Mueller Water Products - Earnings Call - Q3 2015
July 31, 2015
Transcript
Speaker 0
Welcome and thank you all for standing by. At this time, all participants are in listen only mode. After 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, will turn the meeting over to your host, Marty Sakas. Ma'am, you may begin.
Speaker 1
Thank you, Mary. Good morning, everyone. Welcome to Mueller Water Products twenty fifteen third quarter conference call. We issued our press release reporting results of operations for the quarter ended June 3035 yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com.
Mueller Water Products had 160,400,000.0 shares of common stock outstanding at June 3035. Discussing the third quarter's results this morning are Greg Pylen, our Chairman, President and CEO and Devin Hart, our CFO. This morning's call is being recorded and webcast live on the Internet. We have also posted slides on our website to help illustrate the quarter's results as well as to address forward looking statements and our non GAAP disclosure requirements. At this time, please refer to slide two.
This slide identifies certain non GAAP financial measures referenced in our press release on our slides and on this call and discloses the reasons why we believe that these measures provide useful information to investors. Reconciliations between GAAP and non GAAP financial measures are included in the supplemental information within our press release and on our website. Slide three addresses our forward looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward looking statements as well as specific examples of forward looking statements. Please review slides two and three in their entirety.
During this call, all references to a specific year or quarter, unless specified otherwise, refer to our fiscal year. Our fiscal year ends on September 30. A replay of this morning's call will be available for thirty days after the call at 9642. The archived webcast and corresponding slides will be available for at least ninety days in the Investor Relations section of our website. In addition, we will furnish a copy of our prepared remarks on Form eight ks later this morning.
After the prepared remarks, we will open the call to questions. I'll now turn the call over to Greg.
Speaker 2
Thanks, Marty. Thank you for joining us today as we discuss our results for the twenty fifteen third 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 fourth quarter. Our net sales performance for the third quarter was not as we had expected and was notably impacted by above average rainfall, primarily in Texas, Colorado and parts of the Midwest, which impacted Mueller Company's base business.
Outside of these geographic areas, we experienced good growth in Mueller Company's base business. Despite the year over year decrease in net sales, adjusted EBITDA margin for the twenty fifteen third quarter improved 160 basis points to 19.2% as compared with 17.6% for the twenty fourteen third quarter. Moreover, we had particularly strong margin improvement at Mueller Company's base business, which includes our valves, hydrants and breast products with an adjusted EBITDA margin of 30%, an improvement of two sixty basis points from 27.4% last year. Anvil's net sales for the twenty fifteen third quarter decreased to $89,200,000 as compared with $104,500,000 for the twenty fourteen third quarter due to lower shipment volumes primarily into the oil and gas market. Anvil's third quarter financial performance benefited from lower overhead and raw material costs, which partially offset the gross profit impact from the net sales decline.
We believe that much of what we saw affecting net sales this quarter was more short term in nature and that the longer term expectations for our primary end markets and our growth prospects remain positive. I'll discuss this in more detail later in the call. For the quarter, our adjusted net income per diluted share increased to $0.15 up 36%. With that, I'll turn the call over to Evan.
Speaker 3
Thanks, Greg, and good morning, everyone. I'll first review our third quarter's consolidated financial results and then discuss segment performance. Net sales for the twenty fifteen third quarter decreased $17,500,000 or 5.5% to $3.00 $1,000,000 as compared with $318,500,000 for the twenty fourteen third quarter, due primarily to lower shipment volumes, the divestiture of our Canadian municipal castings business earlier this year and unfavorable Canadian currency exchange rates. Gross profit for the twenty fifteen third quarter was $96,200,000 compared with 97,300,000.0 for the twenty fourteen third quarter. Gross margin for the twenty fifteen third quarter improved to 32% compared with 30.5% in the twenty fourteen third quarter.
Gross margin at Mueller Company's base business improved two sixty basis points year over year. Gross profit and adjusted operating income benefited from improved operating efficiencies, lower raw material pricing. These benefits were more than offset by lower shipment volumes, especially at Anvil and unfavorable changes in Canadian currency exchange rates. Selling, general and administrative expenses were lower year over year due primarily to personnel related expenses. Selling, general and administrative expenses were $52,900,000 in the twenty fifteen third quarter compared with $55,300,000 in the twenty fourteen third quarter.
Adjusted operating income for the twenty fifteen third quarter increased 3.1% to $43,300,000 compared with $42,000,000 for the twenty fourteen third quarter. Adjusted operating margin improved 120 basis points to 14.4% for the twenty fifteen third quarter. Adjusted EBITDA for the twenty fifteen third quarter increased to $57,800,000 compared with $56,000,000 for the twenty fourteen third quarter. Trailing twelve months adjusted EBITDA was $186,400,000 We have a tax related receivable from Walter Energy from prior to our spin off from Walter in 02/2006. In July 2015, Walter filed a petition for reorganization under Chapter 11 of The U.
