Mueller Water Products - Earnings Call - Q4 2014
October 29, 2014
Transcript
Speaker 0
Welcome and thank you for standing by. At this time, all participants have been placed on a listen only mode until today's question and answer session. This call is being recorded. If anyone does have any objections, you may disconnect at this time. And I'd now like to turn the call over to Marty Zacchus.
You may begin.
Speaker 1
Good morning and thank you, Kathy. Welcome to Mueller Water Products twenty fourteen fourth quarter conference call. We issued our press release reporting results of operations for the quarter ended September 3034 yesterday afternoon. A copy of it is available on our website muellerwaterproducts.com. Mueller Water Products had 159,800,000.0 shares of common stock outstanding September 3034.
Discussing the fourth quarter's results this morning are Greg Hyland, 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 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 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. All operating results discussed in these prepared remarks are from continuing operations unless specified otherwise. A replay of this morning's call will be available for thirty days after the call at 60386. The archived webcast and corresponding slides will be available for at least ninety days in the Investor Relations section of our website. In addition, we will furnish a copy of our prepared remarks on Form eight ks later this morning.
After the prepared remarks, we will open the call to questions. I'll now turn the call over to Greg.
Speaker 2
Thanks, Marty. Thank you for joining us today as we discuss our results for the twenty fourteen fourth quarter and full year. I'll begin with a brief overview of the quarter and full year 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 first quarter and full year. We had a strong fourth quarter with net sales up 9.4%, adjusted operating income up 29% and adjusted EBITDA up 18.9%.
In the fourth quarter, Mueller Company's 11.5% increase in net sales, 27.2% increase in adjusted operating income and two twenty basis points improvement in adjusted operating margin to 18% were primarily attributable to growth in its domestic end markets and improved operating leverage. Anvil had its strongest year over year net sales growth in 2014 with fourth quarter net sales increasing 5.4%. 2014 was another strong year for Mueller Water Products as evidenced by net sales growth of 5.7% and adjusted operating income growth of 28.7%. Additionally, Mueller Water Products generated free cash flow of $110,700,000 an increase of $33,100,000 or 43% year over year and reduced net debt leverage almost a full turn to 2.1 times compared to three times at the 2013. Adjusted EBITDA grew 16.4% and adjusted EBITDA margin for 2014 was 15.5%.
Adjusted EBITDA margin in Mueller Company was 21.3% and Anvil was 14.1% for 2014. We are also pleased with the progress we made in 2014 in expanding our portfolio of leak detection technologies, including commercially launching 20 fourseven fixed leak detection monitoring for both transmission and distribution mains. While these solutions were only recently introduced, we are excited about their long term growth potential. Our 2014 performance reflects the ongoing operating improvements we have made over the past several years as well as the increase in volume we have realized as our end markets have improved. With that, I'll turn the call over to Evan for a detailed discussion of our financial results for the quarter.
Thanks, Greg, and good morning, everyone. I'll first review our fourth quarter consolidated financial results and then discuss segment performance.
Speaker 3
Net sales for the twenty fourteen fourth quarter of $320,700,000 increased $27,500,000 or 9.4% from the twenty thirteen fourth quarter net sales of $293,200,000 due primarily to higher shipment volumes at both Mueller Company and Anvil. Gross profit increased 14.1% to $101,300,000 for the twenty fourteen fourth quarter compared to $88,800,000 for the twenty thirteen fourth quarter. This improvement was driven primarily by higher shipment volumes and higher sales prices. Gross profit margin of 31.6% in the twenty fourteen fourth quarter increased 130 basis points from 30.3% in the twenty thirteen fourth quarter. Selling, general and administrative expenses were $58,200,000 in the twenty fourteen fourth quarter or 18.1% of net sales.
Adjusted operating income for the twenty fourteen fourth quarter increased 29% to $43,100,000 as compared with $33,400,000 for the twenty thirteen fourth quarter. This increase was due primarily volumes. Adjusted operating margin also improved 200 basis points to 13.4%. Adjusted EBITDA for the twenty fourteen fourth quarter increased 18.9% to $57,300,000 as compared with $48,200,000 for the twenty thirteen fourth quarter. Adjusted EBITDA for 2014 was $183,900,000 our highest year since 02/2008.
Interest expense net for the twenty fourteen fourth quarter declined $700,000 to $12,000,000 as compared with $12,700,000 for the twenty thirteen fourth quarter. During the twenty fourteen fourth quarter, income tax expense was 3,800,000.0 on income before income taxes of $30,000,000 resulting in an effective income tax rate of 12.7%. The twenty fourteen fourth quarter tax expense was reduced by $8,000,000 due to releasing almost all of deferred tax valuation allowance based on our expectation of future taxable income. Excluding this adjustment, the effective income tax rate for the twenty fourteen fourth quarter was 39.3%. Reported net income per diluted share for the twenty fourteen fourth quarter was $0.16 and included the tax benefit I just mentioned.
Adjusted net income per diluted share for the twenty fourteen fourth quarter improved to $0.12 from $08 in the twenty thirteen fourth quarter. The twenty fourteen fourth quarter adjusted results exclude the deferred tax valuation allowance benefit of $8,000,000 and after tax loss on early extinguishment of debt of 600,000 and after tax restructuring expenses of $100,000 The 2013 adjusted fourth quarter results excluded deferred tax valuation allowance benefit of $4,400,000 and after tax restructuring expenses of 100,000 There was a weighted average of 162,600,000.0 diluted shares of our common stock outstanding for the twenty fourteen fourth quarter compared to a weighted average of 161,200,000.0 diluted shares outstanding for the twenty thirteen fourth quarter. I'll now move on to segment performance and begin with Mueller Company. Net sales for the twenty fourteen fourth quarter increased 11.5% to $213,000,000 as compared with $191,000,000 for the twenty thirteen fourth quarter. This increase was due primarily to higher shipment volumes across most business and product lines.
