Welcome and thank you all for standing by. At this time, all participants will be on listen-only mode. During the question and answer session, please press star 1 for any question. This call is being recorded. If you have any objections, please disconnect at this time. We'll turn the meeting over to your host, Ms. Marietta Zakas. Ma'am, you may begin.
Thank you, Gabby, and good morning, everyone. Welcome to Mueller Water Products' 2015 fourth quarter conference call. We issued our press release reporting results of operations for the quarter ended September 30, 2015, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Discussing the fourth quarter's results this morning are Greg Hyland, our Chairman, President, and CEO, and Evan Hart, our CFO. This morning's call is being recorded and webcast live on the internet. We have also posted slides on our website to help illustrate the quarter's results, as well as to address forward-looking statements and our non-GAAP disclosure requirements. At this time, please refer to Slide two. This slide identifies certain non-GAAP financial measures referenced in our press release, on our slides, and on this call, and discloses the reasons why we believe that these measures provide useful information to investors.
Reconciliations between GAAP and non-GAAP financial measures are included in the supplemental information within our press release and on our website. Slide three addresses our forward-looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward-looking statements, as well as specific examples of forward-looking statements. Please review slide two, end year or quarter, unless specified otherwise, refer to our fiscal year. Our fiscal year ends on September 30th. 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. We will furnish a copy of our prepared remarks on Form 8-K later this morning.
I want you to note that we have redefined our reporting segment to provide greater transparency to stockholders and to the financial community, as well as to better reflect how we manage our businesses. We are now reporting financial results for three segments: Mueller Co, Anvil, and Mueller Technologies. Mueller Technologies is currently comprised of the results of the Mueller Systems and Echologics businesses, which were previously reported within the Mueller Co segment. We will file an 8-K today, which will provide the quarterly results for these three segments for 2014 and 2015. After the prepared remarks, we will open the call to questions. I'll turn the call over to Greg.
Thanks, Marti. Thanks for joining us today as we discuss our results for the 2015 fourth quarter and full year. I'll begin with a brief overview, followed by Evan's more detailed financial report. I will then provide additional comment on the quarter's results and developments in our end market, as well as our outlook for the 2016 full year and first quarter. We continue to improve our operating performance. For consolidated Mueller Water Products, adjusted EBITDA margin for the 2015 fourth quarter improved 130 basis points to 19.2%, as compared with 17.9% last year. We had particularly strong margin improvement at Mueller Co., which now excludes the Mueller Systems and Echologics businesses. Adjusted EBITDA margin at Mueller Co. was 28.8%. This adjusted EBITDA margin was the highest at Mueller Co. for a fourth quarter since 2008.
For the full year, Mueller Co.'s adjusted EBITDA margin was 26.2%, compared to 24.6% in 2014. Well for the fourth quarter, our consolidated results came in slightly less than expected due to lower growth in net sales at Mueller Co. We believe distributors were able to meet end market demand largely through higher inventory levels they held at the beginning of the fourth quarter, primarily in states impacted by extreme rainfall in the third quarter. By September, however, we believe their inventory levels were back in equilibrium as we saw a significant pickup in orders over the course of the month. Although our orders met our expectation for the quarter, our shipments were lower given the timing of the orders. We'll discuss this in more detail later in the call.
For the fourth quarter, our adjusted net income per diluted share increased 17% to $0.14. With that, I'll turn the call over to Evan for a more detailed discussion of our financial results for the quarter.
Thanks, Greg, and good morning, everyone. I'll first review our fourth quarter consolidated financial results and then discuss segment performance. Net sales $3 million, or 2.9% from the 2014 fourth quarter net sales of $320.7 million, largely due to lower oil and gas shipment volumes at Anvil, as well as unfavorable changes in Canadian currency exchange rates. Sales grew at both Mueller Co. and Mueller Technologies.
Gross profit was $97.7 million for the 2015 fourth quarter, compared with $101.3 million for the 2014 fourth quarter. Gross margin of 31.4% in the 2015 fourth quarter decreased 20 basis points from 31.6% in the 2014 fourth quarter, primarily due to a less favorable product mix at Anvil. Gross margin at Mueller Co. improved 80 basis points year-over-year and also improved at Mueller Technologies. Selling, general and administrative expenses were lower year-over-year, due primarily to personnel-related expenses. Selling, general and administrative expenses were $53.2 million in the 2015 fourth quarter, compared with $58.2 million in the 2014 fourth quarter. Selling, general and administrative expenses as a % of net sales improved 100 basis points to 17.1% from 18.1% in 2014.
Adjusted operating income for the 2015 fourth quarter increased 4.4% to $45 million as compared with $43.1 million for the 2014 fourth quarter, which included a $2.5 million gain on the sale of Anvil's Bloomington, Minnesota fabrication facility. Excluding the gain from the sale, adjusted operating income improved 10.8% for the 2015 fourth quarter. Adjusted operating income benefited from improved operating efficiencies, lower raw material costs, and lower corporate expenses. These benefits were offset by lower shipment volumes at Anvil and unfavorable changes in Canadian currency exchange rate. Adjusted EBITDA for the 2015 fourth quarter increased to $59.9 million, compared with $57.3 million for the 2014 fourth quarter. Adjusted EBITDA for 2015 was $189 million, or 16.2% of net sales, an improvement of 70 basis points. Interest expense net for the 2015 fourth quarter declined $6.2 million to $5.8 million, as compared with $12 million for the 2014 fourth quarter.