S. Bankruptcy Code. Subsequent to this filing, we recognized a non cash write down for the entire receivable balance of $11,600,000 in the twenty fifteen third quarter. Interest expense net for the twenty fifteen third quarter declined $6,200,000 to $6,300,000 compared with $12,500,000 for the twenty fourteen third quarter. We benefited from lower interest expense this quarter due to lower interest rates and lower amounts of debt outstanding following the refinancing we completed in the twenty fifteen first quarter.
Income tax expense for the twenty fifteen third quarter of $8,700,000 on income before income taxes of $25,200,000 resulted in an effective income tax rate of 34.5% compared with 36.9% for the twenty fourteen third quarter. Net income per diluted share for the twenty fifteen third quarter decreased to $0.10 compared with $0.11 in the prior year. However, adjusted net income per diluted share increased to $0.15 from $0.11 As I just discussed, we had a write down of a non cash receivable from Walter. This write down and restructuring negatively impacted third quarter net income per diluted share by $05 There was a weighted average of 163,500,000.0 shares of our common stock outstanding for the twenty fifteen third quarter compared with 162,200,000.0 shares outstanding for the twenty fourteen third quarter. We purchased approximately 524,000 shares of our common stock during the twenty fifteen third quarter under our stock repurchase program.
I'll now move on to segment performance and begin with Mural Company. Net sales for the twenty fifteen third quarter decreased 2,200,000 to $211,800,000 compared with $214,000,000 for the twenty fourteen third quarter. Net sales at Mueller Company's base business were up 1% this quarter with nice growth with brass products at our Pratt and gas businesses and exports outside North America. Domestic net sales of our valves and hydrants were essentially flat this quarter, we believe largely due to the effects of the above average rainfall and flooding in Texas, Colorado and parts of the Midwest, which caused both delays in underground construction projects and resulted in the buildup of distributor inventory. Greg will discuss this in more detail.
Additionally, net sales were impacted by the divestiture of our municipal castings business and $2,300,000 due to unfavorable Canadian currency exchange rates. Adjusted operating income for the twenty fifteen third quarter improved to $43,300,000 compared with $42,400,000 for the twenty fourteen third quarter. Adjusted operating income at Mueller Company's base business improved $4,900,000 largely due to improved operating efficiencies, lower raw material cost and higher sales pricing. This improvement was largely offset by lower adjusted operating income from our metering products and systems largely due to product mix and additional investments in technology and business development activity related to leak detection and pipe condition assessment. Adjusted operating margin of 20.4% for the twenty fifteen third quarter improved from 19.8% for the twenty fourteen third quarter.
Adjusted EBITDA for the twenty fifteen third quarter increased to $54,100,000 compared with $52,800,000 for the twenty fourteen third quarter and adjusted EBITDA margin for the quarter increased 80 basis points to 25.5%. We had particularly strong margin improvement at Mueller Company's base business, which includes our valves, hydrants and brass products with an adjusted EBITDA margin of 30%, an improvement of two sixty basis points from 27.4% last year. The third quarter's adjusted EBITDA margin was the highest in a mural company based business for any quarter since 02/2007. I'll now turn to Ample. Net sales for the twenty fifteen third quarter decreased $15,300,000 to $89,200,000 compared with $104,500,000 for the twenty fourteen third quarter.
Net sales decreased largely due to lower sales of oil and gas related products, which as a reminder were about 20% of Anvil's 2014 total net sales. Net sales to this market were less than 10% of Anvil's net sales in the twenty fifteen third quarter. Adjusted operating income for the twenty fifteen third quarter was $7,200,000 compared with $9,500,000 for the twenty fourteen third quarter. Adjusted operating margin decreased to 8.1% compared with 9.1% for the twenty fourteen third quarter. Although lower shipment volumes resulted in a decrease in adjusted operating income during the quarter, adjusted operating income benefited from improved operating efficiencies, lower SG and A expenses, lower raw material cost and higher sales prices.
Adjusted EBITDA for the twenty fifteen third quarter was $10,800,000 compared with $13,000,000 for the twenty fourteen third quarter. Adjusted EBITDA margin for the twenty fifteen third quarter was 12.1% compared with 12.4% for the twenty fourteen third quarter. Corporate expenses for the twenty fifteen third quarter were $7,200,000 compared with $9,900,000 for the twenty fourteen third quarter. The decrease was due primarily to lower personnel related expenses. Turning now to a discussion of our liquidity.
Free cash flow, which is cash flows from operating activities less capital expenditures was $48,800,000 for the twenty fifteen third quarter compared with $46,200,000 for the twenty fourteen third quarter. The quarter ending average of accounts receivable, inventories and accounts payable compared with net sales over the past four quarters increased by about 40 basis points compared with a year ago. At June 3035, total debt was comprised of $495,200,000 senior unsecured term loan due November 2021 and $2,000,000 of other. The term loan accrues interest at a floating rate equal to LIBOR subject to a floor of 75 basis points plus a margin of three twenty five basis points. Net debt leverage was 2.3 times at June 3035.