Adjusted operating income for the twenty fourteen fourth quarter improved 27% to 38,300,000 as compared with $30,100,000 for the twenty thirteen fourth quarter. Adjusted operating income improved $8,200,000 due primarily to higher shipment volumes. Adjusted operating margin for the twenty fourteen fourth quarter improved two twenty basis points to 18% as compared with 15.8% in the twenty thirteen fourth quarter. Adjusted EBITDA for the twenty fourteen fourth quarter increased to $48,800,000 as compared with $41,200,000 for the twenty thirteen fourth quarter. Adjusted EBITDA margin for the quarter increased 130 basis points to 22.9%.
I'll now turn to Ann. Net sales for the twenty fourteen fourth quarter increased 5.4% to $107,700,000 as compared with $102,200,000 for the twenty thirteen fourth quarter. The increase resulted primarily from higher shipment volumes to its key end markets oil and gas, commercial and industrial as well as higher prices. Adjusted operating income for the twenty fourteen fourth quarter improved 30.2% to $16,800,000 as compared with $12,900,000 for the twenty thirteen fourth quarter. Amble's adjusted operating margin increased to 15.6% from 12.6% for the twenty thirteen fourth quarter.
The increase in adjusted operating income and adjusted operating margin resulted primarily from higher shipment volumes and a gain on the sale of assets of $2,500,000 which Greg will discuss in some detail. Excluding this gain, Amble's adjusted operating income grew 11% and adjusted operating margin expanded over last year. Adjusted EBITDA for the twenty fourteen fourth quarter increased to $20,400,000 as compared with $16,500,000 for the twenty thirteen fourth quarter. Adjusted EBITDA margin for the quarter was 18.9%. Corporate expenses for the twenty fourteen fourth quarter were $12,000,000 compared with $9,600,000 for the twenty thirteen fourth quarter.
Most of this increase was attributable to the performance units of our stock based compensation program based on the year over year improvement in return on net assets. This improvement applied to awards granted in both 2013 and 2014. Turning now to a discussion of our liquidity. Free cash flow, which is cash flows from operating activities less capital expenditures was $75,200,000 for the twenty fourteen fourth quarter compared to $58,700,000 for the twenty thirteen fourth quarter. Additionally, we improved a measure of working capital efficiency by 100 basis points year over year as evaluated by trailing four quarter average accounts receivable, inventory and accounts payable as a percent of net sales.
At September 3034, total debt was $545,600,000 and included $365,000,000 of 7.32% senior subordinated notes due 2017, dollars 178,300,000.0 of 8.5% senior unsecured notes due $20.20 and $2,300,000 of other. During the fourth quarter, we redeemed $55,000,000 of our 7.32% senior subordinated notes through 2017. Net debt leverage was down to 2.1 times at September 3034. Using September 3034 data, we had $158,300,000 of excess availability under our asset based credit agreement. I'll now turn the call back to Greg.
Speaker 2
Thanks, Devin. I'll now elaborate on our twenty fourteen fourth quarter results and end markets and provide an outlook for the twenty fifteen first quarter and a general overview of our expectations for 2015. I'll begin with Mueller Company. Mueller Company had another quarter with strong net sales growth. Overall, net sales were up 11.5% year over year.
We saw net sales growth in all of our product lines with the exception of export shipments, which declined about 3,000,000 year over year. Our international business tends to be project based and can fluctuate from quarter to quarter. Domestic net sales of our valves, hydrants and brass products grew 17% in the quarter year over year. We believe this strong growth again came from both our residential and municipal end markets. In addition, distributor inventories during the quarter declined both sequentially and year over year.
For the full year 2014, domestic sales net sales of our valves, hydrants and brass products also grew 17% year over year. We saw 14% net sales growth in Canada excluding the impact of unfavorable currency exchange rates. In addition, net sales grew 30% in our Mueller Systems business, although it was an easier comparison. Mueller Company's overall adjusted operating income grew 27.2% in the fourth quarter year over year. This strong growth was attributable to volume increases across all our product lines.
Now let's look at Mueller Systems performance. Mueller Systems adjusted operating income improved about $3,400,000 in the fourth quarter year over year due to a favorable mix and lower costs. For the full year as well, Mueller Systems saw a mix improvement with an increase shipments. For the year, net sales grew 7.2%. Operating performance improved about $5,000,000 due to cost savings and the favorable mix, making it breakeven for the year.
Mueller Company posted an adjusted EBITDA margin of 21.3 for 2014, an improvement of two fifty basis points. The base business reported an EBITDA margin of 24.3%, an improvement of two forty basis points year over year, largely driven by strong growth of our domestic core valve, hydrants and brass products throughout the year. For 2014, Mueller Company's incremental adjusted operating income as a percent of incremental sales was 59%. Anvil's net sales during the quarter quarter grew year over year Anvil's with improvement across both the mechanical and fire protection markets driven by non residential construction spending. This is the first quarter in twenty fourteen that we saw increased demand from both the mechanical and fire protection markets.
The energy market also continued to remain strong with net sales up 14%. Anvil's adjusted operating income improved 30% year over year, primarily due to a gain on the sale of assets. During the fourth quarter, Anvil closed on the sale of its Bloomington, Minnesota facility, which resulted in the gain of $2,500,000 Anvil decided it could better serve its customers and grow its business by using independent sprinkler pipe fabricators rather than doing it in house. It ceased operations at this facility and sold associated production equipment and inventory. This move also enabled us to withdraw from the company's only multi employer pension plan.
I'll now discuss our expectations for the full year 2015 beginning with Mueller Company. We expect continued growth in net sales at Mueller Company, driven primarily by both the residential construction and municipal end markets. With regard to residential construction, while housing starts are expected to grow about 10% in calendar twenty fourteen, we believe we saw stronger growth largely due to the As you know, development of raw land for residential construction is a key driver of demand for our products. According to recent surveys by I. V.
Zelman and Associates, growth in land development activity reached record highs for their survey during the quarter with the strongest activity in the central region of the country, which includes Texas. We expect that some of this activity will drive demand for our products in fiscal twenty fifteen. Blue Chip consensus for growth in housing starts in calendar twenty fifteen is about 18%. And I. V.
