Welcome, and thank you for standing by. At this time, all participants will be on a listen-only mode until the question and answer session of today's conference. At that time, to ask a question, please press star followed by the number one on your phone and record your name at the prompt. This call is being recorded. If you have any objections, you may disconnect at this time. I'll be turning the call over to your speaker, to Ms. Marietta Zakas. You may begin.
Good morning, everyone. Welcome to Mueller Water Products' 2017 second quarter conference call. We issued our press release reporting results of operations for the quarter ended March 31st, 2017 yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Discussing the second quarter's results this morning are J. Scott Hall, our President and CEO, and Evan Hart, our CFO. This morning's call is being recorded and webcast live on the internet. We have also posted slides on our website to help illustrate the quarter's results, as well as to address non-GAAP disclosure requirements and forward-looking statements. At this time, please refer to Slide 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 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. As a reminder, we sold Anvil in January 2017. As a result, Anvil's operating results for all prior periods and the gain from its sale have been classified as discontinued operations. We filed a Form 8-K on February 21st, which included the reclassified 2016 results by quarter. During this call, all references to a specific year or quarter, unless specified otherwise, refer to our fiscal year, which ends on September 30.
A replay of this morning's call will be available for 30 days at 1-800-867-1928. 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. I'll now turn the call over to Scott.
Thanks, Marti, and good morning. Thanks for joining us today as we discuss our results for the 2017 second quarter. On the last call, I had only been at Mueller for about a week. It has been a busy period since then. I have enjoyed meeting many of you at conferences, in meetings, and by phone. It has also been an important time to meet the many talented people across Mueller. I'll begin our discussion this morning of the quarter with a brief overview, followed by Evan's more detailed financial report. I'll then provide additional color on the quarter's results and developments in our end markets, as well as our outlook for the 2017 third quarter and full year. Overall, consolidated second quarter net sales increased slightly due to strong growth at Mueller Technologies.
We were pleased to see that the Mueller Technologies team grew net sales 20.7% in the quarter. However, net sales performance at Mueller Co. was disappointing as net sales declined $600,000 this quarter year-over-year. This net sales decline was largely the result of lower international sales, as sales outside of North America were down about $3 million. Taking a closer look at our domestic water sales at Mueller Co., we also note that the adverse weather conditions in the Western U.S. impacted sales in the quarter as well. Western region water sales were down about 13%. However, all other domestic water sales were up about 4%. Despite slightly lower net sales at Mueller Co., adjusted operating margins improved 40 basis points to 19.8%, the 19th consecutive quarter of margin expansion.
The improvements in both adjusted operating margin and adjusted operating income from continuing operations were due to productivity improvements. The team at Mueller Technologies again delivered improved adjusted operating performance this quarter. This improvement was $1.1 million versus prior year, largely the result of the net sales growth. We recently became aware that in certain environments, some of our radios produced between 2011 and 2014 were failing prematurely. During the quarter, we took a discrete $9.8 million charge to meet current and future warranty obligations associated with these products. Evan will speak in more detail about the accounting and handling of the charge. I will speak a little bit about the steps we took to ensure this isn't repeated in the future. In particular, we error-proofed the manufacturing process so this particular failure mode won't repeat itself, and we instituted accelerated life cycle testing on all of our radios.
I believe we have correctly scoped and addressed this problem and implemented the corrective steps to ensure that our products meet industry and Mueller standards for reliability. As a reminder, we completed a number of strategic initiatives in the second quarter. We acquired Singer Valve in February, which added automatic control valves to our product portfolio. We initiated the repurchase of $50 million of shares under the accelerated share repurchase program. We increased our quarterly dividend 33% to $0.04 per share. We amended our term loan, which lowers our interest rate spread, and we completed the divestiture of Anvil in early January. We believe these initiatives demonstrate our ongoing commitment to create long-term value for our shareholders. We will discuss our outlook in more detail later, but we continue to expect year-over-year growth in 2017 from demand for our products in our addressed water markets.
We believe that Mueller Water Products remains well-positioned to deliver long-term value for our shareholders. With that, I'll turn the call over to Evan.
Thanks, Scott. Good morning, everyone. I'll first review our second quarter consolidated financial results then discuss segment performance. As a reminder, I will only be discussing our results from continuing operations. Mueller Technologies drove the 1.3% increase in consolidated net sales in the 2017 second quarter. Consolidated net sales increased $2.5 million to $199.7 million, as compared with $197.2 million for the 2016 second quarter. Adjusted gross profit improved at both Mueller Co. and Mueller Technologies and was $62.2 million for the 2017 second quarter, compared with $59.3 million last year. Adjusted gross margin increased 100 basis points to 31.1% in the 2017 second quarter from 30.1% in the 2016 second quarter. Selling, General and Administrative expenses were $39 million in the 2017 second quarter, compared with $37.4 million last year.