Using June 3035 data, we had $167,900,000 of excess availability under the ABL agreement. I'll now turn the call back to Greg. Thanks, Abbott.
Speaker 2
Our overall third quarter net sales performance was not what we expected. We believe primarily due to the inclement weather in Texas, Colorado and parts of the Midwest. Additionally, as we had expected, net sales were impacted by the decline at Anvil, the earlier divestiture of our Canadian municipal castings business and unfavorable Canadian currency exchange rates. We did experience domestic net sales growth at Mueller Company for valves and hydrants in those areas that were not significantly impacted by the weather, as well as nice growth with Mueller Company's brass products at our Pratt and Gas business and exports outside North America. We estimate the above average rainfall in Texas, Colorado and parts of the Midwest resulted in about a $10,000,000 net sales impact at Mueller Company due to the delayed construction projects, primarily impacting domestic sales of our valves and hydrants, which were essentially flat.
In fact, when we look at the domestic net sales growth for valves and hydrants in geographic areas other than those affected by inclement weather, we saw year over year growth of 12% consistent with domestic valve and hydrant growth in the 2015. Also, the Ivy Zelman land development survey from July noticed that builders believe the significant rainfall and flooding in Texas delayed development timelines by about three months. Despite this decline in net sales, we delivered solid operating performance at Buellert Cove and improved adjusted operating margin, greater manufacturing efficiencies, lower raw material costs, increased overhead absorption and higher sales pricing all contributed to this year over year improvement in operating results. Adjusted EBITDA margin for Mueller Co. Based business in the third quarter improved to 30%, which was 27.4% in the twenty fourteen third quarter.
As Evan mentioned, this was its best quarterly adjusted EBITDA margin since 02/2007. We believe the fundamentals in our Mueller Company end markets are strong because we continue to see positive signs for municipal municipal spending percentage growth in the mid single digits and expect demand for housing to grow at a greater rate. In fact, current forecast for housing starts in calendar twenty fifteen range from 10% from Blue Chip consensus and IHS to 15% from Ivy Zelman. State and local seasonally adjusted tax receipts continued to increase during the quarter and the CPI for water and sewage rates increased 4% over the twelve months ended June 2015. At Anvil, we saw further deterioration of sales into the oil and gas market, which were down approximately 60% in the third quarter year over year.
Our sales into this market have generally correlated with rig counts, which were down 59% year over year at the end of the third quarter. We believe in this market, anvil sales were further impacted during the quarter by distributors actively reducing their inventory levels. Despite the $15,300,000 decline in net sales, the adjusted operating income declined only $2,300,000 primarily due to the benefits of improved operating efficiencies and lower raw material costs. Turning now to our outlook for the twenty fifteen fourth quarter. I'll start with Mueller Company.
We expect mid single digit year over year net sales percentage growth. We expect increased domestic demand for our valves and hydrants, although growth levels may be somewhat tempered by the lingering impact of the construction delays we saw in the third quarter due to the weather events we have discussed. We believe distributor inventory levels at the end of the third quarter in parts of the country, primarily in Texas, Colorado and areas of the Midwest were higher both sequentially and year over year as a result of delayed construction activity. However, many of our distributors in these locations indicated they entered the fourth quarter with higher backlogs, suggesting the construction delay is likely more of a short term slowdown because the longer term fundamentals remain intact. We expect net sales growth at Mueller Systems in the fourth quarter, primarily driven by recent AMI project awards.
During the last six weeks, we saw a nice increase in the number of awards we received for our AMI metering systems. On a year over year basis, at the July, our AMI backlog including recent awards is up 2.5 times or about $18,000,000 We expect year over year adjusted operating income for Mueller Company in the fourth quarter to increase, driven primarily by higher sales of valves, hydrants, brass products and AMI metering systems. Moving to Anvil, we expect Anvil's net sales to decline in the fourth quarter largely due to the oil and gas market. Rig counts were down about 60% year over year in July and were roughly flat in June. As expected, Anvil adjusted operating income will be lower in the fourth quarter year over year due to negative impacts from lower shipment volumes and product mix.
However, we expect adjusted operating income to increase sequentially. As a reminder, in the twenty fourteen fourth quarter, Anvil had a $2,500,000 gain from the divestiture of its Bloomington, Minnesota facility. For Mueller Water Products as a whole in the fourth quarter, we expect net sales will be essentially flat year over year as growth at Mueller Company is expected to be offset by a decline 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 highlight our twenty fifteen other key variables. Corporate expenses are expected to be $33,000,000 to $34,000,000 Depreciation and amortization are expected to be about $59,000,000 Interest expense is expected to be about $28,000,000 Our adjusted effective income tax rate is expected to be about 37% to 38%. Capital expenditures are expected to be approximately $37,000,000 to $38,000,000 For 2015, we expect free cash flow to be driven primarily by 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 have made only minimal cash contributions to our pension plans in 2015.