We benefited from lower interest expense this quarter due to lower interest rates and lower amounts of debt outstanding following the refinancing we completed in the 2015 first quarter. For the 2015 fourth quarter, income tax expense was $16.3 million, or an effective income tax rate of 42.2%. Income tax expense included deferred tax asset valuation allowance adjustments of $300,000, compared with an $8 million benefit included in the 2014 respectively. Also, the 41% rate in the fourth quarter of 2015 was higher than our full year effective income tax in the prior year. However, adjusted net income per diluted share for the 2015 fourth quarter improved to $0.14 from $0.12 in the 2014 fourth quarter. As a reminder, the primary adjustment in the 2000 tax expense by $8 million.
I'll now move on to segment performance, addressing each of our now three reporting segments, beginning with Mueller Co. Net sales for the 2015 fourth quarter increased $3.2 million to $192 million, compared with $188 million for the 2014 earlier this year, and $3 million from unfavorable changes in Canadian currency exchange rates. Excluding the impact of the divestiture and unfavorable changes in Canadian currency exchange rates, shipment volumes would have increased 5.2%. Adjusted operating income for the 2015 fourth quarter improved to $45.6 million, compared with $40.4 million for the 2014 fourth quarter. The $5.2 million adjusted operating income improvement was largely due to operating efficiencies, lower raw material costs, and lower selling, general and administrative expenses. Adjusted operating margin of 23.8% for the 2015 fourth quarter improved 240 basis points from 21.4% for the 2014 fourth quarter.
Adjusted EBITDA for the 2015 fourth quarter increased to $55.3 million, compared with $50.1 million for the 2014 fourth quarter. Adjusted EBITDA margin for the quarter increased 230 basis points to 28.8% from 26.5% last year. I'll now turn to Anvil. Net sales for the 2015 fourth quarter decreased $14 million to $93.7 million, compared with $107.7 million for the 2014 fourth quarter. As expected, net sales decreased due to lower sales of oil and gas-related products, which were down approximately 60%, or $12.9 million. Additionally, Anvil was impacted by approximately $1.1 million in unfavorable changes. Income for the 2015 fourth quarter was $8.9 million, compared with $16.8 million for the 2014 fourth quarter. Adjusted operating margin decreased to 9.5%, compared with 15.6% for the 2014 fourth quarter.
As previously mentioned, 2014 fourth quarter adjusted operating income included a $2.5 million gain on the sale of its Bloomington, Minnesota fabrication facility. The decline in operating income was also impacted by fewer shipments of higher margin products to the oil and gas market. Adjusted EBITDA for the 2015 fourth quarter was $12.8 million, compared with $20.4 million for the 2014 fourth quarter. Adjusted EBITDA margin for the 2015 fourth quarter was 13.7%, compared with 18.9% for the 2014 fourth quarter. I'll now turn to Mueller Technologies. Net sales for the 2015 fourth quarter increased $1.5 million to $25.7 million, compared with $24.2 million for the 2014 fourth quarter. Adjusted operating loss for the 2015 fourth quarter was $1.8 million, compared with $2.1 million for the 2014 fourth quarter.
Adjusted EBITDA for the 2015 fourth quarter was a loss of $600,000, compared with a loss of $1.3 million for the 2014 fourth quarter. Corporate expenses for the 2015 fourth quarter were $7.7 million, compared with $12 million for the 2014 fourth quarter. The decrease was due primarily to lower personnel-related expenses. Turning now to a discussion of our liquidity. Free cash flow, which is cash flows from operating activities less capital expenditures, was $57.4 million for the 2015 fourth quarter, compared with $75.2 million for the 2014 fourth quarter. For the full year 2015, free cash flow was $50.3 million, compared with $110.7 million in 2014. Free cash flow was lower in 2015, primarily due to the timing of purchase and disbursement activity, mostly related to inventory. Purchasing was relatively high late in 2014, and the related disbursements occurred in 2015.
In 2015, purchasing activity was weighted for the earlier part of the year. At September 30th, 2015, total debt was comprised of $486.6 million senior secured term loan due November 2021 and $2.4 million 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 325 basis points. Our total debt outstanding at the end of 2015 was down $52 million from the end of 2014. I'm also pleased to report that during the quarter, Moody's upgraded our corporate family rating to Ba3 and our term loan rating to Ba3. Net debt leverage was two times at September 30th, 2015, and our excess availability under the ABL agreement was approximately $170 million. I'll now turn the call back to Greg.
Thanks, Evan. I'll now elaborate on our 2015 fourth quarter results and end markets and provide an overview of our expectations for 2016 and an outlook for the first quarter. As you recall, on our last earnings call, we highlighted certain areas of the country that were impacted by heavy rainfall in May and June. In those areas, particularly Texas, Colorado, and parts of the Midwest, our distributors ended the third quarter with about 90 days of inventory, more than double their target. We believe distributors in these areas were largely able to meet recovering end market demand from their existing inventory. As a result, our shipments to distributors in these areas during the quarter were down on a year-over-year basis. While we expected to continue to see weather impact on our fourth quarter results, it took longer for distributor inventories to reach their desired level.
September orders were up notably year-over-year, reinforcing our belief that distributors are positive about continued growth as we look to 2016. Total domestic orders of valves, hydrants, and brass products increased 7% year-over-year. However, as I just mentioned, orders were heavily weighted in September, which affected our shipment timing. In addition, we experienced particularly strong year-over-year shipment growth for Henry Pratt's plant and water treatment valve, with net sales up about 30%. As we have discussed in the past, a lot of Pratt's business is project-oriented, and we can experience a significant swing in net sales on a quarter-over-quarter basis. As Evan mentioned, we again delivered excellent operating performance at Mueller Co. Greater manufacturing efficiency through our lean initiatives and lower raw material costs helped drive a 230 basis point improvement in adjusted EBITDA margin.