Zelman and IHS are forecasting between fifteen percent and twenty percent. On the municipal front, state and local seasonally adjusted tax receipts continue to increase and hit new highs and municipalities overall are in better fiscal shape than they have been over the last several years. We saw strong growth in our municipal business in 2014 and based on discussions with our customers and distributors, we expect to continue to see growth in demand for repair and replacement of water infrastructure at the municipal level in 2015. The CPI for water and sewage maintenance increased around 4% for the last twelve months ended August 2014. Rising water rates are a significant source of funds for municipalities to drive capital projects.
Water rate increases have far outpaced those of other utilities over the last several years. Overall, for the Mueller Company based business, which excludes our metering and leak detection products and services, we expect year over year net sales to increase in 2015 in a range comparable to the 7.3% growth we saw in the base business in 2014. Mueller Systems is entering 2015 with a lower backlog than it had last year. We expect a number of larger AMI projects to be decided in 2015. In fact, we have outstanding quotations on some of these projects today.
We expect to be successful in winning a portion of these projects based on our historical win rate for AMI projects, but we do not think meaningful shipments from these projects will occur until 2016. Consequently, today, our expectations are for Mueller Systems net sales in 2015 to be flat. Even with flat net sales, based on our current backlog and project pipeline, we expect Mueller Systems to again improve its adjusted operating income on a year over year basis. We believe this improved performance will come from our cost saving initiatives as well as from an improved mix. For our leak detection and pipe condition assessment business, we continue to gain traction in both marketplaces.
As with the introduction of other new technologies into the water industry, we find that we often start with pilot projects to enable water systems to test the technology improve the value before broader scale adoption. During 2014, we introduced 20 fourseven fixed leak detection monitoring and in 2015, we expect to complete the full commercial rollout of this technology. We are also concentrating on building our international sales and distribution capabilities. As we have mentioned, there is a significant market opportunity for leak detection outside The United States. For example, we most recently established independent distribution in Germany.
While we expect to see strong growth in net sales in total, we believe that the investments we need to make in our technologies and to expand our geographic presence and grow our distribution will result in a negative net impact of around $5,000,000 in 2015. We believe that these initiatives and investments are necessary to achieve meaningful sales growth in the future. Overall, for Mueller Company, based on the current outlook for housing and municipal spending, we expect year over year net sales growth in 2015 in a range comparable to the 7.4% growth we saw for total Mueller Company in 2014. On the production side, we expect to continue to see the benefits of lean manufacturing and other productivity improvements. We do not expect any significant changes in our average raw material and purchased parts costs for 2015 compared to 2014.
With increased production and shipment volumes, we should benefit from stronger operating leverage and see year over year margin expansion. Overall, we expect Mueller Company's adjusted operating income and adjusted operating margin to again increase 15. Now I'll turn to Anvil. We expect Anvil to see slightly higher shipment volumes in 2015. The Architectural Billing Index was above 50 for most of 2014 and has had strong readings from May forward, which should drive an increase in construction spending in 2015.
Most economic forecasts call for growth in 2015 for non residential construction spending. We saw improvement in our fourth quarter non residential construction end market and believe this level of activity will carry over into 2015. Spending in the oil and gas markets is impacted by oil and gas prices, which forecasts have rig counts flat to slightly up in 2015, but that could change with fluctuations in oil and gas prices. Anvil sales to the oil and gas markets grew about seven percent fourteen. Based on current market conditions, we expect the growth could be flat or increase slightly in 2015.
We expect the benefits of lean manufacturing and other productivity improvements at Anvil to at least offset inflationary increases in production costs. Overall for Anvil, year over year net sales are expected to grow in the low to mid single digit range and adjusted operating income should grow at a greater rate. For Mule Water Products in 2015, we expect net sales growth in the mid to upper single digits. Additionally, with increased production and shipment volumes, we also expect the benefits of continued operating leverage, resulting in adjusted operating income growth and adjusted operating margin expansion. Other 2015 key variables include corporate expenses, which are expected to be $34,000,000 to $36,000,000 depreciation and amortization is expected to be 58,000,000 to $60,000,000 and interest expense is expected to be about $46,000,000 We expect our adjusted effective income tax rate to be near 40%.
Capital expenditures are expected to be 40,000,000 to $42,000,000 For 2015, we expect free cash flow to be driven primarily by improved operating results. We have substantially exhausted our federal NOLs and expect to return to being a cash taxpayer in 2015. We also expect to make only minimal cash contributions to our pension plan in 2015. As a reminder, our target is for free cash flow to exceed adjusted net income. Turning now to our outlook for the twenty fifteen first quarter.
I'll start with Mueller Company. Overall for the first quarter, we expect to continue to see growth at base Mueller Company, driven primarily by demand from both residential construction and municipal spending. Recently, momentum in the growth of housing of the housing market recovery has slowed. However, we still believe that with land lot development, we are benefiting from growth in residential construction. We also believe that we will see growth in the municipal market, which held up well throughout 2014.
We believe Mueller Company's net sales growth in the first quarter will be in the mid to upper single digits. We expect both Mueller Company's adjusted operating income to improve and for adjusted operating margin to expand in the first quarter year over year. We believe this improvement will primarily be driven by an increase in domestic shipments we expect for our core products. We anticipate that Anvil's first quarter net sales percentage growth will be up in the mid single digits year over year as we expect the momentum we saw in the non residential construction market in the fourth quarter to continue in the 2015. We expect Anvil's adjusted operating income to be slightly up on a year over year basis and we expect adjusted operating margin to expand.