We expect free cash flow in 2015 to exceed adjusted net income. During the quarter, our proprietary fixed leak detection solution was piloted in three cities Atlanta, Las Vegas and Los Angeles as part of the National Institute of Standards and Technology Global City Teams Challenge. This challenge was designed to showcase how cities can use the Internet of Things to improve residents. The water sustainability project incorporated Ecologics' proprietary fixed leak detection technology, AT and T wireless connectivity and IBM's water management center. We presented the results from the Las Vegas pilot in Washington in June and are pleased with the greater visibility these projects are giving our leak detection solutions.
For the full year, we expect adjusted net income per share to show nice year over year improvements due to the benefits of higher adjusted operating income and lower interest expense. In summary, we saw excellent results from our Mueller Company based business On a $1,200,000 increase in net sales, adjusted operating margin increased two forty basis points. We continue to benefit from higher operating leverage, improved efficiencies and higher sales pricing. As I said earlier, we have seen a nice pickup in awards recently for our AMI metering systems. We expect to start shipping a portion of these awards beginning in the fourth quarter.
We anticipate entering 2016 with an AMI backlog including recent awards and those we expect to receive by the end of the quarter of more than double than that of the prior year. Obviously, Anvil continues to face challenges related to the decline in the demand from the oil and gas market. We have been lowering headcount at the plants where we produce those products and are looking for opportunities to further reduce costs. For the full year, we expect to see growth in our addressed non residential construction markets and expect this growth will continue in 2016. Finally, we believe our long term prospects in our water markets remain strong given utilities' needs to replace aging infrastructure, monitor and measure usage and address asset management and non revenue water loss, all areas where we are well positioned.
Operator, with that, we'll open the call up for questions.
Speaker 0
Thank you. We will now begin the question and answer session. Our first question coming from Kevin Masca of BB and T Capital Markets.
Speaker 4
Thanks. Good morning.
Speaker 5
Good morning, Kevin.
Speaker 4
Can we talk a little more about this distributor inventory situation? I understandable that that would be higher than normal in the weather affected areas. But how does it look in the non weather affected areas? Is are inventory levels a little bit higher than you'd like to see there as well?
Speaker 2
Actually Kevin when we look to the Northeast and the West inventory levels are about where they have always been. So but I will say that a little bit in the Southeast they ended the third quarter, I'd say maybe with about fifteen days more of inventory than they normally when they normally hold. But when we look at our Central Region and some of our key distributors in our Central Region, there it was up almost double. So they for best we can tell, some of our major distributors, our key distributors ended the third quarter with about ninety days of inventory. They actually when we just checked recently, they brought that down to sixty days in July.
So some of these projects are now starting to release. They're starting to ship some that inventory. However, sixty days is still probably fifteen to twenty days higher than what they would target. So I would think in that region that we will probably we'll still see some of an impact in the fourth quarter. And we've actually we've taken that into account with the outlook that we gave for the fourth quarter.
Speaker 4
And you mentioned some lingering effect of that. So it's not just that it stopped raining, the water receded and we're just going to make up all of these sales as these construction projects get going right away. Is it you mentioned three months or more of a lag you're expecting there?
Speaker 2
Well, was we were quoting an L. V. V. Zellman survey that she just completed in the month of July.
And there she was talking surveying builders who said in the Texas area that because of the rain that they see some projects perhaps being delayed by three months. I think when we look at the overall impact, it's going to take us several quarters to I think to recover. We don't think this business goes away, but we do think it will take some time as I said for us to recover it. When you look at contractors only have so much capacity. A number of those contractors report that they lost sixty days during this rainy period during the last quarter.
And when you stop and think about it, I mean a lot of that is during the prime construction period. So it's going to take I think it's going to take some time, because I think they were probably pretty fully scheduled already for the months of July, August and September. So I think that they only have so much capacity to handle this work. And I think we hit upon another key point on your first question that some of our distributors in these hardest hit areas will have some hangover of products that they have in distribution. And that will take probably another four, six weeks to work its way through.
Just to remind everyone and we pointed this out on our last call that on our price increase on valves and hydrant this year, we had about 20% more orders in this year than we did last year, which we think fully supports that our distributors were expecting a nice pickup in demand. And then lo and behold, we get into the we start getting into the construction period and they lose sixty days and they brought in more inventory this year than they did last year, it's going to have a bit of a it's going to certainly have an impact in those areas. As I said, in those areas where they ended the second ended the June with ninety days of inventory, that cut that down to sixty. But that will still impact us we think probably in the fourth quarter in those areas.
Speaker 4
Got it. And just one more follow on from me as it relates to inventory levels and destocking. In the oil and gas market, I guess that's very understandable. Again, there'd be destocking there. Maybe that hasn't run its course yet.
But is it your expectation that if rigs are stabilizing and maybe they bounce a demand will as well? Or will you continue to see demand remain very soft or even decline more because there's so much equipment out in the field sitting idle now and that can be reused before you'll ever need to see demand for new equipment?