At Anvil, as expected, we continued falloff of sales into the oil and gas market, which were down approximately 60% in the fourth quarter year-over-year. Our sales into this market have generally correlated with rig counts, which were down 58% year-over-year at the end of the fourth quarter. We saw low single-digit percentage growth in sales to the non-residential construction market during the quarter. At Mueller Technologies, our new reporting segment, net sales were up 6.2% year-over-year. Adjusted operating results improved slightly as the mix of our metering products continued to shift towards AMI metering systems from AMR and visual read meters. Mueller Systems was essentially break even for the quarter. This improvement was largely offset by investments in scalable technology and business development activity related to leak detection and pipe condition assessment.
Over the last four months, we have seen a significant year-over-year increase in AMI projects awarded to Mueller Systems as the overall market for AMI systems has shown improvement, and we have introduced new, longer range capabilities. In fact, Mueller Systems began 2016 with AMI backlog and awards of $36 million, compared with $13 million at the beginning of 2015. During the fourth quarter, we continued to make small investments at Echologics to support the long-term growth of our leak detection and condition assessment business. The market is still in the early adoption phase of these technologies, but interest from municipalities and water utilities continue to increase. Echologics began 2016 with $6.2 million under contract, the highest such amount at the beginning of a year in its history.
As we look at 2016, I'll discuss each segment and let you know what we expect to see with our end markets and our performance. We expect our three primary end markets, repair and replacement of water infrastructure, new water infrastructure driven by residential construction, and non-residential construction, to grow in 2016. We expect the residential construction market to be the fastest growing market segment. We expect solid growth in municipal spending, and we expect spending in the non-residential construction market to grow, but not as much as our other two end markets. At Mueller Co., we estimate that in 2015, about 70% of net sales were associated with the repair and replacement of municipal water distribution and treatment systems, 25% with residential construction, and 5% with natural gas utilities.
Overall, at Mueller Co., we expect net sales growth in the mid-single digits for 2016, which includes the expected unfavorable impact from changes in Canadian currency exchange rates and the divestiture of the municipal castings business in December last year. Given our current outlook for product mix, we expect to see conversion margins of about 40%. At Anvil, about 85% of 2015 net sales were associated with non-residential construction, 10% with oil and gas, down from 20% in 2014, and 5% with the power generation market. For fiscal 2016, we expect Anvil's overall net sales percentage growth to be in the low single digits. As we look to 2016, there is a general expectation among industry forecasters that spending for non-residential construction will increase in the mid-single digits, which should drive demand for Anvil's products.
However, we believe Anvil's overall growth will continue to be impacted by an expected decline in net sales to its addressed oil and gas market due to tough comparisons in the first half of the year, especially in the first quarter. As a reminder, Anvil's net sales into this market grew 14% year-over-year in the first quarter of 2015. Based on the current market conditions, we would expect Anvil's net sales into this market during the second half of the year to be flat on a year-over-year basis. Given our current outlook with respect to product mix, we expect to see a conversion margin of Anvil of about 15%-20%. Although the municipal market is the key end market for Mueller Technologies, the drivers of demand are different than those for Mueller Co.
Mueller Technologies is a more project-oriented segment and depends on customer adoption of its new technology products and services. As we have previously discussed, our strategy is for Mueller Systems to be a leading provider of AMI systems. For 2016, we entered the year with significantly higher AMI backlog and projects awarded for Mueller Systems and higher projects under contract at Echologics. We are encouraged by the increased interest we are seeing in the marketplace. Overall, we expect Mueller Technologies to show year-over-year net sales growth of about 10%-15% and for its operating results to improve about $7 million-$10 million, maybe $6 million-$38 million. Depreciation and amortization, which is expected to be $56 million-$58 million, and interest expense, which is expected to be $23 million-$25 million.
We expect our adjusted effective income tax rate to be 37%-39%, and capital expenditures to be $38 million-$40 million. For 2016, we expect free cash flow to be driven by improved operating results and improvement in working capital. We also expect to make only minimal cash contributions to our pension plan. Our target is for free cash flow to exceed adjusted net income. Turning now to our outlook for the 2016 first quarter, I'll begin with Mueller Co. We expect 2016 first quarter net sales percentage growth in the low single digits. In our core domestic valves, hydrants, and brass products, now that we believe distributor inventories are back at their targeted levels, we expect to see high single-digit growth driven by strong residential construction and solid municipal spending.
We expect this growth will be partially offset by the divestiture of our Canadian municipal castings business in December 2014 and unfavorable changes in Canadian currency exchange rates. Additionally, shipments of Henry Pratt water treatment valves are expected to be down in the first quarter due to the timing of projects in our backlog. As we said earlier, this business can be choppy, as we saw in our 2015 fourth quarter shipments were up 30% year-over-year. We expect first quarter adjusted operating income to be up between 10% and 15%. We expect Anvil's 2016 first quarter net sales to decline in the high single digits, largely due to the tough comparison with its oil and gas business. Based on current market conditions, we expect net sales to the oil and gas segment to be down 60%, which is approximately $12 million.
We will offset some of the operating income decline from the lower revenue with cost reduction actions we have been implementing in our oil and gas business. We expect to see the benefit of lower raw material costs and increased adjusted operating income from growth in shipments to the non-residential construction market. In total, however, we expect adjusted operating income will be down approximately 40% this quarter. As you recall, we began seeing a significant drop-off in our oil and gas business in our second quarter last year. Therefore, we don't expect adjusted operating income to be significantly impacted due to the downturn in the oil and gas market beyond this quarter as compared to the prior year. We expect 2016 first quarter net sales at Mueller Technologies to be down slightly with a slightly higher year-over-year adjusted operating loss.
