicely? Or again, do we take two steps forward and then one step back?
Speaker 2
Yes. I think based on our quotation activity and the pipeline of where we think various contracts stand today, we think we would continue to see that see it the improvement in 2017. But before we can, I think, say that more definitively, we're going to have to get a better idea on how many of these projects we win? But when we look at our quotation activity, we think it bodes well for us to continue to see the improvement, driven by not only increased volume, but a much richer mix driven by AMI. But for me to be more definitive, I think that we'll be able to comment on that in the next probably on the next earnings call.
Speaker 6
Okay. That's fair. I'll hop back in the queue. Thank you very much.
Speaker 2
Thank you. Thank
Speaker 0
you. And our next question comes from the line of Mr. Seth Weber of RBC Capital Markets. Sir, your line is now open.
Speaker 7
Hi. This is Brendan on for Seth. I just had a quick question around the 7% price increase that you instituted in mid February, sort of what the response was that and how was that received?
Speaker 2
Yes. Well, certainly, as we said that we understand that our competitors also announced a price increase. Our distributors always welcome the price increase. We probably won't get the real handle on it because we're still, I think, shipping the orders that were pulled forward of the price increase. So, I would think that we'll know in the next thirty to forty five days, but nothing we see today would lead us to believe it's it'll be much different than what we have historically seen.
If I said in the past, we have the last several quarters and expectations, even though we expect raw material costs to go up slightly in the next quarter or so, they're still well below historical levels. That could put a little more pressure on what we see, how much what percent of the price increase we get to keep. But right now, we've seen nothing that would say it's different than what we've historically seen.
Speaker 7
Okay. And then around the Anvil margin, how much would you say that the improvement there, how much was that due restructuring versus mix? And then is it sort of sustainable at the levels we saw this past quarter?
Speaker 2
Yes. Evan, I'll let you take that.
Speaker 3
Yes, I would say when you look at the improvement there, the 14.9% improvement in operating income for the quarter, I think as Greg mentioned before, we did see a nice benefit on the raw material front, specifically around scrap steel. But we did see improvement in SG and A of roughly around $1,000,000,000 and that's due to some of the headcount reductions that we've seen both at the headquarters location and then there's also some cost savings associated with the headcount reductions at the oil and gas facilities and across and below the whole. So a good portion being the restructuring, but then also some support from improved raw material cost.
Speaker 8
Okay. Thank you.
Speaker 7
And then just one last for me, any color around Canadian business levels?
Speaker 2
Yes. Actually, Canadian business levels remain pretty solid. We were impacted again by currency FX, but we're still seeing, I'd say, solid business driven by residential construction. So it was Canada is performing perhaps a little better than what we would have expected going into this year.
Speaker 7
Okay. Thank you.
Speaker 2
Thank you.
Speaker 0
Thank you. And our next question comes from the line of Mr. Kevin Bennett of Twin AG Capital. Your line is now open.
Speaker 9
Thanks. Good morning, everybody.
Speaker 2
Good morning, Kevin.
Speaker 9
Greg, I wanted to focus on MuellerCo for a second. And I guess you guided the third quarter where your core products are going to be up 10%, but overall segment up a little bit less than that. And was curious if that's the Henry Pratt or if that's exports or any kind of commentary around the various pieces within MuellerCo both for the third quarter and then I guess for the rest of
Speaker 6
the year would be helpful.
Speaker 2
Yes. The biggest is when we look at in our third quarter on a year over year basis, We do international will be probably the biggest impact offsetting the growth that we expect to see valves and hydrants. And again, that's very lumpy business, project oriented, but it's down on a year over year basis for us. Our international business will be down about 50%. When we look at we still expect to be offset by FX going the other way.
And when we look at Pratt, it's sort of a mixed bag. We do see some projects shipping in the third quarter, but then that's being offset where we think we will see some softness in other areas. So it really is a combination of it. The biggest year over year impact will be international sales for us, which is down 50% and then some FX and also a little bit, I'd say, a much lower growth rate at Pratt than what we expect to see at valves and hydrics.
Speaker 9
Got it. Okay. And then again thinking about the core business, I was wondering if you could talk I guess within The U. S. About what you're seeing across various geographies, if you're seeing any weakness down in Texas?
I know that's a big area that people are focused on.
Speaker 2
Yes. I will say, Ken, we have not seen a weakness in Texas yet, because I think that probably some of the projects that were the developing project the housing developed projects that were at a stage where they completed those. And in the other parts of Texas, we haven't seen any negative impact. But we wouldn't be surprised if we start seeing perhaps a little bit of slowdown in South Texas, probably more on the residential construction side. But I would say that we haven't seen anything that was significant that we could point out at this time.
Speaker 9
Got it. Okay. And then last question for me, guess, more for Evan. On the capital allocation, I'm wondering if anything's changed or we're still I know you raised your dividend and you have the buyback authorization out there. Just any updated thoughts around that?
