Feb 4, 2015
Executives
Greg Hyland - Chairman, President & Chief Executive Officer Evan Hart - Chief Financial Officer Martie Zakas - Investor Relations
Analysts
Mike Wood - Macquarie Securities Group Kevin Maczka - BB&T Capital Markets Brent Thielman - D.A. Davidson Kevin Bennett - Sterne Agee Daniel Politzer - RBC Capital Markets Noah Kaye - Northland Capital Markets Joseph Giordano - Cowen & Co.
David Rose - Wedbush Securities
Operator
Welcome, and thank you all for standing by. At this time all participants are in listen-only mode.
After the presentation we will conduct a question-and-answer session. [Operator Instructions].
This call is being recorded. If you have any objections, you may disconnect at this time point.
Now I’ll turn the meeting over to your host Ms. Martie Zakas.
Ma’am you may begin.
Martie Zakas
Thank you. Good morning everyone.
Welcome to Mueller Water Products 2015 first quarter conference call. We issued our press release reporting results of operations for the quarter ended December 31, 2014 yesterday afternoon.
A copy of it is available on our website muellerwaterproducts.com. Mueller Water Products had 160.6 million shares of common stock outstanding at December 31, 2014.
Discussing the first 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 2.
This slide identifies certain non-GAAP financial measures referenced in our press release on our slides and on this call, and discloses the reasons why we believe that these measures provide useful information to investors. Reconciliations between GAAP and non-GAAP financial measures are included in the supplemental information within our press release and on our website.
Slide 3 addresses our forward-looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward-looking statements, as well as specific examples of forward-looking statements.
Please review slides 2 and 3 in their entirety. During this call all references to a specific year or quarter, unless specified otherwise refer to our fiscal year.
Our fiscal year ends on September 30. A replay of this morning's call will be available for 30 days after the call at 1-800-396-1242.
The archived webcast and corresponding slides will be available for at least 90 days in the Investor Relations section of our website. In addition, we will furnish a copy of our prepared remarks on Form 8-K later this morning.
After the prepared remarks we will open the call to questions. I will now turn the call over to Greg.
Greg Hyland
Thanks Martie. Thank you for joining us today as we discuss our results for the 2015 first quarter.
I'll begin with a brief overview of the quarter, followed by Evan's detailed financial report. I will then provide additional comments on the quarter's results and developments in our end markets, as well as our outlook for the 2015-second quarter and the full year.
Mueller Company’s adjusted operating income increased 10%, primarily attributable to the 11% increase in domestic shipments of valves and hydrants. We believe this growth came from solid demand from the municipal market, as well as from growth in some residential markets.
Anvil's net sales grew 5.1% in the first quarter with growth across its end markets. During the quarter we prepaid our long-term debt, entered into a new $500 million senior secured term loan and reduced our debt outstanding, thereby lowering our interest rates and improving our financial flexibility.
We continue to believe consolidated operating results for the full year will improve year-over-year due to expected growth in most of our key end markets, lower interest expense and the benefits of operating leverage. With that, I’ll turn the call over to Evan.
Evan Hart
Thanks Greg and good morning everyone. I'll first review our first quarter consolidated financial results and then discuss segment performance.
Net sales for the 2015 first quarter of $261.8 million increased $4.4 million or 1.7% from the 2014 first quarter net sales of $257.4 million due to higher shipment volumes and improved pricing, partially offset by un-favorable Canadian currency translation effects. Gross profit increased 6.3% to $71.3 million for the 2015 first quarter compared to $67.1 million for the 2014 first quarter.
This increase was due to a higher margin product mix at Mueller Company and higher sales pricing. Gross margin of 27.2% in the 2015 first quarter increased 110 basis points from 26.1% in the 2014 first quarter.
Selling, general and administrative expenses were $55 million in the 2015 first quarter or 21% of net sales. Adjusted operating income for the 2015 first quarter increased 15.6% to $16.3 million as compared with $14.1 million for the 2014 first quarter.
This increase was due to a higher margin product mix at Mueller Company and higher sales pricing. Adjusted operating margin also improved 70 basis points to 6.2%.
Adjusted EBITDA for the 2015 first quarter increased 6.3% to $30.6 million as compared with $28.8 million for the 2014 first quarter. Trailing 12 months adjusted EBITDA was $185.7 million.
I will note that this quarter’s reported results include additional expenses primarily associated with our debt re-financing and the closure of a manufacturing facility in Canada. These expenses totaled $39.5 million pre tax or $0.16 per share.
In November, we prepaid our long-term debt; entered into a new $500 million senior secured term loan maturing in 2021 and reduced our debt outstanding. These actions improved our financial flexibility and lowered our interest rates.
The pre-tax refinancing expenses of $31.3 million included the premium paid for the early extinguishment of debt and the write-off of associated deferred finance expenses. During the quarter we closed a small foundry in Canada that primarily produced commodity municipal castings and had faced strong competition from imports.
We also sold certain of the related assets resulting in a pre-tax loss of $7.2 million. Of this amount $2.6 million was non-cash and ultimately we expect this transaction to be cash flow positive subject to our estimated cost associated with the closure of the facility and the sale of remaining assets.
This facility generated net sales of $11.5 million in 2014, but had an operating income loss of about $2 million. Interest expense declined this quarter due to lower interest rates and lower amounts of debt outstanding.