While we are entering 2016 with a higher AMI backlog, we do not expect to benefit from this higher backlog until the second half of the year. For Mueller Water Products as a whole, we expect 2016 first quarter net sales to decline slightly year-over-year, as growth at Mueller Co. should be more than offset by a decline at Anvil. We expect adjusted net income per diluted share to be essentially flat, as the benefits of lower interest expense will likely be partially offset by lower adjusted operating income. Reflecting on 2015, we are certainly pleased with the increase in both our overall adjusted operating margin and adjusted EBITDA margin, as well as with the 30% increase in our adjusted net income per diluted share to $0.39 from $0.30, both of which gives us more flexibility in managing our business and in pursuing growth opportunities.
We were negatively impacted by the decline of sales into the oil and gas market at Anvil and unfavorable changes in Canadian currency exchange rates. Our consolidated net sales growth was negatively impacted by 260 basis points due to the lower sales into the oil and gas market and by 90 basis points due to unfavorable changes in Canadian currency exchange rates. Net sales of our products into the oil and gas market represented about 7% of our consolidated net sales in 2014, but only about 4% in 2015. In 2015, we continued to focus on enhancing value for our customers in expanding our intelligent water technology offerings. We continued to invest in new products and services that are designed to help water utilities improve their operations and better manage their water assets.
At Echologics, we expanded our worldwide sales force and continue to invest in our fixed new technology in our AMI offering that significantly increased our radio range and reduced the infrastructure required for our system. We believe this development contributed to us winning AMI awards in recent months. We also entered into the LoRa Alliance, which is focused on bringing the Internet of Things to a number of municipal applications, including water infrastructure. Our technology businesses have seen an increase in backlog and contracts, which leads us to believe our investment in these areas will pay dividends as more municipalities and water utilities focus on improving their ability to accurately measure water usage, enhance customer service, and detect leaks as a means of conserving water and extending the life of their water infrastructure.
As we just discussed, we believe the outlook for our key end markets, new water infrastructure driven by residential construction, repair and replacement of existing water infrastructure for municipalities, and non-residential construction remains positive. As we mentioned, the spending decline in oil and gas markets will result in tough comparisons for part of our business, especially in the first quarter. As our capacity utilization increases, we believe we will continue to demonstrate improved operating leverage, which should lead to expanding margins and improved returns for our stockholders. With that, operator, I will open this call up for questions. Operator, I wonder if you would open up the call for questions, please.
Thank you. We will now begin the question and answer session. For any questions, please press star and then one. Please unmute your phone and record your name clearly when prompted. To cancel your request, press star and then two. The first question comes from the line of Kevin Matter. You may ask your question.
Thanks. Good morning.
Good morning.
Greg, can we first start on AMI and the better awards? I think you said in the last four months you've seen an uptick there. You've got a better backlog now entering the new year. Can you just talk about what's driving that? I know this is project-oriented and lumpy, but is there anything driving that? I know budgets have been an issue and extended pilot time frames have been an issue. What's really turned that business?
I think two things, Kevin. I look externally, and I think we were pretty consistent through 2015 mentioning that we're starting to see more and more inquiries. I do think that utilities are being able to justify the higher capital expenditure on AMI because the AMI systems just keep getting better, and I think that they can build a better business case, and they're seeing the benefit. I think for us specifically, and I mentioned this in our prepared remarks, that I would say for the last 18 months. We entered the AMI market about four years ago. It's been a learning curve for us, both in terms of what we needed to do to not only enhance the solutions we were offering the end user, but we needed to reduce our costs and get a better cost for our system.
I think we had a nice breakthrough in 2015. We were able to significantly increase the range of our radios, which reduces the number of repeaters and collectors, which in turn reduces the cost of the infrastructure competitive position. I think that certainly has contributed to the uptick that we've seen in the last several months of the awards we've been winning. I think it's a combination of, it's certainly been much slower than our original expectations in terms of adoption of AMI by the water utilities in the U.S. I think we're starting to see more and more of that because they're seeing the benefits. Again, I think we have a system that is not only much more competitive, but overall, it's a better system than what we were offering a year ago.
Okay. Just to be clear, you said the backlog entering the year was $36 million, and it was $13 million the prior year?
Yes. That's a combination of backlog and award. Sometimes we may have a two or three-month lag between the time we're given the award and the contract actually is sold. Fortunately, we've never had an award not turn into a contract. We feel pretty comfortable adding those two together to come up with $36 million. That's the way the $13 million was calculated, too.
Got it. On the oil and gas side, so that was under pressure all year post Q1. I think it's down to, would you say about 4% of total sales now. You mentioned some new cost actions there. I know that's a smaller piece of business now.
Yes.
Can you talk about that? Are there any other larger cost actions going on elsewhere beyond oil and gas that we should know about? I understand you have growth in most of the other.
We referenced these, I think, probably in the last quarter, too. When we look at our manufacturing operations, we do have, at Anvil, two plants that are dedicated to the manufacturing products that directly go into oil and gas. Our headcount's down about 50%. We're doing, obviously, the normal things that need to be done when you see the volume come down. We have not really addressed or taken any action on our field sales force. When we look at our oil and gas business there, we only have four or five salespeople dedicated directly to the oil and gas market. Cost reduction actions. I think our cost reduction actions aren't going to be driven by, I think, any big event.
