Mueller Water Products - Earnings Call - Q4 2017

Transcript

Speaker 0

Welcome and thank you for standing by. At this time, all participants are in a listen only mode until the question and answer session of today's conference. This call is being recorded. If you have any objections, you may disconnect at this time. And now I would like to introduce our speaker for today, Marti Zakas.

Please go ahead.

Speaker 1

Good morning, everyone. Welcome to Mueller Water Products twenty seventeen fourth quarter conference call. We issued our press release reporting results of operations for the quarter and full year ended September 3037, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Discussing the fourth quarter and full year results this morning are Scott Hall, our 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 non GAAP disclosure requirements and forward looking statements. At this time, please refer to Slide two. This slide defines certain non GAAP financial measures referenced in our press release on our slides and on this call and explains 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 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. As a reminder, we sold our Anvil business in January 2017. As a result, Anvil's operating results for all prior periods and the gain from its sale have been classified as discontinued operations.

During this call, all references to a specific year or quarter, unless specified otherwise, refer to our fiscal year, which ends on September 30. We have renamed our segments as indicated in this quarter's press release. Infrastructure was formerly known as Mueller Co. And Technologies was formerly known as Mueller Technologies. A replay of this morning's call will be available for thirty days at 605-0497.

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. I'll now turn the call over to Scott.

Speaker 2

Thanks, Marty. Thank you for joining us today as we discuss our results for the twenty seventeen fourth quarter and full year. I'll give you a quick overview of the quarter now and then let Evan go through his discussion of results. I will return to provide some color on four key areas for the quarter: net sales growth, pricing, manufacturing productivity and capital allocation. As this is the first call of our new fiscal year, we'll finish up with a discussion of our outlook for 2018.

I am pleased with the 7.5% net sales growth that our Infrastructure segment delivered this quarter. Overall, during the quarter, consolidated net sales increased 5.2% due to volume growth, pricing and the addition of Singer Valve to our infrastructure portfolio, partially offset by lower volume in technologies meter business. Our increased pricing covered our higher material costs. I am also encouraged by the manufacturing productivity improvements we continue to achieve in the fourth quarter. A critical component of our long term strategy is sustained investment in our facilities and engineering to drive new product innovation and productivity improvements across the organization.

Adjusted operating margin was lifted by price, productivity and volume, offset by inflation, Singer dilution and higher SG and A personnel related expenses. With that, I'll turn the call over to Evan. Thanks, Scott, and good morning, everyone. I'll first review our fourth quarter consolidated financial results and then discuss segment performance.

Speaker 3

I will only be discussing our results from continuing operations. Twenty seventeen fourth quarter net sales increased $11,300,000 or 5.2% to $226,900,000 from the prior year with $14,300,000 of growth in infrastructure, partially offset by a $3,000,000 decline in technologies. Gross profit improved to $80,900,000 for the twenty seventeen fourth quarter from $77,800,000 last year. Gross margin decreased 40 basis points to 35.7% from 36.1% in 2016. Selling, general and administrative expenses were $42,200,000 in the quarter compared with $39,000,000 last year.

The increase was due primarily to the addition of Singer Valve and personnel related expenses. For the full year, SG and A was 18.9% of net sales, which is comparable with last year. Adjusted operating income was $38,900,000 and essentially flat to the prior year. Operating performance was lifted by price, productivity and volume, but was more than offset by inflation and higher SG and A personnel related expenses. Adjusted EBITDA for the twenty seventeen fourth quarter increased to $49,700,000 as compared with $49,000,000 last year.

Full year adjusted EBITDA was $163,800,000 or 19.8% of net sales, a margin improvement of 30 basis points as compared with the prior year. Fourth quarter net interest expense was $5,200,000 for 2017 and $5,600,000 for 2016. For the full year 2017, net interest expense decreased $1,400,000 primarily as a result of the debt repricing we completed during the second quarter. For the twenty seventeen fourth quarter, income tax expense was $8,000,000 on income before income taxes of $28,100,000 for an effective income tax rate of 28.5% as compared with an effective income tax rate of 38.5% in the prior year quarter. The twenty seventeen fourth quarter effective tax rate was lower primarily due to increases in domestic manufacturing deductions and R and D tax credits as well as reductions in the tax rates applied to state deferred tax liabilities.