Speaker 3
Certainly, yes, certainly when we think about capital allocation, we have said that taking a look at acquisitions that's a priority for us whether it would be something around the mule company segment really in water infrastructure side And we did have the two increases in the dividend over the past year, which has also been something we've over time, we've lowered our net debt leverage down from over six to 2.1 times at the end of the quarter. So debt reduction has been our priority. But as look forward, we'll continue to take a look at all avenues there, including the dividend and take a look at acquisitions as we go forward.
Speaker 2
Okay. Thank you, guys.
Speaker 0
Thank you. And our next question comes from the line of Mr. Walter Liptak of Seaport Global. Sir, your line is now open.
Speaker 10
Hi, thank you. I wanted to just get a couple of clarifying questions asked. In the Technologies business, you talked about a linear progression over the next couple of quarters. But even linear, it looks like it's a step up in from the second to the third in terms of revenue. Is that how we should be thinking of it?
Or is it more of a back end loaded No,
Speaker 2
there will be a nice step, Walt. When you look at our prepared remarks, we expect to see a real a nice step in the third quarter. And I think that step up, when you look at as I was describing discussing a little earlier, in the first in the second quarter we just completed, we were down about $7,000,000 in sales that we had a year ago from American Water that we did not get this year. We didn't make those up. When we look at second quarter, we think we that was $8,000,000 last year.
We more than make that we expect to more than make that up. So, yes, it will be we expect our given our outlook the outlook we just provided, we expect our fourth quarter to be better than our third quarter, but we expect to see a nice pickup in this quarter too.
Speaker 10
Okay, great. And then switching gears to the Anvil business. You mentioned that you'd be up in operating profit. I wanted to make sure I understood that that's quarter over quarter that you're talking about, which wouldn't be much of a stretch or is it or I mean year over year or is it quarter over quarter?
Speaker 2
Yes, we were talking year over year. Yes, when you look at our second quarter and moving into the third quarter, we expect to continue to benefit from the cost savings and some of the efficiencies that we've been able to pick up in the anvil business. But we had a nice benefit in the second quarter from the nuclear power plant project to Taiwan. And we don't have a project in the especially of those kind of margins in our third quarter expectations. So that's where we would see a year quarter, I mean, a sequential drop off, but we do expect to see a year over year improvement.
Speaker 10
Okay, got it. All right. Thank you.
Speaker 2
Thank you.
Speaker 0
Thank you. And our next question comes from the line of Mr. Joe Giordano of Cowen. Sir, you may proceed.
Speaker 8
Hey, guys. Most of my questions have been answered at this point, but I'm just curious if you're hearing any of your municipal customers, do they see more focus on more substantial improvements to their networks given some of the high profile problems we've heard about over the last over the past year or is still just your traditional kind of break and fix?
Speaker 2
Joe, I think it's more to what we're seeing now is more traditional break and fix, but we're hearing more discussion and more discussion about the recognition, it's a bigger issue. And it is not so much a discussion at our at the water systems, the water utilities. I think they have known it all along. I think it's more discussion by the politicians that the city councils that approve, in some cases, to prove the rate increases. I think they're now talking more about the issue.
So, we don't think it's going to be something that's going to be positively drive demand for us in the next couple of quarters, but we do think the discussions lend itself to, I think, a pickup in spending as we look out of maybe perhaps over the next twelve twenty four months from now.
Speaker 8
Fair point. And yes, we're hearing that elsewhere as well. Just in terms of Mueller Tech, how big do you think that business has to get on the AMI side to have real scale where more than just breakeven where you're really covering costs? Same with Ecologics. Just trying to get a sense of how what kind of growth do we need to see to get that to a point where it's material to MWI as a whole?
Speaker 2
Yes. I think that when you look at what we expect to ship the second half of the year at in AMI business at Mueller Systems And if we build off that base, we don't need a lot over that base to for this to be nicely profitable. And we expect this year that we could be shipping three times as much AMI than what we did last year. And so the profitability that we expect to see at Mueller Systems in the second half of the year, I think that that's a nice base to where if we can continue, I'd say, in a 5%, 67% year over year growth rate, that that business becomes nicely profitable. And when I say 5%, 67%, I'm talking about AMI because as I mentioned earlier, that's on average about a 700 basis points higher margin product for us.
On Echologics, I think we need probably another 5,000,000 or $6,000,000 to get to that point. Now we're recovering all of our fixed costs and then we will see a nice margin in contribution to margin because our gross margins on our projects in that business are around 50%. So, really is we think that we're close. We think that if we can continue to build on the base of AMI business that Mueller's systems will ship the second half of the year, that that puts us in the territory where we start seeing nice incremental growth. And Echologics, I think we've always said that we expect to start seeing that in 2017.