Interest expense net for the 2015 first quarter declined $3.2 million to $9.4 million as compared with $12.6 million for the 2014 first quarter. There was an income tax benefit for the 2015 first quarter of $12.4 million on a loss before income taxes of $32.6 million, resulting in an effective income tax rate of 38%.
Net loss per diluted share for the 2015 first quarter was $0.13, however excluding the one-time items just discussed, adjusted net income per diluted share for the 2015 first quarter improved to $0.03 from $0.01 in the 2014 first quarter. There was a weighted average of 163.1 million shares of our common stock outstanding for the 2015 first quarter-adjusted results compared with 161.7 million shares outstanding for the 2014 first quarter.
I'll now move on to segment performance and begin with Mueller Company. Net sales for the 2015 first quarter were relatively flat at $164.7 million as compared with $165 million for the 2014 first quarter.
Mueller base, which excludes metering products and leak detection saw an increase in domestic shipments of approximately 9%, which would lead by about 11% increase in valves and hydrant sales. This was offset primarily by lower shipment volumes of metering products, lower exports and unfavorable Canadian currency translation effects.
Adjusted operating income of $17.6 million for the 2015 first quarter improved 10% from $16 million in 2014. Adjusted operating income improved $1.6 million, due primarily to higher domestic shipment volumes of valves and hydrants.
Adjusted operating margin of 10.7% for the 2015 first quarter improved 100 basis points from 9.7% in 2014. Adjusted EBITDA for the 2015 first quarter increased to $28.2 million as compared with $27.1 million for the 2014 first quarter.
Adjusted EBITDA margin for the quarter increased 70 basis points to 17.1%. I'll now turn to Anvil.
Net sales for the 2015 first quarter increased 5.1% to $97.1 million as compared with $92.4 million for the 2014 first quarter. The increase in net sales resulted primarily from higher shipment volumes and improved pricing.
For the quarter Anvil’s net sales into the energy market grew about 14%. However we started to see a fall-off in mid-December.
Shipments of mechanical and fire protection products grew by about 3% driven by non-residential construction. Adjusted operating income for the 2015 first quarter was $7.2 million as compared with $7.3 million for the 2014 first quarter.
Adjusted operating margin decreased to 7.4% from 7.9% for the 2014 first quarter. The decrease in adjusted operating income and adjusted operating margin resulted form the benefits of higher shipment volumes and improved sales pricing offset by higher manufacturing and other cost.
Manufacturing costs were higher year-over-year as a result of a maintenance shutdown at Anvil’s largest plant in August. We have historically shutdown this plant in August to perform maintenance, but did not do so in August 2013.
These overhead costs negatively impacted our first quarter margins as compared to the 2014 first quarter. We included these higher costs for the quarter in the outlook we provided on our last call.
Additionally we incurred a $200,000 non-cash write-off related to selling an idle building and experienced some higher freight costs associated with disruptions at U.S. West Coast ports related to their labor dispute.
Adjusted EBITDA for the 2015 first quarter was $10.8 million flat with 2014. Adjusted EBITDA margin for the 2015 first quarter was 11.1%.
Corporate expenses for the 2015 first quarter were $8.5 million compared with $9.2 million for the 2014 first quarter. Turning now to a discussion of our liquidity.
Free cash flow, which is cash flows from operating activities less capital expenditures was negative $34.3 million for the 2015 first quarter compared to negative $11.3 million for the 2014 first quarter. The year-over-year change was driven primarily by an increase in inventory in an effort to spread production more evenly between periods in anticipation of the upcoming construction season and timing of receipts and disbursements.
Given the seasonality of our business, the first half of the year is typically negative from a free cash flow perspective. This quarter we built more inventory at Mueller Company in advance of the price increase, in order to level load our plant production, which we expect will lead to improved efficiencies in the second quarter, while reducing the need to work overtime.
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 December 31, 2014 total debt was comprised of $497.5 million senior secured term loan due 2021 and $2.1 million of other.
The term loan accrues interest at a floating rate equal to LIBOR subject to a floor of 75 basis points plus 325 basis points. Net debt leverage was 2.4 times at December 31, 2014.
Using December 31, 2014 data, we had $138.3 million of excess availability under our asset-based credit agreement. I'll now turn the call back to Greg.
Greg Hyland
Thanks Evan. I'll now elaborate on our 2015 first quarter results and end markets, review our outlook for the second quarter, and provide an update to our general overview for the full year.
I'll begin with Mueller Company. There were a number of moving parts at Mueller Company this quarter, both relative to year-over-year comparisons and to the outlook we provided last quarter.
Net sales at our base which excludes metering products and leak detection were up 5%. Domestic shipments of valves and hydrants however were up about 11% year-over-year or shipments of brass products were essentially flat.
We also saw growth in valves and hydrants shipments in Canada, although we were affected by unfavorable Canadian currency exchange rates. We saw a decline in export shipment of approximately $2.5 million.
Sales of our water treatment valves were up slightly year-over-year. Turning to our metering products, year-over-year net sales declined $7.6 million.
This business had a difficult comparison in the first quarter, since we shipped the majority of the large Jackson Mississippi project in the first two quarters of 2014. In addition we were unable to ship about $2 million of meters and radios this quarter due to a delay in receiving components from the supplier.
When we look at net sales this quarter relative to our expectations, we had a shortfall on two additional areas. Even though Mueller Company’s domestic valves, hydrants and brass products increased about 9% year-over-year, the growth was less than we expected, particularly in our western region.