For the fiscal year, the effective tax rate was 30.8% as compared with an effective income tax rate of 34.9% in the prior year. The 2017 full year effective tax rate was lower primarily due to increased domestic manufacturing deductions and tax benefits related to stock compensation. Adjusted net income per share improved to $0.15 for the twenty seventeen fourth quarter compared with $0.12 last year. I'll now move on to segment performance and begin with Infrastructure. Net sales for the twenty seventeen fourth quarter increased 7.5 to $204,400,000 as compared with $190,100,000 for the twenty sixteen fourth quarter.

We increased shipments of valves, hydrants and brass products and realized the benefit of the addition of Singer Valve. Operating income for the twenty seventeen fourth quarter improved 2.5% to $50,100,000 as compared with $48,900,000 for the twenty sixteen fourth quarter. Adjusted operating income for the twenty seventeen fourth quarter improved 4.1% to $50,900,000 as compared with $48,900,000 for the twenty sixteen fourth quarter. Operating income increased primarily due to increased shipment volumes and favorable pricing, partially offset by higher material costs. Pricing more than covered higher material costs in the quarter.

And now concluding with technologies.net sales for the twenty seventeen fourth quarter were $22,500,000 as compared with $25,500,000 for the twenty sixteen fourth quarter. While Echologics net sales increased slightly, Mueller Systems net sales declined during the quarter. Operating loss was $2,800,000 for the twenty seventeen fourth quarter and $900,000 for the twenty sixteen fourth quarter. Adjusted operating loss was $2,200,000 for the twenty seventeen fourth quarter and $500,000 for the twenty sixteen fourth quarter. This increased loss was due primarily to lower shipment volumes at Mueller Systems.

Now turning to a discussion of our liquidity. During the fourth quarter, we made a voluntary $35,000,000 contribution to our U. S. Pension plan, which impacted our free cash flow. Free cash flow, which is cash flows from operating activities less capital expenditures, was $15,000,000 for the twenty seventeen fourth quarter and $45,600,000 last year.

At September 3037, total debt was comprised of a $478,900,000 senior secured term loan through November 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 two fifty basis points. We have interest rate swap contracts that effectively fix the interest rate on $150,000,000 of term loan borrowings at 5.6% from 10/01/2016 through 09/30/2021. As of September 3037, our excess availability under the ABL agreement was $113,100,000 Net debt leverage was less than one time as September 3037. I'll now turn the call back to Scott.

Speaker 2

Thanks, Evan. As I mentioned earlier, I want to provide some color on four key areas of our business. I'll begin with sales growth. We are pleased to see growth of 5.2% in overall net sales for the quarter in line with our discussion last quarter. Infrastructure's fourth quarter net sales grew $14,300,000 or 7.5%, primarily driven by higher organic shipment volumes, pricing and the addition of Singer Valve.

Although Technologies fourth quarter net sales were down $3,000,000 year over year, we were pleased to see substantially higher sales of our fixed and mobile leak detection solutions in the fourth quarter. However, this increase was more than offset by a decline in metering shipment volumes and pipe condition assessment, which was largely attributable to impacts of Hurricanes Irma and Harvey. While weather and some project delays impacted Technologies net sales growth this quarter, our fixed and mobile leak detection bookings growth was solid. Fourth quarter bookings were up 33% compared with the prior year and overall backlog at Echologics more than doubled year over year. Turning to pricing.

I continue to be encouraged by Infrastructure's pricing performance in the quarter, which more than offset higher year over year material costs for the first time this year. Pricing was also higher sequentially, which is a positive sign that our pricing environment is favorable. We continue to believe we can meet any increases in commodity costs with appropriate pricing actions over time. Moving on to manufacturing productivity and capital investment in the quarter. Overall we had a solid operating performance in the business.