Speaker 2
Yes. That's a good question. And we've been trying to dig in on there. I think we feel reasonably confident that a big portion of our distributors destocking probably has occurred in the last four months. There still could be some carryover, but we don't think to the same extent that we've seen as I said the last three or four months.
Rig count has been just an amazing correlation for us with demand for our products. I think that it would indicate that we still have a year over year issue. And as I said in our as we said in our prepared remarks, it's still down about 60% on a year over year basis. But for the last month, it's been somewhat stable. So I would think that I mean, I think right now our view is that we're probably getting close to that point of being stable sequentially, but we still do have the year over year issue.
Speaker 4
Okay. Got it. Thank you. Thanks, Kevin.
Speaker 0
Thank you. Our next question coming from Mike Wood of Macquarie Securities Group.
Speaker 2
Hi. Thanks. It's Mike Wood. Hi, Mike. I agree with your assessment on the fact that you've weather issues linger for a couple of quarters.
Just wondering how you manage that through maintaining your own inventory and production levels. Yes, I'll start there and
Speaker 6
then I have a follow-up.
Speaker 2
We actually we entered the quarter in our Mueller business with a little more inventory than what we had targeted because of I think the surprise that we saw because we do build to a forecast. So we will bring down we in our planning process Mike that we've targeted bringing down inventory in the fourth quarter because we expect that we'll make some of our shipments in the fourth quarter from products that we've already built. Great. And then on the oil and gas exposure in Anvil, can you just give us a sense of what you can do there to right size that cost structure given the lowered size of that business? Yes.
I will tell you on the SG and A side, we since this market we can really target this market. So we don't have an extensive sales force. We probably have about four or five salesmen that just focus on this market and we really can't afford any disruption there because of our long term relationships and their knowledge of the marketplace and all. We have taken out and those plants that focused on manufacturing products that go into oil and gas, we have taken down about 40% of that headcount. And we're continuing to look to see where we can take out more.
Speaker 4
Okay. Thank you.
Speaker 2
Thank you, Mike.
Speaker 0
Thank you. Our next question coming from Giordano of Cowen and Company.
Speaker 7
Hey, guys. This is Tristan Margaux for Joe today. How are doing?
Speaker 5
Morning. Good morning. Morning.
Speaker 7
Most of my questions have been answered. I guess, I believe you're adding a few people at Ecologics. Can you talk a little bit about that and how organic growth is going there?
Speaker 2
Yeah. Yeah. Organic growth is it can be somewhat misleading because we're still dealing with smaller numbers. But for this quarter, sales were up about 15% on a year over year basis. And relative to our investments there, we've really been focusing on increasing the size and effectiveness of our worldwide sales organization and then on further developing our fixed leak detection technology.
We've added salespeople in North America, Europe and Asia. We've taken the sales force from 12 to 25 people in the last eight to nine months. So we're making a significant investment because we're bullish about the upside opportunity. On the technology development side, we expect to spend about 1,000,000 point dollars more this year and this is more focused on further development in our fixed leak detection technology for both the domestic and international markets. Prior to this year, R and D on our fixed development excuse me, our R and D development for our fixed leak detection technology was really focused on communicating over an RF network as well as cellular network for our transmission lines.
We think that there is a significant opportunity to be able if we're able to have the communication over a cellular network. So if we're able to transmit the on distribution lines, the leak detection data over a cellular network, we think that opens up a lot more of the market for us. So that's where a lot of our R and D development spending has been going for the last six to nine months. And in fact, we will have our first pilots with that technology in August. We've had third parties resources size the leak detection global market at 1,000,000,000 So as I said that we're just in the very early stages of I think beginning to penetrate this market and very bullish about our upside.
Speaker 7
Okay. This is great color. Thank you so much.
Speaker 2
Thank you. Thank
Speaker 0
you. Our next question coming from David Rose of Wedbush Securities.
Speaker 6
Good morning. Thank you for taking my call.
Speaker 2
Just Good morning, two
Speaker 6
questions. One is, if you can kind of break out the margin improvement, how much was it from material costs versus lower fixed costs on the MeterCo side? And then secondly, address expectations on profitability for Mueller systems for next year?
Speaker 2
Yes. David, when we look at it when I say the greatest percentage our year over year increase, I think came from operational efficiency and I'll say overhead absorption followed by I think what we've seen in terms of increased pricing and then raw material costs. So on a percentage basis, I'm going to say we're probably about 40% from our operational efficiency 40%, 45% about maybe 30%, 35% from higher pricing. And then I'd say we can lump the rest in raw materials.
Speaker 6
So given that raws continue to be depressed, you've got the same sort of manufacturing levels roughly maybe a step down a little bit. But does this imply this is sort of the new norm for you? Is there anything here that we should look at that suggests Yeah.