While shipments in this region grew roughly 5%, the growth rate was well below our expectations in what we have recently experienced. We think the slow-down in growth in our western region was primarily due to a decline in the growth rate of residential construction.
In addition we had expected our export shipments to grow year-over-year in the first quarter, but exports actually declined. A significant portion of the year-over-year decline and the shortfalls of our expectations is attributable to delayed orders of valves and hydrants for refineries in the Middle East.
We now believe these orders could be pushed out beyond 2015. The bulk of the shortfall from our expected net sales growth in the first quarter was caused by this falloff in export shipment and the slowdown in our western region.
In addition, we believe distributor inventory during the quarter declined sequentially and we are flat to slightly down year-over-year. Mueller Company’s overall adjusted operating income grew 10% in the first quarter year-over-year.
This growth was attributable primarily to higher domestic sales volumes of valves and hydrants and increased pricing. Anvil's net sales growth of 5.1% in the first quarter benefited from strong growth in the energy market and to a lesser extent growth and demand from non-residential constructions.
Despite solid net sales growth Anvil’s adjusted operating income was essentially flat year-over-year due to a number of items Evan discussed. Turning now to our outlook for the 2015-second quarter.
I’ll start with Mueller Company. We expect mid-single digit net sales percentage growth for our base business, driven primarily by domestic demand for our valves, hydrants and brass products from both residential construction and municipal spending.
In early January we announced a price increase on iron gate valves, hydrant and Pratt valves that will be effective February 13. The effective date of the price increase is essentially the same as last year.
Net sales growth in domestic valves, hydrants and brass products is expected to be partially offset by net sales decline in exports and in Canada. For our metering products we expect year-over-year net sales to decline again, due largely to the tough comparison we have relative to the timing of the shipments for the Jackson Mississippi project last year and the timing of deliveries of our backlog that are heavily weighted towards the second half of the year.
As a result of these factors we believe Mueller Company’s sales, second quarter net sales will be flat with the prior year. We expect Mueller Company’s adjusted operating income and adjusted operating margin to also be flat in the second quarter year-over-year.
We expect to see increased operating income from our domestic valves, hydrants and brass products, but this higher operating income will be offset by lower shipments of metering products. In addition, as we mentioned during our last conference call, we have elected to increase our investments in technology and business development in leak detection.
We expect to be negatively impacted by about $5 million for the full year in connection with these investments. Some of these higher costs will ramp up in the second quarter.
Moving to Anvil, we anticipate second quarter net sales to decline year-over-year, based in large part on our run rate of oil and gas orders over the last six weeks. We do not believe the growth that we will expect to see in our non-residential construction markets will offset the net sales decline from oil and gas.
While Anvil’s adjusted operating income is expected to be slightly down, we believe our adjusted operating margin will be close to what we achieved in the second quarter last year. Even though we generally achieved higher margins on our oil and gas products because they are manufactured domestically, we expect to make up some of the shortfall with manufacturing efficiency improvements.
For Mueller Water Products we expect adjusted pre-tax income in the second quarter to improve largely due to our lower interest expense. As just discussed with the puts and takes in our various businesses, we believe consolidated results will show about flat year-over-year net sales, adjusted operating income and adjusted operating margins.
I will now provide an update on our general overview for 2015. As we said on our last call, we expect continued net sales growth at Mueller Company, driven primarily by both the residential construction and municipal end markets.
I’ll start with our base business, which excludes metering products and leak detection. We continue to expect year-over-year net sales for our base business to increase in a range comparable to the 7.3% growth we saw in 2014.
We expect this growth to be driven by demand in our residential and municipal end markets. Additionally, we anticipate higher growth rates in the second half of the year relative to the first half.
Looking at our quote activity, quotations in the first quarter were up 16% in number of quotes and 30% in dollars. Quotation activity was primarily driven by several large municipal projects.
We view this quote activity as an indicator of the direction of future municipal demand, which we think indicates ongoing growth. Economic forecast for growth in housing starts in calendar 2015 are now about 15%.
This growth rate is slightly lower than what was forecast several months ago, but still much higher than the 8.7% growth in calendar 2014 and the 6% growth for the quarter ended in December. We expect greater growth and demand for our products coming from the residential construction market in the second half of our year than what we expect to see in the first half.
For our domestic valves, hydrants and brass products we expect our growth rate for the first half of the year to be about 9%. Given the outlook for growth and residential construction and continued strong municipal spending, we expect to see a slightly higher year-over-year growth rate in the second half of the year.
For our international sales, keep in mind that this business tends to be project based. We believe our export shipments will be up in the second half of the year as compared with the first half.
Finally, we expect net sales of Pratt to increase in the second half of the year compared with the first half, driven by growth in water distribution pipeline work and plant projects. For metering products we continue to believe 2015 net sales will be essentially flat with 2014.
We mentioned last quarter that we had outstanding quotations on some large metering projects and that we expected to win a portion of these. We are encouraged by the progress we made in the first quarter and we continue to expect to win some of these larger orders over the next several quarters.
Bookings for our metering products were up 24% year-over-year in the first quarter. Our backlog has grown nearly 80% since the end of 2014 and we expected to continue to grow in the second quarter.
As we look at our full year forecast shipments are heavily weighted towards the second half of the year given the scheduled shipment dates in our backlog, as well as anticipated future orders. Currently we expect shipments to be up more than 20% year-over-year during the second half of the year.