Infrastructure demonstrated cost savings and productivity improvements, which were equal to about 40 basis points in margin expansion. Technologies productivity was unfavorable compared with the prior year due primarily to the lower shipment volumes largely attributable to weather impacts, partially offset by lower labor costs and lower burden spending. We invested $19,000,000 of capital in the quarter and $40,000,000 for the full year to upgrade our equipment and manufacturing capabilities to further drive productivity and cost savings across the organization. With respect to capital allocation, during the quarter we made a $35,000,000 voluntary contribution to our pension plan, which Evan discussed earlier. As you will recall, we have a $250,000,000 authorization to repurchase shares and we've repurchased $55,000,000 worth of shares in 2017.

During the fourth quarter, primarily as a result of the pending strategic reorganization, we made no share repurchases. As I reflect on the year as a whole, I believe we had a very good year managing a tremendous amount of change positioning us for future growth. Let me highlight a few of those. We divested Anvil, which reduced net debt leverage below one times. We acquired and integrated Singer Valve, which allowed us to enter the pressure valve market.

We repurchased $55,000,000 of shares. We increased the quarterly dividend by 33% and we lowered interest expense through debt repricing. Organizationally, we managed through the CEO transition and at the same time we refocused the strategic priorities in our operating units, then reorganized around value streams and new channel management. We introduced new products around fixed leak detection and migratable AMI. And at the bottom line, we drove a 30 basis point adjusted EBITDA margin expansion.

Overall, a very good year for us. I will now wrap up my comments with a brief overview of what we expect for fiscal year twenty eighteen. From a guidance perspective, we will provide our consolidated outlook for 2018 on a full year basis. On our subsequent quarterly earnings calls, I will update our consolidated outlook, but will not provide a quarterly forecast. So let's start with a look at the growth projections of our end markets.

We expect residential construction market percentage growth to be in the mid single digits and land development to remain on a positive trajectory. As you know, development of raw land for residential construction is a key driver for demand of our products. On the municipal front, our overall 2018 outlook is positive. State and local seasonally adjusted tax receipts continue to increase year over year as do water rates. The consumer price index for water and sewage maintenance increased about 4% for the twelve months ended September 2017.

Fourth quarter spending on state and local public water supply, while down much of 2017, was up sequentially from the third quarter and we expect this trend to continue. Finally, our customers and distributors have indicated to us their positive sentiments on our end markets from discussions they've had with our joint end users. These are just some of the positive indicators we are seeing that should support increased municipal spending for water infrastructure projects in 2018. But there continues to be challenges in the market brought on around the timing and content of any potential infrastructure legislation. With that as our backdrop, we expect percentage growth for municipal spending for water infrastructure projects to be in the low single digits in 2018.

Given that market outlook we just provided, we expect our overall net sales percentage growth to be in the 4% to 7% range for 2018. Based on our current outlook for product mix and our view on market growth, we expect the conversion margin in a range of 35% to 40% on those sales increases. This includes both cost savings from our strategic reorganization and increased investment in new product development, engineering resources and productivity initiatives. Looking beyond 2018, we anticipate continued growth in our primary end markets, residential construction and municipal infrastructure. So combining our internal programs with a positive external environment, we believe the fundamentals for superior long term growth make Mueller Water Products an attractive investment.

I will turn the call over to Evan for some final comments on our 2018 outlook.

Speaker 3

Thanks, Scott. Other 2018 key variables include corporate expenses, which are expected to be 33,000,000 to $36,000,000 We expect depreciation and amortization to be $44,000,000 to $46,000,000 interest expense to be $21,000,000 to $23,000,000 and capital expenditures to be $38,000,000 to $44,000,000 Finally, we expect our adjusted effective income tax rate to be 33 to 35%. Free cash flow is expected to exceed net income and be driven by improved operating results and improvements in working capital. With that, operator, I will open up this call for questions.

Speaker 0

Thank you. We will now begin the question and answer session of today's conference. We have our first question coming from Mike Wood of Nomura Instinet. Your line is now open.

Speaker 4

Hi, good morning. Was hoping you could maybe start with just trying to understand the 35% to 40% conversion margins that you're laying out for next year. I mean, sounds like a solid number, but if I back out the 50 basis points of net productivity that you discussed in the reorganization, plus Singer Valve obviously now has had some time to get some synergies. It seems like the underlying conversion margin is relatively low. So if you could either provide some offsets to those tailwinds or just help me understand how we get to that number?