The $1.6 million increase was due primarily to personnel-related expenses, including our planned increased investment in product development. SG&A expenses as a percent of net sales were 19.5%, slightly higher compared with 19% of net sales in the prior year. Both Mueller Co. and Mueller Technologies contributed to the $1.3 million increase in adjusted operating income from continuing operations for the 2017 second quarter, which was $23.2 million, as compared with $21.9 million for the 2016 second quarter. Adjusted EBITDA for the 2017 second quarter increased to $33.8 million, compared with $31.8 million for the 2016 second quarter. For the trailing 12 months, adjusted EBITDA was $161.9 million, or 20.1% of net sales. We amended our term loan credit agreement on February 21st, 2017. Through this amendment, we reduced the applicable interest rate spread by 75 basis points.
Interest expense net for the 2017 second quarter decreased to $5.5 million as compared with $5.9 million for the 2016 second quarter. For the 2017 second quarter, income tax expense of $700,000 was 13% of income before income taxes. We recognized net discrete tax benefits of $1.2 million in the quarter, primarily excess tax benefits related to stock-based compensation. We grew adjusted earnings per diluted share year-over-year to $0.09 from $0.07. I'll now move on to segment performance, beginning with Mueller Co. Net sales for the 2017 second quarter decreased $600,000 to $181.6 million as compared with $182.2 million for the 2016 second quarter. Mueller Co. increased adjusted operating income and adjusted operating margin in the second quarter due to productivity improvements. Adjusted operating income for the 2017 second quarter grew 1.7% to $35.9 million as compared with $35.3 million for the 2016 second quarter.
Adjusted operating margin grew 40 basis points despite slightly lower net sales. Adjusted EBITDA for the 2017 second quarter increased to $45 million, compared with $43.9 million for the 2016 second quarter. Adjusted EBITDA margin for the quarter increased 70 basis points to 24.8% from 24.1% last year. Now Mueller Technologies. Net sales in the 2017 second quarter increased 20.7% to $18.1 million as compared with $15 million for the 2016 second quarter. As Scott mentioned, we recently became aware that in certain environments, some radio products produced between 2011 and 2014 were failing at a higher than expected rate. Consequently, we refined our estimates and increased the warranty reserve. We have taken a discrete warranty charge of $9.8 million in the quarter to meet current and future obligations, of which $8.4 million is now reserved for future obligations.
Turning now to a discussion of Mueller Water Products liquidity. Free cash flow, which is cash flows from operating activities of continuing operations less capital expenditures, was negative $6.3 million for the 2017 second quarter, compared with negative $4 million for the 2016 second quarter. At March 31st, 2017, total debt was comprised of a $480.5 million senior secured term loan due November 2021 and $1.3 million of other. The term loan accrues interest at a floating rate equal to LIBOR plus a spread of 250 basis points. At March 31st, net debt leverage was 0.9 times and our excess availability under the ABL credit agreement was about $125 million. I'll now turn the call back to Scott.
Thanks, Evan. As we analyze Mueller Technologies' second quarter, the overall 21% net sales growth was primarily driven by a 40% increase in AMI shipments at Mueller Systems. This was the sixth consecutive quarter of year-over-year double-digit growth in our AMI product line. At the end of the second quarter, Mueller Systems AMI backlog was up about 12% from the prior year, and Echologics added $2.5 million of projects under contract. Mueller Technologies' adjusted operating loss of $3.8 million for the second quarter was an improvement of $1.1 million from the prior year due to higher shipment volumes. This is the fourth consecutive quarter where Mueller Technologies has improved its adjusted operating performance year-over-year. Turning to Mueller Co., we again delivered solid adjusted operating performance in the quarter, with our 19th consecutive quarter of adjusted operating margin expansion.
Productivity improvements exceeded the 40-basis-point increase in adjusted operating margin compared to last year, offset by higher raw material costs and price. Looking at our latest 12 months, Mueller Co.'s adjusted EBITDA margin was 28%, or a 140-basis-point improvement from the prior trailing 12-month period. Looking ahead to the third quarter and staying with Mueller Co., this year, our bookings in advance of the effective date of the price increase were lower year-over-year, and shipments were comparable between the quarters. We believe that overall distributor inventory levels at the end of the second quarter were about flat year-over-year. Therefore, we have entered the third quarter with less visibility than we typically have at this time of year. While we remain cautiously optimistic about end market demand growth from residential construction and the municipal markets, uncertainty from less forward demand visibility remains for this business.