For Mueller Water Products as a whole, we believe the twenty fifteen first quarter net sales percentage growth will increase in the mid to upper single digits year over year, driven by performance at both Mueller Company and Anvil. We expect solid increases in our twenty fifteen first quarter adjusted operating income as well as expansion in adjusted operating margin year over year. Reflecting on 2014, we are certainly pleased with our net sales growth, conversion margin and improvement in adjusted income per diluted share to $0.30 from $0.18 Our free cash flow generation of 110,700,000 enabled us to reduce our total debt outstanding and lower our net debt leverage to 2.1 times. Additionally, in 2014, we continued to focus on enhancing value for our customers and expanding intelligent water technology offerings with the introduction of several new products, including our lead free fire hydrant, next generation gate valve, which is rated for pressures 40% higher than competitive valves, remote pressure monitoring and 20 fourseven fixed leak monitoring for both transmission and distribution means. We are certainly pleased with the progress that we have made and appreciate the recognition of our innovations when we received the twenty fourteen Best Smart Water Product Solution Award at the inaugural Smart Water Summit in September.
We received the award for our suite of intelligent water technology solutions, which enables our 20 fourseven continuous leak monitoring for both distribution and transmission mains, our AMI system, including a remote disconnect meter and our remote pressure monitoring offering. This award was voted on by water utility executives representing some of the most progressive water utilities in North America. We appreciate that we need to continue to demonstrate traction with our newer technology products and services and generate net sales growth. However, as we continue to assess the marketplace demand solutions that offer improved operational efficiency, enhanced customer service and value added information, we are increasingly convinced that we are building the right suite of solutions. As we just discussed, we believe that the outlook for our key end markets, new water infrastructure driven by residential construction, repair and replacement of existing water infrastructure for municipalities and non residential construction remains positive.
As our capacity utilization increases, we believe that we will continue to demonstrate operating leverage which leads to expanding margins and improved returns for our stockholders. With that operator, I'll open up this call for questions.
Speaker 0
Thank you. And Mike Wood, your line is open.
Speaker 4
Hi. Thank you. You've provided a lot of detail on the prepared remarks so far. On your Mueller base business, your incremental margins just based on the quick math and the numbers that you gave look like they were about 26%. It's a solid number, but it's far below where it's been running.
Could you give some color in terms of what impacted the incremental margin in that base business?
Speaker 2
Sure. Sure, Mike and good morning. Yes, as we said, including this quarter, our conversion margins for Mueller Company for the full year were 59%, so well above the 35% we typically expect. We had several factors impacting conversion margin this quarter as compared with the previous three quarters this year. I think first, while we saw strong growth in our domestic valves hydrants and brass products this quarter, as I discussed 17%, that's less than what we saw last quarter at 28%.
So we had a slight mix impact. Secondly, given the increase in demand that we have seen for our hydrant product line, we were required to add a partial second shift at our Albertville hydrant manufacturing facility in the quarter. We just couldn't handle the work anymore by working additional overtime. So when we're in that situation, we're just less situation less efficient with a partial shift than we would have been if we had enough work to staff a full shift. So while the additional volume contributed to overall greater profits, the inefficiencies of a partial second shift did impact margin conversion.
Finally, we had higher costs at our Ecologics business as we began staffing for a number of projects that will now begin in the 2015. We had expected some of these to begin in the fourth quarter. But last year, Ecologics backlog entering the year was about $1,000,000 This year's backlog is $5,000,000 So when we look at just the fourth quarter, additional costs related to staffing to handle this additional work did impact the Mueller Company's performance in the fourth quarter. So but still when we look at our full year and we look at Mueller Co. With a conversion margin of 59%, certainly higher than we expect our conversion margin to be on average over time.
If we look at our base business, our base business Mueller Co. Had a conversion margin of 37% and that certainly was brought down by the additional cost that I just referenced at Echologics in the quarter.
Speaker 4
Understood. Thank you. I also believe I noticed a $10,000,000 acquisition of a business in the quarter. Can you describe what that is?
Speaker 2
Yeah. On July 1, we completed the acquisition of certain assets of Line Valve Company. It's a privately held company. We integrated it and are in the process. It will be integrated in our Pratt product line.
The acquisition was about $10,000,000 And Line Valve, if you look at calendar year 2013, had sales of slightly under $11,000,000 We think that this was a pretty nifty acquisition for us because it expands Pratt's product offering when going to water treatment facilities. And so we think when we bring this product line into Pratt's distribution network, the one, we have the opportunity to grow it. But two, it just makes us we think more competitive when bidding on water treatment plant opportunities by having a more complete line. So it was a relatively small acquisition, but we think if we look at a year or two out that when we fully integrate it bring it into Pratt distribution. And again as we mentioned on previous calls, we're beginning to see more and more quotation activity on the water treatment side that is good timing and it's going to put us in a much stronger competitive position.
Speaker 4
Okay. Thank you.
Speaker 2
Thanks, Mike.
Speaker 0
Our next question comes from Ryan Connors. Your line
Speaker 5
Great. Thank you. A couple of few questions for me. First off, Greg, you mentioned in your prepared remarks that distributor inventories declined in the fourth quarter both sequentially and on a year over year basis. What do you attribute that to?
And what's your read on that in terms of an indicator of underlying market strength?
Speaker 2
Yeah. Good morning, Ryan. Yeah, we just look at that as good news. We didn't see a concentrated effort on our distributors saying, boy, we need to bring down inventory. We typically do see it come down this time of year because we're getting ready to get into the non construction.
I mean weather related maybe reduced construction activity across The U. S. But no, we interpret it as very positive because if you recall that the inventories our shipments in the third quarter inventories were up with our distribution network. And the fact that our sales of our domestic valves in the hydrants and brass products still grew 17% and distributors' inventories came down That's just further indication to us that we're seeing a strong end market activity.
Speaker 5
That's good news. I wanted to also talk a little bit about this asset sale in Annville, the Minnesota asset being divested. I know you've talked in the past Greg about low cost region imports being both a risk and an opportunity for Anvil given that you do in source some of your own product from your overseas operations. Are we to read that as and you mentioned in your remarks that they're going to be sourcing elsewhere for some of what was produced in Minnesota. Are we to read that as you're shifting more of your sourcing in Anvil from low cost regions parts of your complex?
Or is that a separate issue altogether?
Speaker 2
No, Ryan that's separate. And thanks. And maybe our prepared remarks weren't quite as clear. This was actually a fabrication business. So it was a regional fabrication business where we would take sprinkler pipe and bend it and get it ready for a job site.