Speaker 2

Yes. Well, was trying to give you a range. I mean, the way to think about it is that as we get the volume leverage, the higher end of that sales number, we give you 4% to 7%. I think you could expect actually more leverage on the flow through as we approach the 7% and less on the 4%. We are going to invest in some of the product development initiatives.

We still haven't got the spend rate or the number of manufacturing engineers and product engineers in place that I think we need to have a new product index that I think is indicative of an industrial healthy industrial company. There's going to be some offsets there. And the other thing that I put in there, to be perfectly candid is, I don't have margin expansion from price in the year. So I'm covering whatever inflation is my assumption. But given that we were that we do have a little bit of a catch up period to go through there, Mike, there might be some upside there.

But I am loathe to get into some kind of all of the world aligns perfectly, the planets, the sun and everything and then all of a sudden we have just breakthrough. So there is a little bit of room depending on what your assumption is around price. There is a little bit of headwinds associated with what your assumption is around how quickly we can bring the engineering expense in. And then there might be a little more tailwind as we approach the upper end of the volume leverage. I don't know if that helps, but that's where we are.

Speaker 4

Yes. No, I understand. And in the quarter in particular, called out the higher SG and A personnel related expenses. Is that something new or is something that is expected to continue or just be more short term in nature?

Speaker 2

I think that's more short term in nature as far as the delta. So I think that our going forward, we'll be around this. But as we go through this strategic reorganization and we have things fall off, some of that will shift between manufacturing and SG and A as we get rid of duplicative SG and A expenses over time and invest more in MEs and IEs and the like.

Speaker 3

And Mike, this is Evan. SG and A as a percentage of net sales was comparable on a year over year basis about 19.8. So I would say some of that personnel related expenses was a bit more timing related.

Speaker 4

Great. If I could just sneak one more in. You had mentioned comments about the tax receipts, water rates providing some optimism for that low single digit growth muni market next year. I know you've talked in the past about some crowding out from emergency type repairs that localities, states had to deal with. Is that something that that headwind, does that continue into next year?

And how does that factor into that muni growth?

Speaker 2

Well, I think when we look at the census data and we look at what we would consider pipe and hydrant kind of investment as opposed to in the wastewater stream, We think there was some crowding out that happened this year and that's why we ultimately saw the pipe hydrant gate valve kind of potable spending being down about 2% year over year in the most recent census data versus the overall spending. So do we see that going forward? I think a lot of it was a result early on of the California flooding and then we had a couple of hurricanes and we had a couple of other kind of almost natural disasters associated with levee breaks in the North. And I do think it was kind of a perfect storm and that has not got long term trend written all over it. Although I will say that the wastewater infrastructure has the exact same underinvestment dynamics that the drinking water infrastructure has.

Great. Thank you. No problem.

Speaker 0

Our next question comes from Brian Lee of Goldman Sachs. Your line is now open.

Speaker 5

Hey, guys. Thanks for taking the questions. Just to get the housekeeping one out of the way. Can you, Evan, quantify the hurricane impact in dollars in the quarter? And then are you guys expecting anything residual moving into fiscal twenty eighteen?

Speaker 2

Let me take that and then Evan you can chime in. So one of the things that's been a hot topic is what really happened in the quarter with we picked up $02 from tax that wasn't in the operating line. So let start with a much longer explanation if I could. So there's two things at play here and I'd like to answer it two ways. One versus last year, the dilution we saw in the business overall was about a third associated with Singer, about a third associated with mix, mainly due to lower volumes in technologies, but also higher sales in brass, which is one of the lower overall gross margin products, especially in this inflationary environment.

And then about a third of it associated quarter versus quarter in the SG and A, as Evan talked about timing. Versus forecast though, if you recall last quarter, said you should expect around 30 basis points of margin expansion year over year in the business. And what really happened there was that Echologics had about 1,000,000 of breakage, in its dilution. And of that about $300,000 of it was associated with pipe condition assessment in Florida. So basically when these guys are doing the pipe condition assessment, they're well compensated, highly technical resources that we bill out when they go into these manholes.