Mueller Technologies has had a strong first half of the year, with nearly 17% sales growth. We expect that growth rate to moderate in the second half of the year, largely due to year-over-year comparisons. You'll remember that last year, our third and fourth quarters were our strongest quarters for Mueller Technologies. Second half growth is expected to come from increased shipment volumes of AMI systems and growth of fixed leak detection projects. For example, we announced yesterday that San Jose Water Company has selected Echologics leak detection technology. This project will be the largest deployment of Echologics fixed leak detection technology to date, with more than 10,000 nodes deployed throughout San Jose's service area. We expect that bookings in the third quarter for distribution fixed leak detection products will exceed all bookings for these products to date.
Looking at the third quarter on a consolidated basis, with the tougher comp in AMI products and the lower pre-buy in advance of the effective date of the price increase at Mueller Co., we believe third quarter consolidated net sales percentage growth will be in the low to mid-single digits. From an operating perspective, the combination of continued productivity improvements offset by the rising raw material cost environment and the dilution from the Singer acquisition are expected to result in adjusted operating margins for the third quarter comparable with previous year Q3 margins. We believe that the demand environment for our municipal and residential end markets remains strong over the long term. For the full year 2017, we expect consolidated net sales percentage growth to be in the low to mid-single digits, much as it is expected to be in the third quarter.
Evan will wrap up now with some other items. Evan?
Based on our current expectations for the full year, corporate expenses will be $33 million-$36 million, depreciation and amortization will be $42 million-$44 million, and interest expense will be $22 million-$23 million. We expect our adjusted effective income tax rate to be 32%-34%, clearly higher in the second half of the year, and capital expenditures to be between $33 million and $37 million. Finally, we expect 2017 free cash flow to be driven by improved operating results and an improvement in working capital. Our target is for free cash flow to exceed adjusted income from continuing operations. Operator, would you please open the call for questions?
Thank you. We will now start the question and answer session of today's conference. To ask a question, please press star followed by the number one on your phone, unmute your phone, and record your name, please. To cancel your question, please press star followed by the number two. One moment as we check if we have incoming questions on queue. Our first question comes from the line of Mike. Your line's open. Mike? Michael Wood, your line's open.
I'm not hearing anything, operator, if Mike is asking a question.
Okay, let's move on to the second question. It's coming from the line of Seth Weaver. Your line's open.
Hey, good morning, everybody.
Morning. Good morning.
Good morning.
Hey, good morning. I guess first, just a clarification, Scott. Are you looking for organic revenue growth for Mueller Co here in the third quarter year-over-year, excluding the Singer acquisition?
Yes. Very slight, I think, is where I would put it, Seth. There's going to be some organic growth. I think there was some pent-up demand as we referenced from the West, where we had that slowdown, and bookings will grow there. To answer the question directly, yes, we expect a small amount of organic growth from Mueller Co. in Q3.
Okay. I guess, kind of taking that to the next level, bigger picture, this is going to be your fourth quarter in a row with ±0 growth in the Mueller Co business. What do you really think is going on there, and what do you think is the real sustainable top-line growth level for that business? I'm trying to reconcile, you've been pushing through price increases pretty consistently, but it's not showing up on the revenue line. I'm trying to understand what the inherent volume growth for that business really is.
I think the inherent volume growth should be around something like 100 basis points or greater than GDP. That's how I think about the business. The many years of neglect in the water infrastructure sets for a long-term growth that exceeds normal growth, for lack of a better word. I referenced it in my comments. One of the things I want to make sure we do as we talk about these things is speak plainly so that there's no questions. Price we have gotten in the past, we have not got it in Q2. In fact, price was about $1 million unfavorable in the quarter. We had good price for a long time. Certainly, while the raw material was dropping, we were able to get a little bit of price and the spread would open. That certainly reversed itself in Q2.
I suspect that's a lag that you'll see. I expect we'll start to get support for price now as we start to see the increase in raw material costs. We'll have to wait and see. I think, to answer your question directly, that we should see better than GDP growth in water spending for some time. I think inherently there has to be.
Okay. That's helpful. I guess my follow-up question, obviously you've only been there a short time, but have you changed your thoughts around capital allocation? You do have the accelerated share program that you announced previously, but are you closer to any M&A, or are you thinking about boosting the share buyback at all? Maybe just your updated thoughts on capital allocation.