Although we expect net sales of our metering products to be flat in 2015, based on our current backlog and project pipeline we believe adjusted operating income will again improve on a year-over-year basis. We expect this improved performance will come from cost saving initiatives, as well as from an improved mix weighted towards the second half of the year.
As we mentioned on the last call, we are bullish about the future potential of our leak detection offering. We are investing in further developing our technology, especially with an eye on international markets.
During the first quarter we continue to gain traction in both domestic and international sales, as well as in quoting activity. On a year-over-year basis our sales funnel essentially doubled.
Though we expect to see significant sales growth during the year as we guided on our last call, we expect to be negatively impacted by about $5 million for the year related to the investments in technology and business development activity. Based on the current outlook for housing and municipal spending, we expect Mueller Company’s year-over-year net sales growth in 2015 to be in a range comparable to the 7.4% growth we saw in 2014.
We expect Mueller Company’s adjusted operating income and adjusted operating margin to increase in 2015 compared with 2014, again weighted towards the second half of the year. Turning to Anvil, some leading indicators related to non-residential construction are positive.
For example, The Architecture Billings Index for December remained above 50. As a remainder, in 2014 about 75% of Anvil’s business was driven by non-residential construction spending.
However our outlook for Anvil has changed since our last earnings call due to its exposure to the oil and gas markets. As you know, these markets accounted for about 20% of net sales in 2014.
As we mentioned earlier, we actually saw about a 14% year-over-year increase in net sales to the oil and gas markets in the first quarter. However, beginning in the second half of December and continuing into January, we saw our orders on year-over-year basis drop about 25%.
If we continue to see deterioration in our oil and gas business of this magnitude to the rest of our fiscal year, we do not believe the growth in our non-residential construction markets would offset the decline in oil and gas sale. Taking this all in to account we expect Anvil’s net sales could be down in 2015 on a year-over-year basis.
In total, we think adjusted operating income could be flat or slightly down year-over-year, excluding the $2.5 million gain that we experience in the fourth quarter of 2014 with the sale of Anvil’s Bloomington, Minnesota facility. We believe that an improvement in manufacturing efficiencies will partially offset the difference in margins between sales of our domestically produced oil and gas products and our non residential construction products, though we continue to see a growing trend in the non residential construction market to purchase our imported products.
From Mueller Water Products as a whole in 2015, we expect net sales growth in the mid single digits. Additionally, with increased production and shipment volumes at Mueller Company, we expect the benefits of continued operating leverage to result in adjusted operating income growth and adjusted operating margin expansion.
Other 2015 key variables include: corporate expenses are expected to be $34 million to $36 million, depreciation and amortization is expected to be $58 million to $60 million and interest expense is expected to be about $27 million. We expect our adjusted effective income tax rate to be 37% to 39%.
Capital expenditures are expected to be $36 million to $38 million. For 2015 we expect free cash flow to be driven primarily by improved operating results, offset by cash income tax payments, as we have substantially exhausted our Federal NOLs.
We expect 2015 income tax payments to approximate our reported income tax expense for the year. We also expect to make only minimal cash contributions to our pension plans in 2015.
As a reminder, our target is for free cash flow to exceed adjusted net income. With that, operator, I'll open this call up for questions.
Operator
Thank you. [Operator Instructions] Our first question coming from the line of Mike Wood of Macquarie Securities Group.
Sir, your line is open.
Mike Wood - Macquarie Securities Group
Hi, thanks so much for all the detail. You actually got to most of my questions in your prepared remarks.
First let me ask about the $5 million investment that you were talking about in the Systems business. Is that primarily related to leak detection and can you give us any update in terms of progress on penetrating the U.K.
market there?
Greg Hyland
Yes Mike, that is all related to leak detection and we said on our last call that as our – the technology that we introduces last year in the U.S. and the results from the pilots, we got very, very excited certainly about the fixed leak detection that we have been working on and our customers have been excited about it, and so we are continuing to invest to expand our capabilities in that area, to really to go after the U.S.
markets, to be able to offer it not only over RS Systems, but over cellular systems. If the utility decides to buy our fixed leak detection only and not couple the decisions with a RF AMI system.
We have in the last several weeks actually submitted several quotations in the U.K. We would expect some decisions to be made probably over the next three or four months, but we have had indications that they will start piloting our technology probably within the next several months and as I said the quotations put us in a position to potentially benefit from much larger orders down the road.
Mike Wood - Macquarie Securities Group
Great and then with the oil and gas headwinds in Anvil, and just general currency headwinds. Do you have any sort of contingency planning or additional restructuring that you may embark on if the headwind increases?
Greg Hyland
That’s a difficult one, because when we look at our SG&A at our oil and gas business, we really have limited sales force there. Our products go 100% through distributors and located in the oil patch, I think our sales people do a good job of not only interacting with our distributors, but the end users and we wouldn’t want to lose that touch point.
From a manufacturing standpoint, those products are manufactured at facilities where we manufacture other products, so we don’t have an opportunity to actually close any manufacturing facility. So we’ll have the opportunity probably to reduce some manufacturing overhead, obviously direct costs will be reduced, but relative to what I would call any real restructuring activity I think we are really limited.
Mike Wood - Macquarie Securities Group
Great, thanks so much.
Greg Hyland
Thank you, Mike.
Operator
Thank you our next question coming from Kevin Maczka of BB&T Capital Markets. Sir your line is open.
Kevin Maczka - BB&T Capital Markets
Thanks, good morning.