It's just going to be, I think, what we have been seeing, and that's a continual improvement of our efficiency as our lean initiatives become more and more of the culture. I think when we look at the improvement that we've seen year-over-year, certainly at Mueller Co., by far our largest operation, where we had a 240 basis points in improvement on just a slight increase in sales. Certainly, we benefited from lower raw material costs. We benefited because the divestiture of our Canadian business was in a loss position, the municipal castings business. Also because we're seeing, I think, ongoing and pretty quarter-to-quarter efficiency improvements. Nothing that I would say would be a large event or a big event for cost reduction, but we're continued to focusing on quarter-over-quarter, year-over-year efficiency improvements that are giving us.
Thank you. The next question comes from the line of Seth Weber. You may ask your question.
Hey, good morning.
Morning, Seth.
Morning. Hi. On the Mueller Technologies business, I think what I heard you say was, for 2016, operating improvement of $7 million-$10 million. The business lost, it looks like, $13 million in 2015. Does that mean that you're still going to be at an operating loss for 2015?
Yes.
2016, rather.
Yes. Overall, Seth, we think we will still be. We think that when we look at it, we expect our Mueller Systems to be profitable. We're still, I think, in the early stages of growing the Echologics business, where we have our sales infrastructure, to support a larger business, because we're moving in that direction. Secondly, we still have some investments to make on fixed leak detection. We have had our end users respond very favorably to the pilot that we have completed on fixed leak detection. Again, just to remind everyone, this is where we put sensors, connect sensors to the system. They're there full time, we're taking readings and communicating that either over a cellular network on transmission lines. Our objective is to be able to move distribution, reading distribution lines, both over a cellular network and an RF network.
We're able then to inform a utility, or the utility can make their own assessment as to what's happening or any leaks developing. We still have more investments, Seth, on that fixed leak detection cellular technology, because we think that that is key to drive growth. Yep, we do expect that this business will slightly lose money next year, and the loss will be more in our Echologics business, because given the backlog we just talked about of our AMI systems, we expect our systems business to be profitable.
It's just two follow-up questions. Is that consistent with what you had said last quarter? I was under the impression that the whole category would be profitable this year. I guess the follow-up is, do you expect the Technologies business to be profitable at any quarter during the year, or is it losing money for all four quarters?
I think it's consistent with what we've said. I think we were talking more about separately last year. Last quarter, I think we were talking about Mueller Systems being profitable, specifically because of the higher backlog and the awards we were receiving on the AMI. I think that we were always of the belief that we had more R&D spending in the Echologics business. Right now, tough for me to give a quarterly outlook for 2016.
Okay. Just really quickly on the 7% increase in orders for the base business, hydrants, brass, and valves, was there any change in pricing timing that contributed to that, or is it kind of an apples to apples? Was there a pricing with the calendar that might have caused any sort of?
No
increase in orders?
Seth, no. Apples to apples. We did receive one nice award for New York that will ship later in the year. Last year, we also received an order for New York for $2.5 million. This year it was $5 million. That's almost some of their annual requirement. I wouldn't say that was out of the ordinary, but that was nice that that order was expanded this year versus last year. As I said, that will ship later in the year. Other than that, I think it was just normal business.
Okay. Thank you very much. I'll get back in queue.
Okay. Thanks, Seth.
Thank you. The next question comes from the line of Kevin Dennis. You may ask your question.
Hey there. Good morning, everybody.
Morning, Kevin.
Good morning.
Greg, I wanted to start with a question about Texas. I know certainly the weather in the third quarter was a disaster, I get there is a lot going on in the channel, but I am wondering if you have any comments on kind of underlying demand in Texas, if you have seen it slowing given the oil and gas downturn, or if that continues to perform well.
Kevin, from what we can see, it continues to perform well. That is certainly a reasonable question and something we are watching, because I think there was pent-up demand. I think when you go back, there were, especially when we focused on the housing development, there were developments that builders just couldn't start because they couldn't get labor earlier in the year. I think they may still be working through that backlog of opportunities. I would say it is something we need to keep an eye on, because certainly the energy markets, the oil and gas markets, a big driver of the economy in Texas. I can say we haven't seen it yet, but it is something that could impact us and something we are watching as close as we can.
Got it. Okay. A question on Echologics. I know part of this long-term strategy is to move that internationally. I was wondering if you have had any success on that yet, or if it is still a little too early.
No, we've had some success. We've had it more in Asia, specifically in Malaysia. Actually, what we've learned in that particular project is giving us some opportunity to actually, what we learned in Malaysia, to bring it back to our product offering in the U.S. Our inquiry level is up in Asia, Malaysia. There's different other utilities in Malaysia looking to do more work, and we're in the process of quoting that right now. I would say that Singapore is another area that we've been in a lot of discussions. It hasn't turned into, what I would say, any substantial orders, but we think the groundwork is being laid. As well as Australia has been moving, I think, in a positive direction for us. We're seeing more activity in Asia than we are in Europe right now, but we are gaining some traction.
Kevin, just let me give you a little more insight into Texas. We talked about how our orders were up big time in September. Actually, our orders were up 60% in Texas just for the month, but up 9% for the quarter . [audio distortion] When you realize that that was the area that had most of the inventory, we were pretty pleased that the overall orders grew 9% coming out of that state.
Got it. That's helpful. One last quick question for Evan. I was wondering, can you remind us what the sales impact was of the castings business that you sold, I guess, in the year ago first quarter?
Yes, Kevin. That was about $11.5 million on an annual basis.
Can you give it for the first quarter, just so we know what the comp is?
If you look at the first quarter, that was roughly around $2 million.
Okay. Exactly what I wanted. Thank you, guys.
Thank you.
Thank you.
Thank you. The next question comes from the line of David Jones. You may ask your question.
Good morning. Thank you for taking my call.
Good morning, David.