And basically our South Florida quarter, we didn't bill. We had all of the expenses, but we're unable to bill about $300,000 In addition to that, we had orders in Harris County that we could have shipped for about $05,000,000 in the meter business in Texas. And so if you were looking for a billing number associated with the hurricanes, it'd be about $1,000,000 But the dilution or the miss you saw at the operating line versus what I told you ninety days ago was more around the a little bit of hurricanes and then about 600,000 to $700,000 of cost overruns and other problems associated with the DX node launch in our facilities as we back up our third party supply with our own in house made. So kind of summarize versus a year ago, think of the dilution as a third thing or a third mix, a third SG and A versus the 30 basis points I told you last quarter, think about $1,000,000 of mix, think about $1,000,000 of breakage at Echo and think about some intentional inventory removals. If you go and look at our balance sheet, we slowed down the foundries, given the order book we had.

It did pick up near the end of the quarter, but we slowed down the foundries and had some absorption miss. Certainly, we're still positive from a performance point of view, but nowhere near as positive as I anticipated when I guided you to the 30 basis points of year over year improvement. The thing I want to stress to everybody though is, this is all temporary. I feel like it's all we've got our arms around the whys and hows and what we're doing going forward. So it's probably a longer answer than you wanted, Brian, but hey.

Speaker 5

No, that's super helpful, Scott. I appreciate the color. Not sure if you'll entertain as much granularity on this next question, but a lot of moving parts here on the full year outlook. I guess at a high level, when I think about the sort of three ish percent growth you saw this year, you're obviously guiding to a bit better growth next year. And clearly, there's some line items we can work with.

But when I sort of back into the math, the 30 basis points of EBITDA margin expansion you saw in fiscal 'seventeen, I would assume you could do better than that with the better top line outlook you have for fiscal 'eighteen, but just wanted to triangulate a bit as to sort of given the conversion margin ranges you're talking about in the top line ranges, whether or not that's sort of the right assumption. Because when I back into it, it doesn't seem like there's a lot more expansion versus what you saw this year, although I would expect it should be better given you're growing faster. But any thoughts on that would be helpful.

Speaker 2

Okay. Well, you're right. Won't give you as much granularity, but I think you're absolutely right. As I tried to say when we were giving the guidance, as you get to the upper end of the growth range, we'll get good leverage. Because we are we've got a lot of fixed costs associated with running foundries.

So we get good leverage when we can melt metal. On the other side of that, we expect to be more efficient. So while yes, intend to invest, I think it's safe to say you should be able to see at the EBITDA line more than a 50 basis points improvement. And I think there's upside to that too. I don't want to be happiness and sunshine all the time, but I think that we have taken some of the steps necessary to ensure that we can kind of drive that number up over the 20% mark at some point here fairly soon.

But it's not easy. But your assumptions as you laid them out, I agree with you.

Speaker 5

Okay. That's helpful. And then just last one and I'll pass it on. Just respect with respect to capital allocation, any updates around M and A and kind of how you're viewing the pipeline today? And then also with the share repurchase authorization, I know you said in Q4, given the reorg, you didn't do anything.

You still have close to $200,000,000 outstanding. You did the accelerated buyback at a price higher than where the stock is at today. So just wondering how you're thinking about the priorities between M and A and buybacks in the context of maybe the stock being at a more attractive level than when you did the initial ASR? Thanks guys.

Speaker 2

Yes. Okay. So nothing has changed except that I think the pipeline continues to grow. I think the team has done a good job of filling the potential candidate field with more candidates. But as I said last quarter, we have a bias for share repurchase as you pointed out.

We think it's undervalued and we think that the it's a good use of the cash we have. So bias for share repurchase, want the right strategic M and A targets either tuck unders or other investments that would put us either in superior channel position or an adjacency that we deem as attractive. So that would kind of be equal there if you will with acquisitions and share buyback being the two most favorable. I don't think that we did a 33% increase in dividend and I'm not sure what it did. So if you look at creating value for shareholders, I think our bias would be with the share buyback and with strategic M and A.

Speaker 5

Okay. And is the reorg sufficiently complete where you can be back in the market this quarter or is that still pending?

Speaker 2

No, I think we are all I don't want anybody to front run it, but I think that all of the pertinent announcements that may be considered inside information that would prohibit us from being able to trade or buy stock is now in the market.

Speaker 6

All

Speaker 5

right. That's great. Thanks guys.