Speaker 2
No. I think when we look at the next quarter, I think we don't see any real change in raw material costs one way or the other. So I would think that when we in our fourth quarter, we should see raw material costs just about the same as we saw in the third quarter. You're right. And as we bring down reference to the earlier to Mike's earlier question, we may cut back some manufacturing a little bit in the fourth quarter because of our higher inventories as a result of the drop off in the third quarter.
I don't think that that will be a substantial impact.
Speaker 6
Okay. That's very helpful. And then on the Mueller systems, from time to time you do provide some guidance on expectations from profitability. I think you pulled away from it when business was weaker. But now that you've got a growing backlog or at least looks like a nice backlog, can you maybe provide some color on expectations for profitability next year?
Speaker 2
Given the lumpiness of this business, given the outlook of 2016, I feel a lot more comfortable when we start getting into 2016. But I will say that when we talk about the recent awards and the growth of our backlog, We highlighted AMI systems and AMI systems are by far our highest margin products. So I would say sitting here today when we look at the next year based on some of the recent awards and what we have outstanding that I mean quotations outstanding that we feel that we're going to see a better year certainly coming out of Mueller systems because of higher AMI shipments that carry a higher margin.
Speaker 6
Okay. That's perfect. Thank you very much. I appreciate it.
Speaker 4
Thank you.
Speaker 0
Thank you. Our next question coming from Doug Keay of Northland Capital Markets. Thanks.
Speaker 8
Let's pick up right there with the Mueller Systems business. Your comment that you're going to see higher AMI shipments. Can you just tell us what you're seeing in the markets generally in terms of tenders? Is the market now shifting in a meaningful way towards AMI from AMR? How
Speaker 2
are you
Speaker 8
thinking about your positioning in that market? What do you think?
Speaker 2
Yes. Great. We are seeing more request for proposals. I would say that we're seeing a greater adoption rate in the smaller and the midsized utilities. For instance, one of our the recent award that we just one of our recent awards came from Charlotte County, Florida, which will represent about represents about 45,000 endpoints.
So a nice award, nice project. I would say some of the larger cities are talking more and more about AMI. But I would say when we get to the larger cities because you start talking instead of 45,000 endpoints potentially 200,000 endpoints that it becomes a much more drawn out process because it becomes a larger political decision. So I would say that yes that we are seeing interest picking up. We're seeing it more in the smaller and the midsize utilities because I think that they have greater control over their decision making.
We're seeing the larger cities getting more interested and we're seeing the request for proposals picking up. And I would say certainly what has helped driving that is that we're becoming and I imagine our competitors, we're just becoming a lot more efficient in terms of the range that we can that our systems can communicate. And as a result, we need less infrastructure to do it, which brings down the cost point. So I just think it's the natural evolution with new technology. And as I said on the last several previous calls that if we would say our biggest disappointment is in how long it takes to make some of the to get these decisions made and there's a lot of resources tied up and putting together proposal making sales presentations and then making follow-up sales presentations.
But I would say right now that we think it's moving in the direction that we expected. We'd like to see it move faster, but I think it's making steady progress.
Speaker 8
Yes. That makes sense. And we're also hearing from Unis and Utilities just a greater desire for more open platforms, basically something to build off of for the future. I know you are now participating in the LoRa Alliance. Can you tell us are you seeing that as well?
And what are you doing with your own platform to kind of make it A, more open and B, more extensible?
Speaker 2
Yes. We are. And in fact, we have been a proponent of open standards. I do think open standards will help move along adoption. So utility just absolutely I think sometimes is very hesitant to put in a dedicated system that they can only use with one manufacturer's product.
So I think open systems will move adoption along. And what we're doing and you're right on the LoRa adopting and we have been spending I'd say the last nine months doing what's necessary on the development side to be able to incorporate the LoRa chip into our communication systems. That has been probably the single reason that we have been able to significantly increase our range. The also benefit of that is that we think that it moves us much further along to be able become a part of the Internet of Things. And in fact, I think the lower alliance is moving I think moving along the adoption of the Internet of Things.
It was the lower and I think that when we start getting to the Internet of Things, I think that's when we start seeing perhaps an explosion in terms of the adoption of AMI, because then a utility no longer has to have a dedicated RF network. And the last I'd say the last twelve to eighteen months, a lot of our development side has been on making sure we're Internet of Things ready and being part of the LoRa Alliance, I think positions us well.
Speaker 8
Excellent. Thank you.
Speaker 4
Thank you.
Speaker 0
Thank you. Our next question coming from Ryan Connors at Boenning and Scattergood.
Speaker 5
Great. Thank you. Good morning.
Speaker 2
Good morning, Ryan.
Speaker 5
I wanted to talk a little bit about, I guess, the pricing side of the oil and gas equation. You talked a lot about the demand issues. But I want to talk a little bit about pricing, if you could give us some color there. And I guess, specifically, have you seen any instances where Anvil is being asked to reprice or renegotiate pricing on business that's already in backlog?