I just wanted a couple questions. One was a follow-up on an earlier question regarding progress on AMI. I know you had some significant challenges with Port Angeles on the service side, I was just getting a better sense of what you've done so that we get comfortable that from a service or from an execution standpoint going forward, that those products you have are more smoothly implemented.
I think that Port Angeles was our very first AMI project. I think our learnings from that project, certainly on the project management, we've gotten a lot better on the project management side. Secondly, I think we're a lot smarter on how we need to educate the customer about an AMI system and what they expect to receive out of the AMI system. I think that those were our two greatest learnings. One, don't overestimate the customer's understanding of what they're going to get right up front. Spend more time, I think, during that process. Secondly, I think that we have become a lot
Better profitability going forward out of the AMI business.
Yes, we would think that we would see better profitability out of the AMI business going forward. I think just, as I said, coming up the learning curve, we're a lot better today than we were several years ago.
Okay. Maybe, Evan, from a high-level view in terms of any of the product gaps you're missing on the technology side, obviously Echologics was a great fit in. What else do you need to do from an M&A standpoint to add to your capabilities?
As we look at it, we're pretty comfortable with the products that we've developed in our current suite of products. I think that there are always opportunities on the meter side. We don't have a solid-state meter. That's a small portion of the market, but we think that that could grow at a faster rate. We have decided to go down the route of a solid-state register, but we do see benefit meter. When we look at, from an acquisition standpoint, I think just getting access to some of the markets outside the U.S., I think certainly the market in Europe, we've talked in the past and how that is. That market may be developing faster than any region around the world. I think they have a better spend.
I think we've mentioned in the past where the U.K. alone spends $100 million a year on leak detection. That's as much as we are able to identify that's being spent in the U.S. I think there, we have most of the technology. I think we could add to our technology, but perhaps getting access to the market would be opportune for us. David, I think from where we are today, that we're pretty pleased and satisfied with the technology we have. I think if we think more on the acquisition front, it would be getting a better access to a market.
Okay. Thank you. That's very helpful. Last one, just on the inventory levels, can you provide just some quick thoughts on where you should be on inventory, and how are you going to drive the working capital performance, the improvements going forward in 2016?
Yeah. David, Evan and I will team up on this. Our inventory grew this year. I think one of the biggest drivers for that, in the third quarter, we were building to a forecast, and we were very surprised by what happened in the third quarter we think related to the excess rainfall. We built inventories at our Mueller Co business that we're still working through, and we brought them down in the fourth quarter on a year-over-year basis, but we still have inventory to take off there. On the oil and gas side, we also at Anvil, I would say in the midyear, didn't expect much of the drop-off that we've seen there. We have inventory to take out, to still to bleed off related to oil and gas.
I think when we gave our outlook for cash flow, free cash flow for next year, we said that would be driven by both in improvements in operation, operating improvements, as well as coming from working capital. Evan, anything to add to that?
No, that's right. As Greg outlined, inventory did decrease in the fourth quarter, and I think came down about $6 million. It was related to the timing of purchasing a disbursement activity related to the inventory. I will note, when you look at our fourth quarter free cash flow, which was down about $18 million on a year-over-year basis, there was roughly about an $8 million to $10 million impact, relative to cash taxes. We became a federal taxpayer in 2015, and the taxes that we did pay were heavily weighted toward the fourth quarter compared to minimal last year. There was also some timing on interest payments that impacted our fourth quarter about $5 million to $7 million as well. The purchasing activity was a big driver of cash flow and inventory.
In the fourth quarter, we had those two other items in the tax and interest area.
Okay. Thank you.
Thank you.
Thank you. The next question comes from the line of Brent Thillman. You may ask your question.
Hi, good morning.
Good morning, Brent.
First is a clarifying question. I'm sorry if you've reported this somewhere, I didn't see it. On Mueller Co, the op income growth and sales growth numbers you provided for Q1, do you have last year's revised sales and EBIT numbers, just given the segments have changed?
Brent, we will be providing an 8-K later this morning, in that 8-K, we will be having the quarterly information for the three segments for the years 2014 and 2015. Everyone will have that broken out shortly.
Okay, great. Thank you. Then, in terms of Anvil, how did the oil and gas piece do on a sequential basis? Did you see further pressure there?
On a sequential basis, I think that, Brent, for the most part, it leveled off. I would say that we may have seen a little more pricing pressure. From a volume, we saw about a 60% drop-off in the third quarter, saw that similar drop-off in the fourth quarter.
Okay. Shifting to Mueller Co again, has any of the order timing shifts you've seen recently, I guess, changed your plans for timing of price increases over the next 6 to 12 months for that business?
What pricing actions we should be taking, we're in that evaluation right now. I would say that nothing probably has surfaced that would alter our thinking from previous years, especially now since we think that the distributor inventories are back at their targeted levels. Right now in process, nothing that I would say that has surfaced in the last four, five, or six months that would really impact our thinking about timing, at least currently.
Okay. Your business up in Canada, aside from currency, I know it's small, I think it's been a bit of a headwind for you. Do you see activity stabilizing up there?
Actually, we saw growth in it. When you look in Canadian dollars, that business grew for us in 2015. The real headwind has been currency. When we look in the first quarter, as we've said, we will be impacted by the divestiture. The divestiture that Evan just referenced. We think that we may be flat or maybe see some slight growth in the first quarter. For the full year 2015, Canada, again, in Canadian dollars, grew nicely for us.
Okay, that's encouraging. Greg, in terms of the CapEx for 2016, can you remind me how much is the sustaining recurring spending versus, I guess, investment for building out the Technologies business?