Greg Hyland
Good morning, Kevin.
Kevin Maczka - BB&T Capital Markets
I guess can we just touch on Mueller Co. So we had a couple of things surprise us here in a quarter with the Mid East refinery delays and the resi business out West.
And it looks like from your guide, we are shaping up in terms of total Mueller Co. to be flat in the first half, but Greg if I heard you right you are still thinking may be 7% plus for the year, so really back end loaded strong second half.
I’m just wondering, can you say a little bit more about your confidence level, your visibility, your forecasting ability. What gives you the confidence to keep that kind of a target after a flat first half?
Greg Hyland
Yes, Kevin, excellent question. And let me break it down into components.
We look at our valves and the hydrants and brass products. For the first half of the year we think that on a year-over-year basis they are going to grow close to 9%.
When we look at the second half of the year, then we think that that will grow. We would expect that to grow at really greater amounts driven by our expectations for growth in residential construction and our expectations that we are going to continue to see a solid municipal market.
I think our expectations relative to the residential construction market are really driven by, I would say the consensus or the midpoint of housing forecast of a 15% growth year-over-year and as we said in our prepared remarks, in 2014 that grew less than 9% and in the quarter just ended in December, that grew about 6%. So in order to have calendar year 2015 to be at a 15% rate, we’re would have to see a pick up in residential construction and certainly that expected pick up is built into the outlook that we just presented.
So I would say that where could we be vulnerable, where could we be vulnerable in our current outlook that if we don’t see residential construction growing at or near that 15%, we could certainly have some vulnerability in our most profitable products at Mueller. If we look at the macro environment relative to residential construction, it certainly looks like those variables support the expectation of the 15% growth rate.
Job growth is accelerating. There seems to be higher consumer confidence, household formation has increased dramatically in the recent months and interest rates remain historically low.
So that would certainly support an expectation of higher residential growth. But when we talk about a municipal spending remaining solid, we referenced that we saw a nice increase in a number of quotes we issued in the first quarter, about 16% in terms of the number of quotes, about a 30% increase in the dollar value.
Most of that was driven by larger municipal projects. That gives us some insight that at least there we think that there’s some bullishness around municipal spending, and also we saw that some of these projects tended to be transmission work related and distribution work usually follows the transmission.
So when we look at core Mueller and I’ll say our valves, hydrants and brass products, 9% growth in the first half of the year, we are expecting 9% growth in the first half of the year, slightly higher in the second half, but those are obviously the products that generate our highest margin and we have the greatest conversion margin. Now when we look at Mueller Co.
exports, our export business – when I look at the last 18 months, a lot of it had been influenced by shipments as we referenced to refinery in the Middle East. They had a change, I would say probably the last six, seven, eight months ago in their specifications to make sure that their valves and hydrants could handle sea water, as well as clean water.
We had to make a change to the internals in those products, to be able to not only handle clean water, but sea water. We made those change, so we’re going to go through a period when they come over and test the product and inspect the product and that’s why we say, hey, we think that those exports could shift in 2016.
However, we have seen an up tick, I would say in the last seven months and our quotation activity on infrastructure projects in the Middle East and right now as we look at both our backlog and expected wins, we expect to see pick-up in our export activity in the second half of the year as compared to the first half of the year. Albeit I think it’s important to point out that we don’t earn near the same margins on the export business as we do on domestic valve, hydrants and brass products.
Our Pratt business, more project oriented. As we look at our backlog, we see the second half of the year growing at a much greater rate this year perhaps, greater than what we see in the first half and greater on a year-over-year basis.
And then finally if you look at probably the biggest impact, will be our expectation that our metering sales will grow 20% year-over-year and that again is weighted to orders that we have in our backlog, orders that we expect to receive and so when we put those together, we do see an up-tick in the second half. If you would ask me what is the biggest concern at this point?
I would say it is if we don’t see a growth rate in residential construction that drives lot development at or near the 15% growth, then I think our second and half forecast and our full year outlook could be vulnerable.
Kevin Maczka - BB&T Capital Markets
Got it Greg. That’s all very helpful.
I appreciate all the detail there. Can I just ask one more about price cost and then I’ll jump off.
Greg Hyland
Sure.
Kevin Maczka - BB&T Capital Markets
More price increases coming in February, presumably the input cost side is under control and maybe even increasingly favorable. Can you just address that and how does that affect your guidance?
Greg Hyland
Yes, I think relative to input costs, Kevin, I think under control is a good way to put it. I think that when we look at our overhead costs per unit sale, we expect that to come down as our capacity utilization and our manufacturing increases.
I think we still have a little bit of the mix – we’re little mixed on the raw material side. I think when we look at brass ingot and when we look at our scrap steel purchases, we think that we will get a tailwind from those components, but we are seeing an increase in components that we source, especially those from China, given where they were 12 months ago, and so when we look at the price increase of Pratt, that price increase is very important to offset the higher component costs that we’re seeing from China that a lot of our components and even machining of our valve bodies is done in China and then come to Pratt for assembly.
So all in all, I would say it should tend to be a bit of a tailwind, but we are seeing on the material side there is offset from the lower scrap steel and brass ingot costs relative to source components, especially those coming from China versus what our costs were a year ago.
Kevin Maczka - BB&T Capital Markets
Okay great. Thank you.
Greg Hyland
Yes, thank you.
Operator
Thank you. Our next question coming from Brent Thielman of D.A.
Davidson. Sir, your line is open.