Let me reiterate that we're on path with what I laid out in our last quarter call, where we were examining our strategic options as far as where to take the business outside of just pure play water infrastructure, as we look at these swim lanes that I think I described in detail in the past. We have all of that work still ongoing. We have our Board meeting in July. Still teed up to have that work presented and then something to communicate to you after that, in the first quarter of next year timeframe, where we lay out what our strategic direction is going to be. We are filling our M&A pipeline. We continue to look at many options. I think that we're not going to have a knee-jerk reaction here.
The bolt-ons certainly we'll continue with, but if there's going to be a new leg of the stool, so to speak, it's not going to come because somebody put an offering memorandum out or something like that.
Very helpful. Thanks a lot, guys.
Thank you, Seth.
Our next question comes from the line of Mr. Bryan Blair. Your line's open.
Hey, guys. Thanks for taking the questions. Just to follow up on the guidance point. On the low to mid single-digit guide for the year, it's a subtle change from the mid single-digit number from your prior outlook. Is that all from Mueller Co., or can you maybe provide some context on the mid single-digit and 15% growth targets you had laid out for Mueller Co. and Mueller Technologies on the last call?
Yeah. Thanks for the question. To clarify, I think overall, we're moderating our view to how much growth we will get in the Mueller Co. business in 2017. I've been here a quarter now, and I've seen the bookings and the trends, and I think that there's really mixed kind of messages from the market as far as where the growth is going to come and how sustainable it is in the near term. I do believe the team has had a difficult environment. I can't point to a single municipality that said, "Oh, I'm not going to do what I said I was going to do," but I do think that the pent-up demand has been muted by people waiting for this infrastructure spending. I think that uncertainty doesn't look like it's going to be fixed anytime soon.
I think it's prudent to say I think that number is going to be in the three or lower kind of range from Mueller Co. The AMI trends remain strong. I think that our success rate with AMI and where our growth is coming from, I still expect that business to deliver 15%. I expect that business to give us better conversion on their growth. Frankly, I expect them to give us better conversion on the growth than they gave us in Q2. We've got some work to do there, but they're aware of it and we're working on it.
Okay, thanks. That's super helpful. Maybe, Scott, just staying on Mueller Co. for a second. You mentioned the weakness in the international segment. Can you remind us how much international exposure you have there? I'm assuming it's mostly north of the border here, and then how much of that is playing into your sort of slightly downgraded view of Mueller Co.'s outlook? Was that the biggest surprise outside of maybe the California weather on the quarter?
Yes. To be clear, I said outside North America, Canada remains okay. Not great, but okay. Really, it's a Mid-East, Latin American problem in the quarter. Part of it is a comp, but it's about 5% of the business, but I think the outlook for it could be difficult in Q3 again as well. I think Middle East mostly, though, I think is where we're experiencing the softness. I don't know the outlook right now. We've got a couple of things in the hopper that could get them back to kind of breakeven, but right now, our forecast is breakeven for that non-North American piece of the market, but there is some risk there.
Okay, great. Last one from me, I'll pass it on. Just on the You had alluded to the rising raw material costs and the guidance here for fiscal Q3 is for operating margins to be relatively flat year-on-year. How should we think about the trend in margins here in that context of maybe a tougher year-on-year environment from a raw materials cost perspective? Just curious to hear your take on what we should be thinking there. Thanks.
Okay, no problem. Thanks for the question because I kind of want to spend a little time on this. In my comments, the prepared comments, I said we had about a 40 basis point improvement at Mueller Co.. If you really dig into where the productivity came from, there was some material usage productivity, there was some machine utilization productivity, and then there were mostly some insourcing absorption productivity that were really strong in the quarter that I want to make sure everybody realizes. If you think about the difficulty they had from a volume point of view, and then you go ahead and you layer in the ballpark $1 million of inflationary pressures they felt in their raw material buy, and then $1 million or so of price pressure we felt year-over-year price declines.
Manufacturing team basically delivered the 40 basis points, plus the $2 million and covered, flex their spending so that a little bit of lower volume also didn't hurt margin. I'm very pleased with the situational awareness and the execution at Mueller Co. around that. With that said, I have no reason to expect they can't deliver similar performance in Q3 from an execution point of view. I'd caution you to, when you think about the margin in Q3, the reason I'm calling it flat is because I haven't said we're going to get that price back. I haven't said we're not going to be able to feel those same inflationary pressures. If we're able to move the price in the market, as we're certainly trying, to recover those increased raw material costs, then I think we could have some margin expansion.