Speaker 2
Yeah. Ryan, I would say no repricing because we don't have in that product a long backlog. We probably we'll get the order and we'll ship it within a couple of weeks and it goes out to our distributors. I think what our distributors have been doing as I referenced earlier, they've been bringing down that inventory their inventory to greater rate and not replacing it. We've seen some pricing, I think some pricing pressures.
I think we've seen maybe a little more of our end user or distributors maybe looking a little closer or end users looking a little closer in an off shore product rather than domestic produced. Generally this market is will tend to favor domestic produced products. We estimate for the third quarter that we may have seen about a $200,000 erosion from pricing in the oil and gas market at Anvil.
Speaker 5
Okay. Okay. That's interesting. Thanks, Greg. And then I guess this is a tougher one to answer.
Appreciate that there is not too much you're going to tell us on a quantitative basis. But the four color the 4Q color is appreciated. But given the fiscal year, obviously, 16 is arguably more important for the stock right now. So I mean recognizing you don't want to quantify anything, how are you can you give us some qualitative kind of perspective on how you're looking at 2016? I mean you've talked about some of the tailwinds.
I mean do you think it's a double digit type of is it a significant growth year in Mueller Co. Given some of these headwinds we've had and the comps will be relatively easy? Is it single digit? I mean any kind of perspective Let would be
Speaker 2
me preface my remarks and I'm making an assumption that we're not going to have to build any arcs next year because of forty days of rain. But when we look at the drivers, certainly, I think that from the housing and municipal spending, we think that looks to be at least as strong as we saw in 2015. And if we don't have as I said, if we don't have the weather disruption, certainly we're not meteorologists. We would think we should see nice continued growth on the MuellerCo side. On the Anvil side, I think we continue to expect to see growth in non res construction.
And when we start getting to the middle of the year next year, we're going to have a lot easier comps on the oil and gas side. I think when we look at Echologics, a lot of our big investment will be behind us. And the investment that we put in salespeople as well as I referenced earlier the development of cell technology for our fixed leak detection for distribution water distribution systems. And we expect to be going into 2016 at Mueller Systems at least on the AMI side with backlog and awards double where we were. So I'd say right now that again difficult for me to put percentages percentage growth.
But I would say that with the exception of the question mark on oil and gas will there be further deterioration, we feel pretty comfortable in what's happening in our end markets. And as I said that if we don't see further deterioration in oil and gas in the second half of the year, we should have easier comps.
Speaker 5
Okay. And then on the down the P and L a little bit also looking at 2016, you've made some going back a year or more you talked about kind of where you saw Mueller Co. Margins kind of getting to in the peak of the cycle. And I think recall saying hearing 20% would probably be kind of as good as it would get. And yet here we are kind of there and I think an earlier point in the cycle than we'd expect.
So can you comment on the kind of margin outlook longer term for Mueller Co? And then I'll add to that any outlook you provide on the corporate unallocated line because it's come down and should we expect those savings to continue into next year?
Speaker 2
Sure. Yeah. I think that when we look at the results especially this quarter at our Mueller based business, I think that we continue to see the benefits of increased operating leverage. But we're also seeing the benefits of our lean initiatives. We're in our fourth year of lean initiatives.
So we're just getting much more productive. So when we look I'll say when we look at our Mueller based business, we said we always felt comfortable with that getting back to twenty five percent EBITDA margins. We hit 30% this quarter. So I think that we should be able to do better than the 25% that we have previously said for Mueller Co. Then when we add systems and ecologic, again as I said that we're confident that we'll be going in with a much higher backlog.
So we should see better performance on those businesses and our investment in Ecologics should be behind us. So the big investment that I talked about. So when we look at the when we look at that that we said, yes, if we look and we continue to see the demand that we expect, we should perhaps do better I think than what we have what we guided in the past. And I'm sorry, Ryan, your other question?
Speaker 5
Just on the corporate expense Yes. Yes.
Speaker 2
Always strive to streamline corporate operations. Sometimes we will have some quarter to quarter variability based on a project that we may have done here at corporate. We did one a year ago in the third quarter. That didn't repeat this quarter. That helped contribute down.
Evan any comments there?
Speaker 3
No. I'd just say that last year corporate expenses were just a little over $39,000,000 and we expect corporate expenses to be 33,000,000 to $34,000,000 in fiscal twenty fifteen. And going forward, as Greg mentioned, we're always focused on improving our efficiency here reducing costs. And I would say, wouldn't see anything any significant movements in corporate perhaps a little inflationary impacts. But in that $33,000,000 $34 $35,000,000 range is about the run rate for us now.
Speaker 5
Okay. That's very helpful. Thanks very much for your time.
Speaker 2
Thanks, Ryan.
Speaker 0
Thank you. Our next question coming from Kevin Bennett of Synergy Capital.
Speaker 9
Hey, good morning, everybody.
Speaker 5
Hey, good morning.
Speaker 9
Last quarter we talked about California drought and how near term that could negatively impact you guys if homebuilding slows down. I was wondering if you had an update on that front in terms of kind of what you saw in the quarter and what you're hearing now?