Yeah. Brent, about $27, $28 million we think is for sustainable CapEx. A lot of our CapEx above that has been going into our core businesses for efficiency improvements. We've, for instance, in the middle of completely automating or almost completely automating the assembly of hydrants. We've been investing the kind of money that gives a pretty quick payback and improves our efficiency and lowers our cost. We've also, for instance, still in the midst and still have a little more spending putting in a new ERP system at Anvil. We gave guidance that probably shows capital spending about $10 million above our sustaining, and those are going to efficiency improvement, cost reduction, and some of that is going to the new Technology businesses. I would say more of what's above sustaining is still going into our core businesses for efficiency improvement.
Brent, for the Technologies for fiscal 2015, for those businesses, we spent around $6 million on capital spending.
Got it. Okay, last one, if I could. It sounds like Mueller Systems will hit the profitability threshold this year, and it sounds like you get some nice momentum in Echologics. What level of business, or how do we think about timing of that business kind of getting to a break-even point?
I think that I'll put it more in terms of that we're moving away, in the process of moving away from that business having more revenues coming from doing field work to what we're calling leveragable business. That is where we don't want to be involved in having a lot of people tied up in doing field work. We want to sell the technology such as fixed leak detection that we talked about, and we think that is much more leveragable. It depends really on the adoption of that kind of technology.
Given the pilot that we conducted in 2015, I think given some of the inquiry and additional discussions we're having with new potential customers, that I'm right now looking at it, I think that if that technology is adopted on the time that we think it will be, I think we're pretty right now optimistic about 2017.
Great. Thank you.
Thank you.
Thank you. The next question comes from the line of Joe Giordano. You may ask your question.
Good morning, everyone.
Morning, Joe.
Morning.
I just wanted to clarify something on the cash conversion. I know your goal for 2016, over 100%. You've typically been way above that. It looks like on a trailing 12-month basis, fourth quarter, with going to a cash payer on taxes, what's a better normalized view to think about going forward?
Evan?
Yeah. Joe, certainly our fourth quarter was not as. It did fall a little bit below. As I mentioned we had roughly about a $10 million impact relative to cash taxes that were paid in the fourth quarter this year compared to the fourth quarter last year. There was about a $6 or $7 million cash interest payment made this quarter that we didn't see in the last quarter. Before we moved into the term loan, we paid interest about twice per year. Now we're paying it on a monthly basis, so it's just timing, albeit overall interest was down on a year-over-year basis. Specifically, if you look at all of 2014 free cash flow, about $110 million, very strong, and around $50 million for this year.
You almost need to kind of look at the average of the two years because we did pay quite a bit of the payments related to purchasing activities last year in our first quarter, and then with the operating activity and the timing of purchases this year, it just had a fairly significant impact on it for the year. I still believe as we go forward, our free cash flow should be greater than adjusted EBITDA. It was just a bit of a timing between 2014 and 2015 that led to a lower amount this year.
Okay, fair enough. I want to shift over to on the metering side, see if you had any updates on the American Water contract. I think it's up in January. I just want to understand the margin profile of what you've been booking recently versus that and how critical you look at that. How big is that as a percentage of that business, and how critical is it to maintain that despite maybe a less favorable margin profile there?
Yeah. The business, the AMI business, Higher margins than the American Water business. American Water business is primarily AMR, and of course, what we've been referring is AMI, and AMI by its very nature, has higher margins. I will say that that request for proposal has been issued. We're in the midst of responding to that request for proposal. It'd be difficult for us to go actually give any more detail, relatively about this specific proposal. I will say that our objective has always been to become a leader in AMI. As we move to a greater percent of our business being AMI, let me put it this way, that's really our focus to grow that business, and given its margin profile, we're a lot better off having a greater percentage of our business being AMI.
Okay, great. Then maybe lastly, on capital allocation priorities. I was a little surprised to not see any activity on the buyback, given the shares dipped below $7 there for a bit. Given, I guess, the revenue underperformance of some systems over the last couple of years, how are you viewing the best way to deploy capital here over the next couple of years versus buybacks, versus businesses that are kind of operating at the break-even operating level?
Yeah. Well, you bring up a good point. If these businesses continue to operate at a break-even level, I think that we will certainly change our thoughts on capital allocation. I think that right now, as I said, that we made assumptions four or five years ago about the AMI business market, and it's been slow to develop. However, I think we look at the last 12 months, we've been pretty encouraged by both the movement in the marketplace and certainly with our technology. I think still based on our current outlook, that we can believe that Mueller Systems can achieve an ROIC in the range of 35%-40%. We're very bullish about the leak detection because we're moving that to be an asset-light business.
I would say that if we find that our assumptions about either the adoption of the technology in the marketplace or the competitive dynamics change, we'll adjust our strategy. I would say, as we look at it today, that we think in the midterm to long term, that we can generate better returns by investing in that business. Certainly, as I said, that if we see that it's not playing out that way, then we'll make the adjustments in our strategy.
Great. Thanks, guys.
Thanks.
Thank you.
Thank you. The next question comes from the line of Michael Wood. You may ask your question.
Hi, good morning.
Hi.
Hey, I was hoping you can give us some color in terms of the Anvil non-res trend, sort of what growth you had this quarter, excluding currency and what you're seeing in your orders and backlog that underpins your 2016 view.
Yeah, Mike, I would say that we have been somewhat disappointed relative to our expectations on the non-res construction side. In this quarter, I think we were in somewhere between the 1% and 2% range in our growth outside oil and gas. I think as we continue to look at some of the forecasts for non-res construction spending throughout the year, they continue to come down. When we look at 2016, the general forecasts are for mid to single-digit growth. When we look at the ABI index, certainly for most of the year, it was positive. I would say that our outlook, when we gave the outlook for 2016, it was based on the assumption that we'll see non-residential construction growing mid-single digits.