Brent Thielman - D.A. Davidson
Hi, good morning.
Greg Hyland
Good morning Brent.
Brent Thielman - D.A. Davidson
Good, good. Greg is there anything specifically your kind of looking at as it relates to infrastructure proposals out of Washington that you think might be significant to the company?
Greg Hyland
You know Brent, certainly what’s coming out of Washington, what we’ll have to classify as very positive. I think the question is timing and the overall bureaucracy.
Certainly I think that when you look at the state revolving funds, that I think that over $2.3 billion was allocated by the federal government, which is up from where it has been and that seems that a majority of that – I mean well, less than half of that for drinking water, but almost $1.5 billion allocated for clean water. So certainly I think rebuild America.
The discussion there to invest $1 trillion over five years; who knows where that will go, but I think even out of Washington as you mentioned there is bipartisan support for the Sustainable Water Infrastructure Investment Act, So I would say that what we are seeing out of Washington is positive. I can’t say that we’ll see much of an impact in 2015 other than I think the increase in state revolving funds.
I think that that increase should flow through into the market.
Brent Thielman - D.A. Davidson
Sure. Okay, that’s helpful.
And then what do you expect your overall kind of sales exposure is going to be in Canada going forward, since it sounds like you kind of scaled back the business?
Greg Hyland
Yes, actually we only scaled back – as we said, we had I think last year it was somewhere around $11 million of sales of municipal casting. So we are talking a real commodity product.
It has been a legacy business for us and I’d say up until a couple of years ago it was a pretty reasonable business for us, because there was a tendency to buy locally. Over the last couple of years we’ve seen to trend the exports take some of that market, so as we discussed we elected to exit that business.
We lost about $2 million at the OI line last year and the sale of those products are completely unrelated to our valve, hydrants and brass products and any of our other products; different buyers, different distribution, so relative to our cutting back our investment in Canada. We don’t believe it really will have any impact on the rest of our business.
Now was that your question?
Brent Thielman - D.A. Davidson
No, I think that hits it Greg. I guess one more on that.
I mean, are you continuing to sort of focus on pushing some of the technology products up into that region as well?
Greg Hyland
Yes, we are. We have pilots ongoing with several of the major water systems there, but it’s more on the leak protection side, really not on the metering side.
Brent Thielman - D.A. Davidson
Okay great, thank you.
Greg Hyland
Thanks.
Operator
Thank you. Our next question is from Kevin Bennett of Sterne Agee.
Sir, your line is open.
Kevin Bennett - Sterne Agee
Thanks, good morning everybody.
Greg Hyland
Good morning Kevin.
Evan Hart
Good morning.
Kevin Bennett - Sterne Agee
Two questions Greg. First, if we can talk housing for a second.
You know you mentioned some of the headwinds out west that you saw late in the quarter. I’m wondering if you could talk about the other regions and I guess more specifically in terms of kind of new community development, what your seeing on that front?
Greg Hyland
Yes, when we made our comments about the west, as we said, we were surprised, because for the last four quarters we were seeing very, very nice growth out of the west and this quarter we only saw a 5% growth. So we really did a deep dive and said, okay on a year-over-year basis where are we seeing the real difference and we were able to identify over a year ago some pretty nice shipments that we’ve made to our distributors that was specifically earmarked for different housing developments that were going through the development process at that time.
So Kevin that is why we were saying that hey, we think this downturn on a year-over-year basis from our expectations has been a slowdown from residential constructions. Relative to community accounts, I think the community counts continue to grow and move in a positive direction.
We continue to see I think the statistics would indicate that land development continues to grow, albeit at a slower growth rate than what maybe we were seeing several quarters ago, and I think that’s what’s supporting our outlook of why we think in the second half of the year we are going to see the up-tick and further growth coming from residential constructions. But when I answered all of your questions that Kevin asked, if one were to ask us right now what’s the vulnerability in our forecast, it maybe are we going to see that kind of growth rate.
Kevin Bennett - Sterne Agee
Certainly that makes sense. Thanks for that and then lastly Greg and I guess Evan, now that you guys have some financial flexibility, can you talk about your capital allocation plans going forward.
I mean should we look for a dividend hike or a buyback or M&A or what are you thinking about on that front.
Greg Hyland
Again Kevin, good question. We do have the flexibility.
When we look at our board. With our board we look at all the different options.
I would say right now that our first priority would be is there an opportunity for us to grow our business, and we’ve said in the past and when we look on the acquisition side, it was acquisitions that have strengthened our position while our infrastructure will add to our technology that we would look very seriously. So we have flexibility, I say we looked at all options.
I would say, as we look to the immediate future our priority would be either growth or other opportunities for us to grow the business.
Kevin Bennett - Sterne Agee
Okay. Thanks Greg, I appreciate it.
Greg Hyland
Thank you.
Operator
Thank you. And our next question is from Seth Weber of RBC Capital Markets.
Your line is open.
Daniel Politzer - RBC Capital Markets
Hey, good morning. This is actually Daniel Politzer on for Seth.
So I guess going to your revised guidance for 2015, what’s your level of comfort with the incremental expectation. You guys have talked in the past about Anvil around 25% and Mueller around 35%.
Should we still expect that for this year or kind of what are you thinking?
Greg Hyland
Sure, I’ll have Evan’s take that.
Evan Hart
Certainly. When you look at our conversion margins, for the base business, which excludes metering products, and leak detection, we saw conversion margins of about 38% for our first quarter.