And we just looked at it and said that's outside our core. It was a legacy business. We have been up in that territory for some time. We went to one of our distributors who's also a fabricator and just said we think you're probably better off doing this business and rather than us competing with our distributor and then sold the business to our distributor. So really it had nothing to do on the manufacturing side.
On the manufacturing side was almost an isolated operation for us where we did fabrication of bending and all of sprinkler pipe and just moved it to a distributor, which we think in the long run might even increase demand for our products since we're no longer competing with
Speaker 5
Okay. That helps clarify that. And then while we're on the topic of low cost region sourcing, I mean, said in the past that that part of your business in Anvil is growing faster than domestic sourced product. Is that still the case? And what are the what's the update there?
Speaker 2
Yeah. When we Ryan, when we look at it and it moves very it's a very slow movement. But I think when we look at the trends that we certainly can come to the conclusion that as you just mentioned that we could see that growing at a faster rate than domestic produced. We actually that was happening before the downturn in the 02/2010 timeframe. That started to level off.
And I think it levels off because a lot of time our distributors will carry an offshore produced product and a domestic produced product because we have and we mentioned in the past that there'll be locations or there will be some contractors that will only install a domestic produce. So that gives our distributors the flexibility. Generally, when we see when the market downturn, they'll manage their inventories a little more closely. If they carry only domestic produce that gives them a little more flexibility obviously because they can sell that to either when domestic produce is required or to any application. So to us it's an indication that if our distributors are now starting to carry domestic produced and offshore produced, it's an indication to us that they're seeing the market pick up.
But it's also we do think that more likely that that's a trend that we may be seeing over the next couple of years. So we don't think it's a dramatic shift, but just a slow steady shift.
Speaker 5
Got it. And then if I could sneak one in for Evan. Evan, we're well inside of a year now when the senior note is going be callable next year in September. And I just want to get your early read on the potential for cash deployment beyond that point. Obviously, that's assuming that the restricted payments provisions get lifted then.
Would a buyback be something that the company would consider as one of the things that it would look at a year from now?
Speaker 3
Well, good morning, Ryan. And certainly as you know, we're limited a bit related to our senior indentures with respect to share buyback and additional debt reduction. That has been our primary focus. But we do believe however we're in an opportunistic position to consider refinancing as we move closer to that first call date of our senior notes and breakage costs have come down less than what they were several months ago, which contributes to some compelling economics. Despite some recent volatility in the markets, we're hopeful that there will be a market window where we may have the ability to reduce interest expense, improve overall cash flow and gain some flexibility through refinancing.
Obviously, terms of any potential refinancing remain to be seen and any transaction would be subject to favorable market conditions among other things. We'll of course keep you posted of any developments in this regard.
Speaker 5
Okay, great. But just to be clear once that's refinanced presumably you will have more flexibility to do something like a buyback. Is that not correct?
Speaker 3
Certainly with the refinancing effort there will be additional flexibility compared to what we have today.
Speaker 5
Okay. Super. Well, thanks for your time.
Speaker 2
Thanks, Thank
Speaker 0
you. Our next question comes from Jerry Revich. Your line is open.
Speaker 6
Hi, good morning.
Speaker 5
Good morning, Jerry.
Speaker 2
Good morning, Jerry.
Speaker 6
Can you just talk about the assumption of flat material costs next year? Are you assuming steel costs pick up in the back half of the year? I guess I would think given steel price moves that might be a tailwind for your business at least in the first half?
Speaker 2
Yes. Jerry, when we look at 2015 and trying to read the tea leaves and talk to our suppliers and so on, we could see some movement throughout the year. But I think generally that our conclusions are that we'll see that we are expecting flat material costs. I would say that when we look at our fourth quarter year over year, our scrap purchases were up 2%. The cost on an average price per ton sequentially that was down.
So we keep seeing some movement. For instance in our second quarter, they were down flat year over year. So we're seeing it moving up and down. I would say that when we look at it the fourth quarter, was a help for us. And I would expect that when we look at the back to your point for the first half of the year, it will be more of a help than a negative.
And if we see any negative, it may be in the second half of the year. But overall, when we look at what we see the first half of the year versus the second half of the year, right now we think it looks pretty flat.
Speaker 6
Okay. Thank you for the color. And then from a pricing standpoint, can you just calibrate us on what you expect to realize compared to the list prices that are out there? And I know you've had some product transitions recently as well. Can you calibrate how you're thinking about pricing for 15 for Mueller Co?
Speaker 2
Yes. When we look at pricing for 15, you well, I'll go back to the price increase that for valves and hydrants that we implemented in February. We've been realizing about 60% of that price increase. So we'll get the carryover impact for our first probably our first five to six months of this year. Again, when we get to the in the January time frame, our Mueller team will assess our cost position and the strength of the market and so on and we'll make an evaluation then relative to pricing for 2015.
But as we sit here today, we're pretty confident that we'll continue to see that 60% conversion margin on the conversion sorry, realization on the price increase we implemented in February. And we probably don't start shipping at the new price until April. So that will give us six months of fiscal year 2015 to get the wraparound or carryover pricing. And then our Mueller team will make the evaluate probably in the process now of starting to make the evaluation of what needs what they should be doing on pricing for 2015.
Speaker 6
Okay. Thank you. And then in terms of the contracts that you're evaluating in Mueller Systems or the bids that you're submitting I should say, can you talk about just the magnitude of the opportunity if you deliver the historical win rate that you highlighted in the prepared remarks? What would that mean for book to bill this year or revenue growth next year for Mueller Systems? Can you frame that for us at all?
Speaker 2
Yes. Were talking that we are seeing this year or we're in a period for the last couple of months and expect for the next several months, you see four or five major cities and they have started issuing request for proposals, much bigger cities than what we've seen the last several years. These quotations can range anywhere from $30,000,000 to $80,000,000 So we're talking about significantly bigger projects, the bigger cities. And it's interesting that most of the inquiries that we've seen have included requirements beyond meter reading as part of their AMI system. And we're seeing more and more requests to include leak detection in the AMI system.