Speaker 2
Kevin, I don't think yet it's impacted us positively or negatively. On the positive side, we're having a lot more discussions about leak detection. We referenced earlier that we have a pilot in Los Angeles. We have a pilot that's going on at East Bay Mud, which is outside Oakland. So we're seeing more and more interest there.
But when we look at our year to date in California, on our water side, our sales are up about 6% and they were 7% through our first six months. They were 5% up 5% in the third quarter. So I would say we really haven't seen too much movement either way from the drought yet.
Speaker 9
Okay. Great. Moving to Anvil, if I can you give us some commentary on what you're seeing on the non res side? Maybe what it did in this quarter and kind of kind of growth you're looking at going forward?
Speaker 2
Yeah. When we look at the non res side at Anvil, sales of our fire protection products were essentially flat in the third quarter year over year. And sales of our mechanical products were slightly down. We believe that there may have been some negative weather impact, but we just don't feel as comfortable making an assessment on that impact on the anvil side as we do with the Mueller business. Our mechanical products are more widely used and we go across as we've talked in the past the institutional hospitality industrial applications.
We actually think that our sales were down on the industrial side, which could we may be having an indirect impact from oil and gas because oil and gas cuts across a lot of manufacturing industries and that we may have seen a bit of an impact there, but we think it's more timing. Through our first six months, we believe we were up about 5% to 6% year over year. We've seen a little bit of a pickup in our July daily shipments up between 46%. So I think when we look at the fourth quarter, we still think that we're going to see growth from non res construction. And as we said a little earlier, it looks like that the indicators are that we should see some growth in 2016.
But from what we're seeing with exception of what we saw this quarter, it's still looking like mid single digits.
Speaker 9
Okay. Great. That's helpful. And then last question for me. On the M and A front, I mean, know you can't comment on anything specific, but any color you could provide there and whether you're having more conversations than you have in the past or if you're not really focused on that or what you're thinking about M and A?
Speaker 2
I can't really say we're having more conversations. I mean, we continue to look to see where are the strategic fits. We said in the past that if we have the opportunity to grow on our water side, that's obviously our priority. If we have a chance to enhance our competitive position on the I'll say the technical side on the smart metering, systems, leak detection that would be an opportunity for us we think to enhance our international exposure. But I would say that right now that we're there's probably not much change than where we have been in the last twelve months other than we feel more comfortable in talking about it because our balance sheet is in a lot better position.
Speaker 9
Got it. Okay. Perfect.
Speaker 2
Thanks, Greg. Thanks, Kevin.
Speaker 0
Thank you. Our next question coming from Seth Weber of RBC Capital Markets.
Speaker 8
Hey, good morning, everybody.
Speaker 2
Good morning, Seth.
Speaker 8
Most of the questions asked and answered. But just going back to Anvil, can you give us an idea where you're at with capacity utilization there? And I'm just wondering, mean margins in that business have been kind of 8% here for three quarters or four quarters three quarters, I guess. Is this the new normal for Anvil assuming that energy oil and gas prices don't inflect higher from here? I mean is the margins in the business from 2012 to 2014 were double digits, but is 8% a kind of a better range to think about going forward?
Speaker 2
That's a certainly as we pointed out that when we're down in the oil and gas even though it's 20% of Anvil's sales, those products carry about an 800 basis points higher gross margin. So, yeah, we are unduly we are impacted more on the gross margin line than perhaps the sales line when we see a downturn in that market. I think as we if we increase our capacity utilization and in total landfill is about 65%. But when you're when we look at our oil and gas those we have two facilities that are primarily manufactured for oil and gas. They're well down they're well below the 50% level.
So if oil and gas stays flat and we see some growth in non res construction, I think we would see some margin improvement because of capacity utilization at our largest facility that's dedicated to manufacturing those products. But I would say on the other hand, if that the oil and gas will have an impact to keep it down, I would think margins below what we saw several years ago.
Speaker 8
Okay. That's helpful. Thanks, Greg. In the past, guys have given the margin drag on Mueller Co. For the Systems and Echologics business or a dollar drag.
That something you can update?
Speaker 2
Yeah. If you look from an adjusted operating margin, it was about 300 basis points this quarter.
Speaker 8
Terrific. And then just lastly, the share buyback 500,000.0 shares or so, I mean that was good to see. Is that of run rate we should think about going forward?
Speaker 2
I don't know if it's a run rate. As we said in our prepared remarks, we'll certainly we don't anticipate implementing a formulaic repurchasing plan. I think we'll approach it on a quarter to quarter as we consider all of our capital allocation options. And but it's something that obviously we have the authorization from our Board and it's something that we look very closely.
Speaker 8
Okay. Appreciate it. Thank you very much guys.
Speaker 2
Thanks, Ted.
Speaker 0
Thank you. At this point, there are no further questions.
Speaker 2
Well, again, thank you very much for your participation today and look forward to seeing you all soon.
Speaker 0
Thank you. And that concludes today's conference. Thank you all for joining.