And one variable that negatively impacted that conversion margin was about 800-basis point related to higher cost of components sourced from China by our Henry Pratt business. We have included that in the guidance we provided last quarter.
So if you take that into effect, excluding this Mueller Co. base business conversion margin in the first quarter, it would have been around 46%, 47%.
As you mentioned, we typical expect total Mueller Company conversion margins around 35% to-date; that’s on average and can fluctuate from quarter to quarter based on the mix and specifically the mix of a higher margin valves and hydrants. So certainly a base conversion margin fairly solid in around 46%.
And then taking a look at Anvil conversion margins for the quarter, if you look at the volume, we saw conversion margins of around 30%, however I sighted in the prepared remarks that we negatively impacted some higher manufacturing costs due to a shut down. Excluding those costs and just taking a look at the business we saw conversion margins a little over 20% in the Anvil business, which is pretty close to our overall stated average of around 25%.
Daniel Politzer - RBC Capital Markets
So for the year would you still say 35%, around 25% for each of the business is…
Evan Hart
That’s right. When we look at full year, I would say that those conversion margins that we provide, we would see those and certainly that’s dependent upon the mix as we go forward, but we would expect conversion margins in that level.
Daniel Politzer - RBC Capital Markets
Okay thanks. And another one, on the FX impact from the Canadian dollar, could you give an approximation of what the impact was on operating income from that?
Greg Hyland
Yes. Our currency exposure is primarily in Canada and just a little bit on sizing.
If you look for the quarter, our consolidated net sales growth would have been about 55 basis points higher or 2.25% excluding the unfavorable exchange rates and adjusted operating income growth would have been 19% compared with 15.6%. And at Mueller Company our adjusted operating income would have improve about 12.5%, excluding the unfavorable exchange rates.
So it’s all in Canada and I would say on the whole for the business from the revenue perspective, it impacted us a little under a $1.5 million and about $0.5 million on the operating income side.
Daniel Politzer - RBC Capital Markets
Okay, great, thanks. I’ll leave it there.
Operator
Thank you. Our next question coming from Noah Kaye of Northland Capital Markets.
Your line is open.
Noah Kaye - Northland Capital Markets
Yes, good morning. The capacity utilization, you’ve given data on that in the past.
Can you tell us what it was this past quarter?
Greg Hyland
Yes. We signed found increase in both Anvil and Mueller Co.
on a year-over-year. Mueller Co., we are estimating moved from about 62% overall a year ago up to about 67% this year in the first quarter and Anvil about 70%.
Noah Kaye - Northland Capital Markets
Okay. And for Anvil you know, I imagine you have some pretty good visibility to the non-residential business, especially for large products.
How much are you expecting the non-residential construction portion of Anvil to grow this year?
Greg Hyland
Yes, that’s a great question. And right now as we look at it, its pretty consistent with the guidance we gave last quarter.
We are looking for around mid-single digit growth. If we look at our first quarter, we saw about 3% to 4% of growth of our products going into fire protection and mechanical systems in non-res construction spending.
As we look, we think that should maybe and continue to increase slightly throughout the year. But as we look at where we fall in the construction cycle, that I would say now it would be difficult for us to guide any growth greater than that mid-single digit.
Noah Kaye - Northland Capital Markets
And just a follow-up on that, when you fall in the construction cycle. By that you mean you have some limit on visibility into the out quarters or are you suggesting that sort of fully baked into the year?
Greg Hyland
Yes, I think that’s fully baked into our year. As we said, we expect that the construction, we start seeing I think positive movement about 12 months, 14 months ago, but we have to see foundations in place, structural seal and some progress before our products get in.
probably about I would say mid cycle of the construction project depending on specifically what it is. So I think that we are certainly are little more backend weighted and possibly when you look at non-construction and what appears to be happening in that market.
We may even see some of that increase, flowing into our first quarter of our fiscal year 2016, even though it would still be in calendar year ’15.
Noah Kaye - Northland Capital Markets
Great. And you mentioned I think a very substantial increase in the Mueller Systems backlog.
I think you said 80%. Could you repeat that?
Greg Hyland
Yes, it was up 80%. Albeit its on smaller numbers for Mueller Systems.
But we saw a nice continued growth in our order and as we said our orders were up on a year-over-year basis; 24% in the first quarter, the backlog growing. We said in the last call and we reiterated on this call that in the last six months we have seen request for proposal from larger cities that I don’t think have been around for the last couple of years.
We continued to make I think real progress on those in the past quarter and we expect to win some of that business over the next several quarters. But yes, we are seeing positive activity both in our order rates, our closure rate, the growth of our backlog and that supports our expectation that on a year-over-year basis our sales will growth about 20% year-over-year over year in the second half of the year.
Noah Kaye - Northland Capital Markets
Okay great. And would you be able to give us a backlog number?
Evan Hart
Yes. Our backlog is between, but right now its about $16 million and $17 million.
Noah Kaye - Northland Capital Markets
Okay great. Thank you so much.
Greg Hyland
Yes. Thank you.
Operator
Thank you and our next question is from Jo Giordano of Cowen. Your line is open.
Joseph Giordano - Cowen & Co.
Hi guys. How are you doing?
I’m just curious, how much could mix in terms of residential construction. help offset growth in the overall numbers that if it fails to meet up to 15%.
I guess if it was shifted more towards single family than it was last year, but the overall growth rate was not as much. How much can be offset by mix?