Speaker 7
Of course, don't know if
Speaker 2
any of you had the opportunity yet, but we issued a press release this morning where we received an order from American Water West Virginia for our 20 fourseven fixed leak detection and that's communicate will be communicated over our AMI system. So we've this is our first order moving from the pilot stage into an actual order. As you know, we've been talking the last several years that we've been focusing our R and D on leak detection as part of an AMI system. We think it can certainly further differentiate us in the marketplace. So we believe that we have the right strategy, the right suite of products and services.
We're seeing that coming through for the proposal request. But I think that back to your point, as we progress in 2015 and expect to grow our AMI business with wins on some of these projects that will be the validation of our strategy. So as we look at them today that we think decisions will be made on most of these projects that were currently out for proposal or that have been quoted. But we don't believe that there will be much if anything shipped in 2015 and that will move into 2016. So when we look at 2015 for Mueller Systems, we look at it as a very important year in terms of what we believe order activity to be.
From that activity though, we think that most of those shipments will be in 2016 for those who win those orders.
Speaker 6
Okay. Thank you. And just can you clarify what's been your historical win rate on these types of bids?
Speaker 2
Well, I can tell you on these types of bids, this is the first time that we've seen in the last couple of years the big the bids to the very large systems. If we look at our win rate on AMI systems that we have quoted over the last several years, it's in the 35% to 40% range.
Speaker 6
Thank you.
Speaker 0
Thank you. Our next question comes from Noah Kaye. Your line is open.
Speaker 8
Thank you and congrats on
Speaker 4
the strong quarter. As you look at that guidance of about 7.5 growth in Mueller Co, I guess for next year, can you talk about the contribution you're baking in for residential construction to drive demand versus the replacement market? How that compares to what you're seeing now?
Speaker 2
We'll look at this year and these are our best estimates and we've said a number of times. We get our information from our distributors, our field sales force and so on. But we think that for Mueller Co, sales or sales driven by the residential market grew about 20% for us and from the municipal markets about 6% for the full year. When we look next year, we actually think that we may see a little higher growth coming from municipal markets and just slightly less coming from the residential construction market. But it would still be relatively strong growth in the double digit range.
And again, as we said in our prepared remarks that based on land development activity that was that was being reported in the July and June, July, August time frame, we'll think we'll get some benefit from carryover of that activity and should drive some of our expectation for growth in demand. So when you look at it, we're saying that we think we're in we should see the same range in 2015 that we saw in 2014. We still think more of that growth will come from residential construction, but we think probably a little less this year from residential construction, a little more from municipal spending.
Speaker 4
Great. I mean just to be super clear and I really appreciate the commentary. So you have 7.5%. So approximately what of the 7.5% would be ballpark residential construction?
Speaker 2
When I look at it, I mean I'd say anywhere from two thirds residential construction, maybe a third of the growth coming from municipal spending and year over year growth. Of course, municipal will still be a much higher percent of Mueller's Sure. Overall
Speaker 4
Absolutely. Absolutely. Second, the AMI discussion, very interesting and appreciate all of the detail. Can you talk a little bit about the existing kind of metering infrastructure in the cities where you're seeing the bids specifically if there's gas and electric metering? What requirements are you seeing for interoperability?
And how do you think you're kind of set up there? Because I would imagine that would be part of a consideration for some of these cities is having all of their infrastructure on the same network.
Speaker 2
No, that's a good question. I will tell you the projects that I referred to are water only. And it's being run by the water utility. They've formed their own committees. They've spent quite a bit of time getting prepared for their proposal.
We're very impressed with the homework they did and what they're asking for. We're clearly seeing that they're not only looking for meter reading today, they're looking at this system to be able to be still be a valuable system six, seven years down the road and be capable of having increased functionality. So the ones I'm referring to that we are seeing are water only. We do from time to time see a combination of water and electric. And in the past, we have partnered with an electric meter manufacturer to go after those.
And depending on the and will depend on the particular relationship or so on, which AMI system. But typically, we've been going on some of the smaller water and electric systems that we've been quoting our AMI system and we have been putting our radios and sourcing the electric meter. We have not yet seen a big trend of interoperability at different cities. Certainly, in a lot of cases, you go to a city, the gas utility, the electric utility could be investor owned, while the city runs the water utility and the water system. So we haven't seen a lot of that yet.
The quotations I referenced are right now strictly water. But we have as I said on occasion when there's water and the West Creek going together, we have partnered with a meter manufacturer.
Speaker 4
Right. Right. That's incredibly helpful. And last quick question. I think last quarter you said for your kind of your core products capacity utilization was around 75%.
Can you tell us about where it was this past quarter?
Speaker 2
Yeah. When we look at this quarter, as I referenced, hydro plant had to put on a second shift, although it wasn't a complete second shift. That bumped up their capacity utilization. And with our valve so we were still I think in that 75%, maybe the 78% range when we look at especially at our valve operations. For the full year, we still think we were down slightly under 70% at Mueller Co, 65% at Anvil.
And now we expect that capacity utilization as we enter the non construction season to come back down.
Speaker 4
Thank you so much. Congrats again. Thanks.
Speaker 0
Thank you. Our next question comes from Brent Thielman. Your line is open.
Speaker 2
Hi. Good morning. Good morning, Brent. Good morning, Brent. Greg, as you're speaking with end users, what's your sense of the priorities are for municipalities and I guess particularly capital investments for utilities kind of headed into calendar twenty fifteen?
And then as a second part to that, is there any discussion yet in the industry about lower fuel prices what that could mean for budgets or any of your own thoughts there? Yes. We haven't heard I'll address your second part of your question first. We haven't heard specific we haven't had any specific discussion about what lower energy costs might mean for the municipality. But certainly, has be a plus.