I was very plain in the discussion that's not in our outlook right now because I haven't got a long history of being successful, saying, "Oh, I'm going to raise price and put it in my pocket." There's always some dynamics there that we forget or it's difficult in industrial markets. I've got it flat, but yes, price and cessation of the inflationary pressures would be upside in the quarter.
Okay, thanks, guys.
Thank you. Our next question comes from Mr. Michael Halloran. Your line's open.
Morning, everyone.
Good morning.
Scott, on the last call, you mentioned you were anxious to get out on the road and visit the plants. Perhaps you could provide us with some color on what you found, particularly in the area of opportunities to improve margins.
Well, thanks, Michael. I think the tours have been, first of all, fantastic, and I think the team that I've inherited here is very talented, and I think our employees are very motivated. With that said, I think that as you think about self-directed workforce, you think about cellular manufacturing, you think about single-piece flow, there's opportunity at all the plants I've been to improve. Some have quite a large opportunity set, and others are near world-class. I would really like to applaud the team in Albertville, Alabama. It's the best foundry I've ever been in. Great visual systems. You know exactly where they are in their production schedule every day. Every way, you know where they are in their assembly schedule. The flow in the plant is all things that you can see what operation is going to happen next. An impressive facility.
On the other end of things, there's been, I think, underinvestment in certain places. I think between some of the machine shops and some of the foundries, there is opportunity as it relates in the brass business and in the gate valve business for margin expansion, both through a combination of investment and relaying out some of the plant and thinking more about flow. The thing I normally would do here is try and quantify it for you and give you 100 basis points here or 200 basis points there. I think there's enough of an opportunity set that we conceptually, at a high level, should be thinking about margin expansion of somewhere around 50 to 75 basis points a year.
I think we're under-invested in our engineering resources as it relates to new product development, and so some piece of that being reinvested back into the engineering and product development piece of the business.
Okay. That's a good color. As a follow-up, regarding the San Jose Water announcement, should we expect to see other announcements like that from large, well-known water utilities in the near future?
We have a couple of things in the hopper that we're optimistic on. Yes, and as I said in my comments, we expect the distribution of leak detection product, that EchoShore-DX product, actually in Q3, take more orders in for each of the next foreseeable quarters than all previous years' sales. It's finally catching on. I think the success we've seen in the trials we've run, the leak locates have the efficacy of this product is starting to catch on. We're hoping we've caught lightning in a bottle here, but it's too soon to call it. Early indications are really exciting.
All right. That's all I had. Thank you.
Thank you.
Thank you. Our next question comes from the line of Jose. Your line's open.
Good morning, guys.
Good morning.
Hey, Scott. You gave some good color on the Mueller Tech business. I'm just wondering if your expectations are still for the profitability improvement in that business over the course of the year, that maybe you guys had at the beginning of the year.
I realize when I'm talking on these that there's employees listening, too. My expectation is that we committed to $10 million of operating improvement when we developed our plan. If we're going to have a culture of execution, we do what we say we're going to do. With that said, I think I look at the conversion we got in the quarter. We increased sales $3 million. It only turned into $1.1 million of operating improvement. I would have expected that to be in the $1.5 million-$1.7 million range kind of number. I realize we have some risk and there's probably on that $10 million of year-over-year operating improvement, there's risk. If you're going to have a culture of execution, you find ways to develop your countermeasures. You take other actions to meet your commitment levels.
We have to review those plans for technologies. It can't just be always sell your way out of trouble. Sometimes you have to look at your cost structures. You have to look at your inputs. To answer the question directly, I still expect it, but I recognize having seen Q2 performance, that there's a little bit of risk.
Okay. That's very helpful. Maybe Evan, you can help out on this one. What's the expectation on the warranty expense going forward? Any kind of hints to that you can call out?
Well, Jose, with this particular issue, as we mentioned, we did record about $9.8 million in the quarter. We were left with about an $8.4 million warranty reserve for this particular item. I will note that back in Q1, we saw about $800,000 of expense for this particular problem, and that really was the catalyst for us to take a more detailed look, do an in-depth study, and refine our estimates to come up with a particular charge in the second quarter. We think that the charge is adequate and sufficient to cover these issues with the radios produced between 2011 and 2014. I think going forward, we'll just have a normal warranty charge provision that we've always had. So there's really nothing expected from a large magnitude like this in the future.
Okay.