When we look at the acceptance and some of the success we're having with our fixed leak detection, we think that 4,000,000 or $5,000,000 of sales that puts us at the point where then we would have a nice flow through. We think we're within twelve months of seeing that.
Speaker 8
Great. And just lastly, is the radio component of the American Water contract, is that still like out to bid or is that secure with you guys?
Speaker 2
No. The radio contract is still out to bid. And during that period, we continue to provide radios.
Speaker 8
Okay, great. Thanks guys.
Speaker 6
Thanks, Jeff.
Speaker 0
Thank you. And our next question comes from the line of Mr. David Rose of Wedbush Securities. You may proceed.
Speaker 6
Thank you. This is really a follow-up call to Joe's question as well as some of the other questions I had earlier. But really in terms of scale for newer technologies and where you're positioned, maybe, Greg, you can give us some perspective strategically what you need to accomplish to be really relevant in this space. Do you need international distribution? Do you need as the grid becomes much more focused on the edge, do you need other product additions, whether it be gas or electricity?
And maybe you can provide some thoughts secondarily what that would mean in terms divestitures of existing businesses if you wanted to get bigger that might be anvil as an example?
Speaker 2
Yes. Thanks, David. For I think that where we are tracking right now with our Mueller systems business, if we can continue on that trajectory, and I point out that we expect that our AMI shipments will be up three times this year where they were in 2015. I don't expect that we're going to increase it three times every year, but I mean we do think that we will be able to continue to grow the AMI business that we think then we become relevant really in that segment. And all along that has been our target segment when five, six years ago we decided to invest in this business to try to penetrate the water meter market, knowing we were at a competitive disadvantage when we looked at visual read meters and somewhat even on AMR, but knowing we thought that the space was open on AMI.
We think the technology and we commented this in our prepared remarks, we think the technology that we introduced twelve months ago on the LoRa technology that significantly increased the range of our radios has now made us almost would say the system of choice, the small to midsize utility, because the infrastructure requirement is so much less that they're now be able they're able to build the business case to put in AMI. I think if we expect to continue to penetrate the AMI market and if we continue to do so as we expect, I think we will be relevant and we would stay committed to this business. If we find down the road that we're not able to penetrate at the rate that we expect we will, then that will bring it into question. Relative to and so I don't think that we really have to expand internationally on the Mueller systems business. I think expanding internationally on leak detection, that would be gravy on top of I think of where we're headed.
Again, think we've made some nice breakthroughs in technology the last twelve months on fixed leak detection. Again, our vision all along was not to have big field crews in the market, doing field surveys and finding leaks. When we have that business, it's profitable. But when we don't have that business, We have those crews sitting around as a fixed cost. Our vision all along was to make leak detection 20 fourseven on a fixed network.
That obviously takes a lot of pilots and a lot of work with our end users. It also takes us our take our what we learn from each pilot and make adjustments to the technology. But when we look at some of the success we've had with some of the customers we've had the last six months, customers that have indicated that they are very interested in putting fixed leak detection over a greater sense over I'm sorry, over a greater portion of their system that it gives us confidence that I think we're on the right track and we will see meaningful contribution from our leak detection business to our bottom line. So, as we sit here today, we don't think we have to go out and make a large acquisition to make us relevant, especially in the market segments that we want to that we're focused on penetrating. If that opportunity came up, it would be certainly something that we would look at.
And I think that's what Evan said when answering the question about our capital allocation, our overall capital allocation strategy. So, David, I think that we think we're on a path to be relevant in the market segments that we have focused on penetrating. I think we'll know a whole lot more twelve months from now, But given that what we have in the backlog in for AMI that we expect to ship this year, given what we're quoting and what we see the our funnel of quotations that we think we're on the right track. But I think it will take, as I said, we'll have a lot better picture twelve months from now because as I said, we're just twelve months into introducing the LoRa AMI technology and we started winning the projects. Now we're at the point of starting to ship those.
Speaker 6
Thank you. And that's a very comprehensive answer. And maybe just briefly, what would it take for you to make a decision to divest yourself of Anvil?
Speaker 2
We are always we always analyze our portfolio of businesses. It would be a divestiture of Anvil, as we've talked about. We think our real growth opportunity is on the water side. And I don't know if I can say there's any one thing that would be the catalyst and the trigger for us to divest Anvil. But I would say that it is something that we're giving a lot of attention to.
Speaker 6
Thank you.
Speaker 2
Thank you.
Speaker 0
Thank you. And at this time, there are no further questions. Speakers, you may proceed.
Speaker 2
Well, again, thank you very much for your interest. Look forward to seeing some of you over the quarter and in our time on our next quarter's conference call. Thanks very much.
Speaker 0
Thank you. And that concludes today's conference. Thank you for participating. You may now disconnect.