When you think at I think when we look at the whole state of California, I remember seeing one time a figure that said the largest use of energy in California was moving water, transporting water. So I mean as energy as those energy costs come down, you would think that that certainly would free up their budgets somewhat. Relative to our discussions, and I can't say that we've seen any specific trends in our discussion other than that our field sales force report that our municipal customers still feel very comfortable that with their level of spending. And as I said, it gives us a confidence that we think that we'll see greater demand in 2015 from the municipal market. I will say and this is not enough for us to make any far reaching conclusions, but on a year over year basis for instance at our Mueller Company and our public quotation activity, our number of quotes were up 30% year over year.
But on a dollar value, that was up less than 5%. So that tells us that perhaps the utilities are now looking at some of those smaller projects that they've been putting off for a while and are now finally getting to do some of those even some of the smaller projects. But I would hasten to add that that's one quarter and that's pretty difficult for us to come to that conclusion with any certainty. But we thought it was a pretty interesting development as we looked at it in the fourth quarter on a year over year basis.
Speaker 7
Got it. Thank you for the color and good luck.
Speaker 0
Thanks, Brandon. Thank you. Our next question comes from David Rose. Your line is open.
Speaker 9
Good morning. I have a couple. Hopefully, I can dig them up quickly. First, on the incremental margins, can you provide a little bit more color on your expectations for the incrementals now that you have the second shift? Then on Anvil, if I understand it, we strip out the $2,500,000 your incrementals were about 28%.
So are those the type of incrementals we should expect out of Anvil? And then on Mueller, what should we see?
Speaker 2
David, we are phasing out of that second shift at Mueller Co. We enter in October as we entered our first quarter fiscal year, we were still running it, but we expect to be out of that probably any day and we think we can cover everything we need there with overtime. For us, we are so mix dependent. And as we said, it can fluctuate from quarter to quarter. We have historically said that on the Mueller Company, we expect a 35% we would expect 35% conversion margin at Anvil, a 25% conversion margin.
Certainly, as we see a big shift in mix and the kind of growth rate, for instance, we saw in the third quarter at Mueller, where our domestic valves, hydrants and brass products and our valves domestic valves and hydrants are our most profitable product, we're going to see a higher conversion rate. As we go into 2015, for instance, and we think we're going to see some growth in water treatment and wastewater activity. That may mean we'll see greater growth in our Pratt business, which has lower margins than our valves and hydrants and certainly can impact it. So we're very mixed impacted by mix. We feel very comfortable in the 35% conversion margin at Mueller Co.
And again can point out though that with mix as we demonstrated the last couple of quarters, it can be higher than that. And Anvil, the 28% around that 25, I think we'll see it at times it could be 18%, times it could be 28%, 29%. But again, we feel comfortable on our expectations of about a 25% conversion margin there.
Speaker 9
Okay. Thank you. And then what on a high level what's your rationale for keeping Anvil?
Speaker 2
Anvil is we think we've done a lot of work in that business. It is we think we are we've taken out costs. It's we continue to grow the margins. We've improved generally productivity, though we had a very tough second quarter this year. And we think we're at the very early stages of very early stages of seeing a nice rebound in the non construction market, provides very positive cash flow.
That being said, I think we've always been consistent in saying that if we have opportunities to expand strategically on the water business, If we have the opportunity to get I think a nice international position, we can always look at where Anvil fits in our portfolio. But as we look at it today, we think that we're at the beginning of a nice rebound in its primary market and we've taken out costs out of that business. So we expect it to be a very nice performer for the next couple of years.
Speaker 9
Okay. And then that's helpful. And then one last one and I'll get back in the queue is, on Echologics you have a lot of activity. One of your competitors just announced that Baltimore win. I'm assuming you'll participate in that as well as is perhaps a subcontractor.
You have I believe WSSC has announced that you've won that as well. So I see a lot of activity. What's your bandwidth to manage that? And how much of that business can you manage?
Speaker 2
Great question. David, yes, we think as we're and I referenced and WSSC is a great example that we thought that project would start to begin in the fourth quarter. It's now beginning. We started adding the staffing for that business in the third quarter. So I think we have the ability to flex our capability relative to the field work.
And we have been adding the last year, I would say, our fixed technical people that we hope that we expect will move from project to project. So I think for the when we look out for the next twelve months, we certainly have the capability to handle and grow that business and we can flex our field employees and we have we think enough of the technical people, the engineering people in house today. I think though as we start growing and expect to grow internationally, we are going to have to add more people and some of that is in our forecast that I gave in the outlook for 2015 where I said on a net net basis given that we expect to see growth in our sales at Echologics and that turning into giving us more profit. We're going to offset that though with investments in our sales infrastructure and some R and D primarily a lot of that focused on the international market. When I look at the projects that we have in the pipeline and those that we think that we can win when I look at 2015 and maybe even going into 2016, I think we have the right complement of technical people.
We'll be able to flex our field people. But when I look at our growth expectations on the international market, we have to add people and that's actually reflected in the outlook that I gave for 2015.
Speaker 9
Okay. Thank you very much. I appreciate it.
Speaker 2
Thank you, Jim.
Speaker 0
Thank you. Our next question comes from Walter Liptak. Your line is open.
Speaker 8
Hi. Thanks for taking my question. I wanted to ask about the guidance that you gave. And I think for the first quarter mid to high single digit MuellerCo mid single digit Anvil looks fine to us. But I wondered how what you're thinking about for the rest of the year in terms of like second quarter should be an easy comp.
And so I think I'd expect high single digit, mid single digit again. But then in the back half, in Anvil, it sounds like there's more of a deceleration that you're expecting from the first half. I Well, wonder if it's
Speaker 2
no. When we look at it and as we said in for the full year, we do think that Mueller Co. Will be in the range what we saw this year 7.4%. And on the Anvil, we're looking this is our first quarter as I pointed out that we had both our mechanical and fire protection product lines growing year over year. And I would say that we think that we're going to see a stronger non res construction spending market, but we also temper that a little bit with some of the uncertainty right now that's going on in the oil and gas market with the recent drop in prices.
So I think right now that we're comfortable in pegging Company's net sales growth for the year to average 7.4% and looking at Anvil probably in the mid single digit range.