I will say that we're probably a little less confident in what's happening in that market, as we are in what's happening in residential construction and municipal spending.
Got it. Then could you quantify for us the incremental leak detection, and just general Mueller Systems investment you're making next year? Maybe just also comment on why the incremental in the quarter of Mueller Systems was 20%, whereas, I imagine you're seeing a richer mix come through from AMI.
Yeah. Certainly, let me ask that the AMI is lumpy and project-oriented. We did see some AMI this quarter, but the bulk of what we received will come through the second half of the year. I think that relative to investments, we haven't put a dollar amount on that, but when we look at where we think the real investment in these two businesses next year, beyond just day to day, will probably still be, as I answered the question a little earlier, in the development on our fixed leak detection. That will be on the R&D side, and more specifically, to be able to communicate data over a cellular network. We still have to, I think, some improvements in our RF network. I would say most of the investments that we saw in 2015 are behind us. We've built our worldwide sales force.
There may always be some adjustments. We've started the development on the fixed network. I think in 2016, what we will see is continued investment in development action. I think relative to Mueller Systems, from an investment standpoint, for probably mid-2014 through mid-2015, we were spending development money on increasing the range of our radio. We've introduced that to the market in June. I think a lot of those investments are behind us. When we compare 2016 to 2015, much more investment in 2015 than what we expect to make in 2016.
Great. Thank you.
Thank you.
Thank you. The next question comes from the line of Jose Garza. You may ask your question.
Morning, guys.
Morning.
Morning.
Thanks for fitting me in.
Absolutely.
I just had a question about the longer term. Now that you guys have broken out some of the economics on Mueller Technologies, just the longer term to get you to some of the numbers that you've talked about, especially as you, like you mentioned, make the business a little bit more leverageable to get you to 20% EBITDA margins down the road.
Yes. On the Mueller Systems side, it's increased penetration in the AMI market and that market picking up its growth trajectory. Jose, as I said, we think we saw both of those happening in 2015. We've seen more and more inquiries for AMI coming in from municipalities, and we've increased our win rate. We need to continue on that path. Relative to Echologics, and I answered this in a previous question, that we think that 2017, we see that business being profitable based on a greater adoption of fixed leak detection. I think where we're positioned right now, it'll be driven by the top line. I think that on Mueller Systems, we have our cost of our system where it needs to be. I think on Echologics, we now need to lever the sales force that we've put in place, as well as the technology that we're developing.
To me, I think that we start seeing that in 2017 and 2018.
Okay. I guess the assumption is a large increase in your gross margins in that.
Yeah. The gross margins, though, will come from the volume growth. When I look at Echologics, when you look at our gross margin on that business, it goes between, on a project-by-project basis, 50%-70%. We need the volume there to absorb the fixed cost we put in that business so it would grow. On Mueller Systems, we think margin improvement comes by a shift to a greater mix of AMI.
Okay. Very helpful. I know you talked about the first quarter for Henry Pratt, but what's the overall outlook for 2016 in that part of the business?
Yeah, when we look at 2016, right now, a lot of that comes out of our current backlog, we think it'll be up in the low single digits. Our distribution, our products that go to water distribution. We will have a little bit of a tough comparison because, as you know, we've discussed this in the past, from time to time, we have orders that go to retrofit to a nuclear plant. We shipped some of those this year. We don't see that coming back, replacing that in 2016. That's a long lead time item. We know pretty much now, if it's not in our backlog today, that we won't probably see it over the next 12 months. The other is we made some nice shipments to water treatment facilities in the fourth quarter of this year. Our quotation activity is up on water treatment facilities.
Based on that timing, that could be down a bit. Sorry, that is trying to give you all the different components.
Okay. Very helpful. Thanks, guys.
Yeah. Thank you.
Thank you. The next question comes from the line of Walter Luther. You may ask your question.
Hi. Thanks. Good morning.
Good morning, Walter.
call's running a little bit late, so I'll just ask one. The Mueller Co. operating leverage was very good this quarter, and the 40% that you had in your 2016 guidance, I wonder what assumptions go into that, if you can give us any color on pricing or mix into that 40%, or is that just sort of the normal run rate for the business?
The 40%, Walt, would be that, this ties in with a little bit on Jose's question, that we expect in 2016 probably to see a mix shift more to our valves and hydrants, less from Pratt, because we think valves and hydrants are going to grow at a greater rate. That certainly contributes to a better conversion margin. It's based on right now our expectations for the overall mix and timing of shipments. I will say that of course, if you look at the last 2 quarters, we've had conversion margins significantly above that, but that's because of, Evan referenced this a little earlier, the divestiture of our municipal casting business. That was around $11 million-$12 million of revenue for us in 2015. It was only $2 million this year, and it lost money in 2014.
You'll see that the divestiture negatively impacts our overall revenue growth rate, but it has a nice positive impact on our margin. I would say that the 40% right now is based on how we think our mix will play out, and it's one that, unless there's a change-
Thank you. Next question comes from the line of Seth Weber. You may ask your question.
Hi. Thanks. Sorry, just a quick clarification. The $36 million backlog in awards, is that a next 12-month number, or does that get extended over a longer period of time?
Good question, Seth. That's entering backlog for 2016. The majority of those today are scheduled to ship in 2016. A little of that could move into 2017. By far, the vast majority is currently scheduled for '16. We certainly hope to add to that because we still have quotations outstanding that if those turn into awards the next couple of months, we would still have opportunity to ship those in '16.
Okay. Thank you very much.
Thanks, Seth.
Thank you. No question at this time.