I'd like to go on and say that we did the advanced life cycle testing, Jose, on the things made after 2014. We've been running those environmental tests, the failure rate has been better than industry averages by a lot, like near 0.04%.
Okay. That's helpful.
I feel like the team, I wasn't here, but whatever the change is when they realized they were having some of these issues. Basically, for everybody's benefit, it's when they're underwater in a pit environment in warm climates. That's when they really start to have a problem.
Okay. Just any changes in terms of the raw material that you saw throughout the quarter that you're extrapolating into the rest of the year, or is it roughly the same across both businesses?
I would say that when you take a look at our two largest inputs, scrap steel, red ingot, in the second quarter, they were up about 5%. As a reminder, that accounts for about 15% of cost of goods sold related to Mueller Co.. That was roughly around a $1 million impact in the quarter for us. I think as we go forward, I had seen some data, some forecasts that are calling for mid to say, 9% increase in those raw material inputs. I wouldn't say anything significant at this point on the horizon, but I think we'll be faced with a little higher input cost in the third quarter as well.
Okay. Very helpful. Thanks, guys.
Thank you.
Thank you. Our next question comes from the line of Ryan. Your line's open.
Hi. Thank you. Yeah, it's Ryan Connors with Boenning & Scattergood. I wanted to kind of drill down on this pricing issue a little bit, Scott. I'm a little surprised about the pricing. I want to understand some of the dynamics behind it. You mentioned in your comment earlier that there's always these dynamics that crop up, that impact price. My understanding of Mueller Co. has always been that even though it might not have the sex appeal of Mueller Tech, it's an oligopoly market. It's even maybe duopoly in some of the product niches, and pricing has always been very rational. In this kind of environment where we've got raw material price, costs up, and the demand environment is at least okay, if not phenomenal, at least certainly serviceable. I mean, what are those dynamics that are preventing you from getting prices?
Is it some kind of bad actor in the market that's suddenly acting irrationally, or is it some channel issues? I mean, anything you can give us in terms of why that's happening?
Yeah. I can give you my theory, and I'm happy to do that, but it is just that. Here's what's happened. I think that, last year, we announced a price increase just as we did this year. In anticipation of that price increase, distribution took a lot of orders in a pre-buy. Certainly, $15 million, $20 million more than you would anticipate a normal February being. They bought that, they pre-bought it in Q3, and then raw materials ran away. They ran down. Competitive forces being what they were in the first quarter of this year, basically, our first fiscal quarter, basically, the pre-buy that they did in our Q2 for their shipments in Q3 didn't actually result in higher gross margins for them. Why did the distributor pre-buy? They pre-buy so their gross margins will go up.
They get the benefit of the lower cost, but they get to sell into the higher price market. Raw materials ran down and pricing was basically flat. Price to price was flat. This year, you come along and everybody announces a price increase. Distribution doesn't pre-buy. Now, inventories are getting heavy, in the distributor lanes. They now come out with their buys, and people being hungry and not having the visibility, all of a sudden now might be willing to discount a little. Is there a bad actor in the market? Yes, there's a bad actor in the market, in my opinion. Somebody's not got the discipline to keep where they need to be. I'll say it's not so much around hydrants as it is around valves and brass. When you look at where the price came out, that's part of it.
The other thing I wanna make sure everybody understands is when you think about our products, think about the deeper they go in the ground, the more valuable they are. A fire hydrant with a 10-foot stub for Canada sells for more money than a fire hydrant that has a wet barrel, and basically it's just got the L going under the surface in the ground. If you think about what we lost out West as an weighted average price on a fire hydrant, or you think about what we lost out West as a result of the rains, that also played, kind of almost like a regional mix impact on our price. I think those were the two big drivers of why we've had the difficult price environment in Q2 than we traditionally have, Ryan.
Got it. Well, that's maybe only a theory, but that's a very helpful one. My second question is actually related in that bigger picture. As you look at capital deployment, there have been a number of companies, some of them in the metering side, some of them more in the pump side, and elsewhere, that have started to kind of forward integrate into their channel and distribution and started to go into more of a corporate channel as opposed to the traditional third-party channel. Obviously you're not gonna tip your hand in terms of whether that's something that's being tactically contemplated. What's your view of that as a concept? Is that something that at any point you think would make sense, or do you feel that the traditional channel is the way to go?