Speaker 2

Thank you.

Speaker 0

Our next question comes from Seth Weber of RBC Capital Markets. Your line is now open.

Speaker 7

Hi, thanks. This is Brendan on for Seth. I was wondering if you could discuss the competitive dynamics you're seeing in the margin outlook for the upcoming year for your infrastructure business and then whether or not you think we might see tech be profitable this year?

Speaker 2

Okay. The competitive dynamics is to my way of thinking, it's a stable market with well established players, with excellent products, with no clear advantage except as it relates to specification position. Our competitors have their things that they think they could differentiate on. Obviously, we have the things we differentiate on. I expect order in those markets.

I expect it to continue. I think that the barriers to entry, whether it be around American iron and steel regs or whether it be around imports or whether it be around the cleanliness and the fact that you're in the potable drinking water stream, all lead you to believe that we should see continued order. As long as somebody isn't stupid, I would expect more of the same. With that said, I think that the margin outlook is really a question around what is your assumption for raw materials? I mean to put it in perspective, I think the market's been pretty resilient.

I think everybody has done a good job. But you've seen sequentially brass price increases since Q1 twenty seventeen, our Q1 or Q4 twenty sixteen has been going up sequentially quarter over quarter over quarter. And so is that going to continue? Is this is the brass price going to get to $3.5 $4 $4.5 a pound? If that's the case, as I've said many times, I would expect our price but it's going to lag.

So there could be pressures. But I think that you can't build or run a business with Chicken Little kind of mentality that says everything is going to be bad. So we've got basically a static kind of view for commodity. But to answer your question on margin, I think that's where the real pressure comes from. I don't think it comes as much from the competitive dynamic.

And what was the second part of your question, Brendan?

Speaker 7

Sure. It's the whether or not we might see tech be profitable this year.

Speaker 2

Yes. I don't want to this is one of the things that I'm trying to avoid because it's been a trap. And I think I don't think it's helped anybody. I think last year, before I came, they said it would get to breakeven and we gave a lot of segment guidance and we gave a lot of core guidance. My intent is to get, to a consolidated yearly outlook that we affirm or not affirm as we go quarterly.

And I think when you're talking about what is fundamentally a sub-one $100,000,000 business and you start worrying $1,000,000 here and $1,000,000 there and it starts creating noise as it has this year, I don't think that helps either us or the investor because I think there's too much, I guess, riding on each quarter. What I will say though is that this past quarter as I looked at systems, systems didn't miss by as much as it may appear. The technologies missed from my expectations was more around this DX node problem we had and the fact that we had a lot of unbilled pipe condition assessment labor. Those were the two big drivers that basically cost $1,000,000 in the quarter. So I don't want to say technology is going to be or not going to be, but I believe in the context of what our growth prospects are, I believe in the business.

And I would like to reiterate that for everybody. If you believe that large cities are going to deploy a fixed network for every single kind of meter, that's water, gas and hydro. So it's separate fixed network for water, a separate fixed network for gas, a separate and then they're going to put in a separate fixed network for traffic lights and a separate fixed network for policing, then we probably haven't placed our bet correctly. But we continue to believe that with our open architecture designs, with our ability to be not only in private spectrum, but in public spectrum, to be in a medium sized city with our own proprietary networks or to integrate into a Comcast or an AT and T network put us in the best position to experience better than competition growth in the Technologies business. The fact that we can integrate leak detection with it also leads me to believe we can.

So

Speaker 8

I don't want

Speaker 2

to handicap these guys with trying to just make this an operation story. It's not. They have to go grow the business. And that's what the focus has to be. Then I think we'll be profitable.

But we've got a ways to go, obviously.

Speaker 0

Our next question comes from Jose Garza. Your line is now open.

Speaker 4

Hey, good morning guys.

Speaker 2

Good morning, Just

Speaker 8

wanted to get your thoughts Scott on just where the inventory levels are kind of at distributor level, you have any comments on that?