Speaker 8
Okay. That's fair. Can you refresh us just on the oil and gas? My recollection is that's 10% to 15% of Anvil?
Speaker 2
No. It's 10% of total Mueller Water products, 20% of Anvil. So over the last couple of years that's grown nicely. And as I referenced in the prepared remarks that was up 7%. Demand was up 7% in the oil and gas market for Anvil this year.
So that's about 20% of overall revenues for Anvil. We've been sitting at this time giving our outlook for the last couple of years. I think when we look at non residential construction, we always reference the forecast that we're calling for growth non res construction spending. And when we got into the middle of the year, we talked about how that didn't materialize. Again, we're sitting here with the forecast of growth for non residential construction spending.
But I would say it feels today it feels a little more solid than what it has in the past couple of years. But I would say that we probably right now are sitting less confident on what's going to happen in the oil and gas market.
Speaker 8
Okay. Yes. That sounds great. And then I wanted to ask about the larger city orders that you referenced and how that would impact 2016 growth. Are you suggesting that we would see a continuation of this high single digit growth rate in 2016?
Or could we see an acceleration because of these orders?
Speaker 2
Well, yes. And we're confident, but not confident in that to call them orders yet. They're still we're still in the quotation stage and to be decided this year. But several of these are of the magnitude that certainly would have a material impact on year over year growth rate. But I think at this point, as I said, they're in the quotation stage.
And I think as we go through 2015, they're going to be decided. So once we have better insight there, I'll be better able to comment on 2016.
Speaker 8
Okay, great.
Speaker 2
Thank you. Thank you.
Speaker 0
Thank you. Our next question comes from Seth Weber. Your line is open.
Speaker 10
Hey, good morning. Thanks for keeping the call going here. Just a couple of quick tack on questions. The $5,000,000 negative impact that you highlighted, how is that going to be front end loaded? Or how should we think about that kind of flowing through the year?
That's my first question.
Speaker 2
Seth, it is that's difficult to right now to be able to a lot of it will depend on how quickly we can hire some of the people and fill the positions that we're looking at. If you're sitting here today, I would say it may be more towards we might start seeing more towards the middle of the year and then working through the end. But it depends on how quickly we're able to move.
Speaker 10
Okay. Thanks. And the CapEx guidance for the year 40,000,000 to $42,000,000 I mean that would be the highest level I think it's been since 02/2007, 2008 something like that. Is there anything that you would call out? Is there any you're not adding any brick and mortar I assume, but is there anything specifically you would call out that you haven't addressed on the call yet that we should be thinking about?
Speaker 2
Yes. Seth, I'll ask Evan to address that. Hey, good morning, Seth.
Speaker 3
for 2014 capital spending was around $37,000,000 and we did say 40,000,000 to 42,000,000 for 2015 is our expectation. And it's higher than 2014 because we have identified two projects which improve our productivity. They have a payback of about one point five years. And so they're certainly contributing to higher capital spending, but we believe the return metrics are very attractive. And additionally, in our leak detection, as we look to expand our international offerings, capital spending will be a bit higher as well there.
As a reminder, our maintenance capital spending needs are about $26,000,000 $27,000,000 and the spending above that is for these projects either cost saving related efficiency or new product development.
Speaker 10
And which business categories do the two projects that you've identified fall under the cost savings?
Speaker 3
They fall under Mueller Company.
Speaker 10
Mueller Co. Okay. Great. Thank you, Evan. And then last quarter you talked about a hiccup in the Pratt business as sort of impacting third quarter numbers.
Did that get reconciled here in the fourth quarter? Or is that continuing to in the fourth quarter? Or does that continue? No.
Speaker 2
We're seeing Pratt shipments picking up. And certainly when we look at their backlogs up about $10,000,000 they tend to year over year, they tend to the water treatment market tends to lag what we see on the distribution side. Seth, we mentioned mentioned about quotation activity being up Pratt even though sales were down. And the orders coming in, we were there was really no impact on the negative side from Pratt on this quarter. And we're encouraged because their backlog is up as I said about $10,000,000 on a year over year basis.
Speaker 10
Okay. Great. And then just one sorry one last one. Just a clarification on your comments about the energy outlook with the anvil business. Have you actually seen or heard of a change in customer behavior around the lower oil prices?
Or you're just sort of trying to handicap what you think may happen going forward and that's why you're being concerned that relates to your commentary?
Speaker 2
It's more handicapping. We thought it actually grew 14% for Amdahl in our fourth quarter and haven't seen a slowdown yet. But we're sitting here saying, gee, you would think it would have to catch up at some point. But we have not seen it from the market yet.
Speaker 10
Terrific. That's very helpful. Thank you, guys.
Speaker 2
Thanks. Thanks, Seth.
Speaker 0
Thank you. Our next question comes from Joe Giordano. Your line is open.
Speaker 7
Hi, guys. How are you doing? Great. I apologize if this was asked already. I kind of been bouncing around.
But on Anvil just for the growth rate in the quarter, I just wanted to parse out how much of that was attributable to oil and gas and how much was non res?
Speaker 2
Yeah. Joe, when we look at on a year over year basis, the energy still oil and gas was still the largest single market I mean grew the greatest of any of our single market. On a year over year basis, it was almost 14% as I mentioned. When we look at our non res construction, it probably was about in the 5% range to both our mechanical and fire protection grew. And as we said, that was the first time we saw demand for both of these grow on a year over year basis in this quarter I mean in this year.
Speaker 7
Okay, great. That does it for me. Thanks guys.
Speaker 2
Thank you. Thank you.
Speaker 0
David Rose, your line is open.
Speaker 9
I'm sorry, I can follow-up afterwards and keep the call short. Thank you.
Speaker 2
Thank you. Thanks, David.
Speaker 0
Thank you. And at this time, I'm showing no further questions.
Speaker 2
Well, again, thank you very much for your interest and look forward to seeing you all soon.
Speaker 0
This now concludes today's conference. Thank you for your participation. You may now disconnect.