I think the whole channel question is a fascinating discussion. I think that, disintermediation and more direct sales, as you see more municipalities try to enter into the MWBE space and disabled veteran, I think there's just a ton of dynamics going on in the channel right now. You see, potentially that HD Supply could be have their waterworks for sale, could go PE, it could go strategic buyer. There's a lot of moving pieces there. That said, I am not sure our core competency is ever going to be around putting together the portfolio that you need to be a successful distributor.
I had a distribution business previously in my career, I can tell you to make them successful and add value to the people that use them, generally a lot of what you have to be good at for manufacturing are not necessarily the things you're going to be good at to be a distributor. Therefore, while it remains a possibility, it's something that I would give a very, very, very low probability to. It's a tough putt. The other thing I would say is, when you're number one in a well-established channel, very, very difficult to go into competition with your customers. It's always the play of the distant player to kind of take that role to disrupt the distribution channels because they're really not getting their fair share of the distribution channel. Probably not something that you would see Mueller do.
Got it. Well, that's very insightful and well-reasoned. Thanks for your time.
Thank you.
Thank you. Our next question comes from the line of Jim. Your line's open, Jim.
Hi, Jim Giannakouros from Oppenheimer. Thanks for taking my questions. I understand you're pleased with execution in plant. Appreciate that you're doing good things in there. Is there investment in plant that we should be cognizant of when thinking about incremental margin progression as capacity utilization clears 70% and heads up from here?
I don't think there's anything massive. I think that we're not contemplating, Deane, a big new foundry at this point. I think that there's enough available capacity. I think there's enough fine-tuning. I think there's enough square footage and other things that if we needed a melt furnace at some point, we could buy one. I don't think there's any massive depreciation load coming in the next two or three years. With that said, I think that there is some modernization that needs to happen. In Decatur, there is some modernization that needs to happen in Chattanooga. Certainly, there's some modernization that needs to happen in Cleveland, North Carolina.
I think that there will be perhaps, as I said in the last call, $4 million or $5 million, $6 million kind of incremental CapEx for some period of time as we fix the machine tool utilization part of the business and improve our assembly capabilities, those kinds of things, but nothing major.
Got it. Okay. I apologize, I did hop on a little late here. Quite a few comments on the muni side, a pause ahead of clarity on stimulus, et cetera, that you're seeing. Any comments on how residential, I guess, either housing starts or more specifically, new community development is tracking versus your expectation? I'm curious to the outlook view through your lens. Our checks and read certainly suggest strength, but your results certainly don't stack up. Thanks.
I think that that's one of the things we're trying to connect the dots on, is we feel good about what we've seen in housing starts and land development. I think single-family units were strong in January and February. I think we were tracking pretty well in January and February with the single-family dwellings. March was a bit of a cliff that fell off. I think part of that was weather-related. I think, when you look at the housing starts data, I think March actually, on an annualized basis, seasonally adjusted, was down from the January and February, kind of muting what is good fundamentals going forward for strength in land development. If you think about brass, it's predominantly residential, and that's an area that we've got to start getting some growth from here in Q3 if we're gonna meet our and your expectations.
Got it. Thanks. A clarification point, I think it was Ryan that asked on pricing. I'm surprised as well. You did say that there's a quote unquote "bad actor," where's the pressure coming from? Are you feeling the pressure? Is it from distributors that may have inflated inventories? Can you just provide a little more color there, because I kind of missed the point on where exactly the pressure is coming from.
Okay. Let me try and give you some clarity. If you look at the average price that I sold a distributor in Q2 versus the average price I sold a distributor the exact same product Q2 a year ago, that is down ever so slightly, like less than $100,000. If you look at how much an eight-inch gate valve is going for that's getting buried in Las Vegas versus one that's getting buried in North Florida, you will see that that same valve has a different price. I'm making those up. Nobody should take them away and say. The actual regional pricing difference is such that losing a lot of the West volume as a weighted average cost us about half a million dollars. Then about $400,000 kind of comes from the mix of different deals between customers.
You might get a rebate or you might get this or you might get that and somebody else doesn't. Freight terms and things the like that are also part of our price. It's a complex subject that I don't want to give too much away on in terms of the competitive dynamics. At the same time, it's something I can tell you we have our arms around and we're watching very carefully. There should have been better support regardless, on both sides, for the price increase in valves and hydrants. There's been another increase for brass that's recently been announced and we haven't baked any of it into our forecast because we got to wait and see how everybody behaves. We'll be watching it carefully.
To summarize, part of it is the regional difference in pricing, part of it is the mix of large distributors versus small distributors, and then part of it is just some small amount of year-over-year price degradation.
Thank you. That's helpful.