Speaker 2

Well, I believe that near the fourth quarter that there was a little bit of chicken going on between the channel and the manufacturers where I think manufacturers may have been discounting a little bit in previous quarter ends to try and get volume through. And we were definitely going to break that cycle here in the fourth quarter. I know with Mutter Systems and with Mutter Co. That it was clear, we were going to live with what the pull through was. So I think they got kind of low at the end of the fourth quarter, as they were waiting for maybe some incentives to fill up their stocks didn't materialize because we saw an inordinate amount of our order book come in, in the final seven days of the quarter.

And there were no incentives offered. With that said, we have met with our key channel distributors and their sell through looks really good. So I believe they may still have, let's call them low to mid kind of inventories and not as high as they were at the end of Q2. So I feel pretty good about where the channel inventory is. And I think that we should continue to see a pretty strong book here through the fourth quarter or through the calendar fourth quarter, our first quarter.

But these things, they can change on a dime, but that's where we believe we are right now.

Speaker 8

Okay. And on the CapEx for next year, how do we just think about kind of the timing around that?

Speaker 2

That's a great question. I would say that as an operating executive, we would like to tell you it should be pretty even. But as you saw this year, of the $40,000,000 almost 20,000,000 of it came in the fourth quarter. That speaks to our ability around project management along with the efficacy of our process around approving these things. So we're going to attempt to be better than that.

So I would like to see it shift to kind of a quarter by quarter by quarter kind of $9,000,000 a quarter experience. But I suspect what we will have is more back half weighted. Probably not as bad as this year, but back half weighted where you're probably sixty-forty.

Speaker 8

Okay. That's helpful. And then anything on the Henry Prep business that kind of told you something kind of directionally in this quarter?

Speaker 2

Well, feel really good about the Prep business. I really believe it's one of the businesses that is actually going to get the biggest benefit from the channel reorganization. I think that our participation in distribution and our participation on a direct basis and our participation with our third party reps, all can be satisfied. We can continue to do all of those things. But we will be in a much better position to manage channel conflict to make the right decision for the entire company, not just one product or one person.

So, I believe the order book was strong. Well, I don't believe it. The order book was strong for the Henry Pratt business in the fourth quarter. Opportunity and we're getting a chance to look at more of the industrial valve kind of business than we Will have in the we be able to convert that into tangible sales and actually grow that business faster than the underlying business. That's our plan, but that's the challenge in front of the sales team.

Very helpful.

Speaker 8

Thanks guys.

Speaker 2

Overall, I think it was good.

Speaker 8

Thank you.

Speaker 2

Thank you.

Speaker 0

Our next question comes from Ryan Connors. Your line is now open.

Speaker 6

Great. Thank you. Hi, Ryan. I wanted to talk a little bit more about the Technologies business. You did a great job summarizing the competitive landscape for infrastructure.

But and by the way, congrats on the renaming. I think that's always been a confusing segment nomenclature. So that's good news. But in terms of competitive environment on the technology side, obviously, of the competition has been out there, been active in some of these partnerships. Obviously, Pure Technologies partnering up with Xylem in The Middle East, and there's been some consolidation there and so forth.

You mentioned Scott that it's a sub-one $100,000,000 business. What's your view on the things you need to do and how you the game theory of responding to those competitive moves and what kind of how you envision scaling that business up? Is it just as a standalone or is there some kind of similar partnership or other competitive response that you think is required to take it to the next level?

Speaker 2

Well, I hope everybody has caught the fact that we have decided to use the fire hydrant as the integration point for the leak detection. And that wasn't without a strong look across where all of the types of technology are out there. So let me try and break you into a couple of points. Would we do an alliance with somebody who is in the space? Yes, of course.

But we believe where we're going from a technologies and integrated technologies point of view is very different than a leak location or a metering business or a we are basically the only people now with leave behind fixed leak detection. If you look at the pure system, you basically have to crack open the pipe, run the ball down the pipe, what they call their free swimming technology or they put a robot in the pipe and do some pipe condition assessments, all viable technologies. But when it's done, it's done. Whereas we are creating listening devices that basically have algorithms that lay over top that will be able to give you early warning systems in real time and nobody else is doing this. At the same time we're doing that, we're making software that integrates not only district metering and metering, but we're also working on other kinds of integrations of other sensors, whether it be chlorine or pressure transducers or conceivably one day you could even see for lead content and any number of things that we believe that our network technology will allow us to talk to.