Greg Hyland
You know Joe, certainly if we see a transition to more single family homes, that’s a plus for demand for our products and so if you are saying that mix in terms of hey overall housing starts may not reach the 15% growth, but we see a greater percent of growth coming from single family. That’s certainly could offset a short fall you know from the overall growth rate.
But ask the question again, because I’m not sure that I just addressed the question you asked.
Joseph Giordano - Cowen & Co.
No, that did address it, thank you. How large is your export business?
Like you mentioned you were talking about the mid-east components stuff like that?
Greg Hyland
Yes. When you look at Mueller Co.
in total, it’s about 5%. I think it becomes probably more impactful when you are discussion perhaps year-over-year movement in a particular quarter, but it trends around 5%.
Joseph Giordano - Cowen & Co.
Okay, and then just last for me, how would you kind of gauge your overall confidence level here versus where you were three months ago in terms of your outlook and I see what you said with the guidance, but how do you feel about your level of comfort now?
Greg Hyland
I would say we are just as comfortable with demand for municipal spending as we were last quarter. I would say that our outlook for Mueller Systems, we feel just as comfortable given the order increase that we saw in the first quarter and the increase in our backlog.
I would say that the fact that housing starts for the quarter ended December were less than 7% gives us maybe a little bit of pause saying gee, exiting the year at 7% and having a full year of 15% growth, that certainly could be a little concerning. But again, when we go through the macro actor that we did, it certainly could support that type of growth.
We announced our price increase on valves and the hydrant in mid-February. We’ll know exactly to what extent this has been accepted by the marketplace based on the number orders that we put forward, but our competitors certainly appear to have followed.
I would say the other area that when you look at total Mueller Water Products, certainly it has been the fall off in energy, in the oil and gas markets and that’s why we made the comments that we did and that we say if you look at the last six months. I mean we are sitting here and I imaging a lot of people who are sitting and saying what’s really going to happen over the next nine to 12 months in the oil and gas business.
In a very short time, it changed pretty dramatically. So all we can do is provide an outlook based on what we are seeing and in the short term, as I said for the last six weeks, we saw a downturn on a year-over-year basis of about a 25% erosion in our fall off in our orders from oil and gas.
So that certainly has changed from a quarter ago and probably makes us as we guided, feeling that Anvil’s overall performance will be less than what we though it would be a year ago. So Joe, I don’t know if that captures it all, but I’d say for the bulk of our business we feel very comfortable of both of our markets.
Certainly maybe a little question mark on the growth rate in residential construction and oil and gas markets will negatively impact us.
Joseph Giordano - Cowen & Co.
Okay great. Thanks for the color guys.
Greg Hyland
Thank you.
Operator
Thank you. Our next question is from David Rose of Wedbush Securities.
Sir your line is open.
David Rose - Wedbush Securities
Good morning and thank you for taking my call. I have a couple of follow-ups and I maybe repetitive and then I was dropped, but if I may ask, in terms of the oil and gas exposure, can you break down down-stream, mid-stream and up-stream for us and provide us a little bit more color on what you’ve seen historically and maybe in terms of what’s MRO versus what’s related to CapEx.
Greg Hyland
Yes. Our products are production related and we’re up-stream and we don’t typically see a lot of the MRO opportunity, because our products, they go into a process that don’t wear out.
We are providing couplings for piping systems, for tank batteries and in gathering fields and so on. We have always found a good indicator for demand for our products as tied to the rig count, because I think that certainly is a probably good indicator of new production and we follow very closely.
So we are really tied into that sector of the oil and gas market.
David Rose - Wedbush Securities
And then in terms of your guidance for Canada released FX, have you baked in this guidance as the stronger dollar I’m assuming just to be clear?
Greg Hyland
Yes. We would have baked in the guidance on the stronger dollar, but we also baked in – if you look at it last year for the full year, we shipped about $3 million of Mueller valves to the oil sands, we go and fire protection systems and right now we don’t think that business will repeat in 2015 given what’s going on in the oil and gas business.
David Rose - Wedbush Securities
Okay, that’s helpful and then just a couple of quick ones is on the SG&A bump, was some of that from the leak detection business. How much of it was from the investment leak detection this quarter?
Evan Hart
Yes, when you take a look at SG&A, I would say that it was a small amount from some personal related expenses, just inflationary impacts, some costs associated with a small acquisition, a line above acquisition and then we also had SG&A associated with the write off of assets of a mirrored building, in our Anvil building that we indicated on the prepared remarks and just a bit on the investments related to our leak detection.
David Rose - Wedbush Securities
Okay. And then last one is, your comments have been pretty clear about, you need a potential risk for your numbers in resi.
Can you quantify a little bit what that would mean if resi grew at 7 or 10, versus 15, on a dollar basis? And then provide color as why not just assume a lower residential growth rate?
Greg Hyland
Yes, that will be something that we would really – obviously if we saw a decline from a growth with half of expectations it would impact us. Right now I really can’t quantify what that impact would be, but certainly it would be a follow-up in our valve and hydrant business and which we’ve discussed a number of times as our most profitable business.
David Rose - Wedbush Securities
Okay, great. Thank you very much.
Greg Hyland
Thanks David.
A - Greg Hyland
Well, seeing that there are no additional questions, that concludes today’s call. Thank you for your interest in Mueller Water Products and for joining us this morning.
Operator
Thank you. And that concludes today’s conference.
Thank you all for joining. You may now disconnect.