Thank you. Our next question comes from the line of Joe. Joe, your line's open.
Hey, guys, this is actually Tristan for Joe Giordano at Cowen today. Thanks for taking the question. I believe that Singer Valve is much more global than other businesses that you have. Have you already identified some opportunities where you might be able to go back to these global customers and introduce your full range of products?
Yeah, that's part of the integration is, whenever you think about the synergies, we are looking where they can take us and their channels are established, and we are looking where we can actually grow their presence in our existing channels. Whether we do some Mueller-branded pressure control valves or Singer's channel can actually take gate valves and butterfly valves and the like into their markets. Certainly, those are the things that we're working on and that we've identified. I think to be fair to the development team out there, I think the channel development work is more than an immediate quarter kind of timeline. When we think about where that growth is going to come from, and we think about those developing infrastructures around the world, we think that the sales cycle on those is measured in quarters, not in days.
Okay, thanks. I think one of your competitor has mentioned that they have remote disconnect capabilities, which I think you were probably one of the few companies to offer up until now. Could you remind us of some of the tech that separates you from your competition? Thank you.
Yeah. I think that the biggest difference is, A, for everybody's benefit, we are patented with our RDM technology. B, our actuation technology is such that we're not going to denigrate anybody, but we're confident that we have more than 50% advantage in battery life usage when you actually have to use the RDM. Ours is the most efficient from not having to go back out and replace the battery. You can get, I don't want to be incorrect here, so somebody clean me up if I'm wrong, but I think twice as many actuations where you could actually turn off and turn back on the meter without actually having to service the battery. Way fewer truck rolls if you use our solution than anybody else's. Basically it's because we patented the valve and the actuation methodology that is the most power efficient.
Our next question comes from the line of Varisa. Your line's open.
Good morning.
Morning.
Last quarter, AMI backlog was up 70% from last year, this quarter around 12%. What's the average time you expect to turn that backlog into revenue?
A great question that I'm not trying to duck here, but I am trying to get some clarity on for ourselves. I think the behavior here is that you get your award and contract from your municipality or from your PUC, and you get a target date of when they're going to start their install. Then you get another target date when they're going to start their install. Then as you get closer, you get refinement. All of the stuff that's been awarded and contracted is on the book. It's really difficult to estimate the timing until we get within the 90-day window of when they're actually going to use the resources to put the trucks in the field to start the change outs.
The part that's really, I think we've got a fair deal of clarity around is the part where it's new construction, new homes are going up, they're being sold. That's got some clarity around it. It's these swap programs that the estimates vary wildly on. I know it's not a very satisfying answer, but the answer is, we miss on the contracted pieces by 90 or 180 days quite often.
All right. That helps. Then, looking at, I guess, acquisition scenarios, for Mueller Technology segment, is it an area that you would consider to complement what you have? Also for Mueller Co., can you find adjacent business operating at the margin profile you do in that business?
Well, I think the margin thing is difficult. I understand the margin dilution discussion, but we have to create opportunities. If we can make investments that exceed our weighted average cost of capital, then we're creating value. Sometimes the EBITDA margins will be dilutive, and sometimes, hopefully, they'll be accretive. This is a very good business we have with Mueller Co. from an EBITDA margin point of view. I also think that there are adjacencies out there that we could absolutely get into to lever and be successful with. As for Mueller Technologies, I'm less inclined right now to do acquisitions. I think there's a lot of operational heavy lifting to do in front of that business.
I said it earlier, I'll say it again, I think that if their conversion had been stronger on the 3 million of volume, then you would say, okay, they're executing and everything's running exactly the way you want it to run. Then you would consider that they have the capacity for an integration. I don't think we're there right now, so I would expect to see a little more execution, if you will, in the systems business. I think in the Echologics business, it's a different challenge. I think that their order book has swollen. I think the challenge of the San Jose water thing, we have to be mindful that there could be pieces there that we would need to bolt on to increase their capabilities, increase their assembly capacity.
That I would certainly do, because I think the future is bright there, and I think we have enough operational excellence in Mueller Co. and in other parts of the business that we can make sure that business grows to its full potential by levering what's internal. More inclined to do adjacencies, willing to do bolt-ons at Co. and Echologics. Want to see some execution on technologies first. I'm sorry, on systems first.
Thank you. I show no questions at the moment.
Let me thank everybody, that'll wrap us up for today. Martie, if you have anything you want to say to wrap up, we'll go from there.
Nothing. Thank you all very much.
That concludes today's conference. Thank you for your participation. You may now disconnect.