And there's any number of things we believe in the long run that we can actually use the fire hydrant antenna, if you will, sticking out of the ground to collect and transmit that information. So I think we have articulated both from a product development point of view and from a competitive differentiation point of view, how we see the world following. We know where those holes are. For instance, we don't have a piezoid electric transducer or we don't have heavy metal detection sensors. We don't have lab on a chip technology, but we think we know how we would integrate all of that.

So long story short, we think we're on the right path Technologies. I think the sad part of the Mueller Technologies story, if I can digress a little bit is, this is a business that had a really meaningful market share as Hersey Meter in the industrial space prior to being owned by private equity. And then when it missed the investment cycle for AMR and therefore lost all of its incumbency's position, if you will, to others. And now we are trying to use technology to come back on the other side and grow that business faster, if you will, than the market. So I think we do come from deficit, but I think we have a superior technology.

I think we're right about network evolution. And I think we're in good shape from a pipeline of products coming through. So we need customers to adopt though. I mean, it's great that we're doing all of this and certainly we'll continue to invest in it as long as we believe in it, but we need to be successful with it.

Speaker 6

Okay. Now that's very helpful perspective. My other question had to do with the residential land development story. And specifically, mentioned some of the data earlier, the census data and so forth, the stuff that you watch on the municipal side to track the outlook for that side of the business. But what are the best data sets to watch for the forward outlook on the residential side of the business?

We've always found it's a tougher one to track. Housing starts don't seem to be that great short term indicator. Can you just give us some perspective on the data sets you use to gauge that outlook? And then obviously, maybe expand on what you're seeing in those right now?

Speaker 2

Well, I think permits pulled and things like that for land development are spotty. And I think the one we watch around land development is some variation on that. And I don't want to misspeak here, but we'll get you the real answer. But I think we use that data on a nine month lag is the one that we have the most success with as being a lead indicator that land development after permits pulled, plans approved, basically wait two seventy days and then curb and water and sewer basically go in the ground. We actually use a model that has it's kind of like a multiple regression model and then we do a simulation forecast and then come back and say, we think this is the best fit for the next ninety and next three sixty five.

That's why we kind of feel okay about giving you that 4% to 7% for next year because that's kind of where we are within our margin of error plus our new products plus a couple of other things.

Speaker 6

Got it. Okay. That's helpful. Thanks for your time.

Speaker 2

Thank you.

Speaker 0

Our next question comes from Joe Giordano. Your line is now open.

Speaker 9

Hey guys, this is Tristan in for Joe. Thanks for taking the question. Could you maybe just break down the pricing volume and Singer contribution infrastructure in the quarter?

Speaker 2

Yes. So basically Singer had no price. We didn't own it before and it wasn't something they tracked and a lot of customization. So don't think of price in Singer. And Singer was basic in the quarter, while we talked about some of the dilution, we took in the quarter, we finalized our purchase accounting and we took all the catch amortization associated with the customer list and that for the year.

And so basically, as I said last quarter, it contributed nothing, which is why it was 30 points of the dilution year over year for the infrastructure business.

Speaker 9

Thanks. And then just a quick one, what was your AMI shipments during the quarter?

Speaker 2

I'm not going to get into that, but I will say that year over year AMI business was up double digits, and that's all I'm going to say on it from a competitive point of view.

Speaker 9

Fair enough.

Speaker 2

Thank you. Thank you.

Speaker 0

There are no questions in queue at this time. Speakers, One moment please for your next question.

Speaker 2

Okay, operator. Well, before I sign off, I would like to I'd like to remind everybody that this is Evan Hart will be retiring at the end of the year and he's going to be at a couple of more conferences. I know he's looking forward to seeing some of you guys out there, but he's going to retire to we don't know where yet, probably Alabama, but he's been a great wingman for me for the past nine months, invaluable service and insight into this stuff. And Evan, I just want to in front of the investing community just say thanks for everything you've done. It's remarkable and I've enjoyed it immensely and I wish you the best as far as what fun you have planned for your future.

Speaker 3

Thanks, Scott. I really appreciate that.

Speaker 2

All right. So operator, there being no more questions, I think we'll call it a day.

Speaker 0

Thank you. And that concludes today's conference. Thank you all for your participation.