Welcome. Thank you for standing by. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question and answer session. To ask a question, please press star and then one. This call is being recorded. If you have any objections, you may disconnect at this point. Now, I'll turn the meeting over to your host, Ms. Marietta Zakas. Ma'am, you may begin.
Thank you. Good morning, everyone. With us on the call today 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 on the topics to be discussed today, which also address forward-looking statements and our non-GAAP performance. 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 performance measures are included in the supplemental information within our press release and on our website. Slide three addresses forward-looking statements made on this call.
This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward-looking statements, as well as specific examples of forward-looking statements. A replay of this morning's call will be available for 30 days after the call at 1-866-483-9093. 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 today. After the prepared remarks, we will open the call to questions. I'll now turn the call over to Greg.
Thank you, Marti. Good morning, everyone. Thank you for joining us on such short notice. This morning, we made a number of important announcements that we believe better position our company for the future and demonstrate our board's commitment to delivering value and growth for our shareholders. First, we announced the sale of our Anvil International division for $315 million, which immediately transforms Mueller Water Products into a higher-margin, pure-play water infrastructure company. I'll have more to say about why this is such an exciting move in a moment. We also announced that our board has authorized up to $250 million in share repurchases and has increased our quarterly dividend 33% to $0.04 per share, up from $0.03 per share. Finally, we are pleased to announce that Scott Hall will join Mueller Water Products as our next president and CEO effective January 23rd.
Scott comes to us from Textron, where he was President and CEO of its $3.8 billion industrial segment. I will become Executive Chairman and look forward to working with Scott to effect a smooth transition. We are excited by what these strategic actions mean for the future of our business, as well as for our customers, employees, and shareholders. I'm going to go through each of them in a little more detail, then we'll answer any questions you might have. Turning to slide five. Let me say a few words about how the board came to the decision to sell Anvil. The board determined that Mueller Water Products, as a pure-play water infrastructure company, would be better positioned from a financial and operating perspective to deliver long-term value to its shareholders.
Specifically, as we look at the industry in which Anvil competes, we determined that in order to create value, we would have to commit meaningful capital towards becoming a consolidator. After carefully analyzing our options, we felt that we could better use our capital by investing in our higher-margin businesses in the water industry and returning some of it directly to our shareholders. We conducted a thorough process over the course of 15 months with the help of our outside advisors. After reviewing a range of options, the board unanimously determined that the opportunity to become a more streamlined business through a sale of Anvil to One Equity Partners was in the best interest of our shareholders. We estimate net cash proceeds from the transaction after taxes and some transaction-related expenses will be approximately $250 million.
The sale of Anvil repositions Mueller Water Products immediately as a higher-margin business with an improved return on net assets and a higher growth profile. We are now a streamlined, pure-play water infrastructure company with leadership positions in most of our markets and the operational and financial resources to focus fully on the attractive growth opportunities in our core markets. We will have top-tier industrial operating margins, EBITDA margins, and return on net assets with a higher growth profile. This transaction not only makes us a more focused company, but given our strengthened balance sheet, combined with our expectations to continue to generate strong free cash flow, we now have greater flexibility to pursue all capital allocation options. On slide six, you can see what our remaining core businesses, Mueller Company and Mueller Technologies, look like from a net sales and market and product portfolio perspective.
We are now clearly a pure-play water company and believe our end markets are attractive from both a near and long-term perspective. We also believe that we continue to have near and long-term growth opportunities with our municipal and residential construction end markets, as the need to address aging water infrastructure with the demand for repair and replacement continues to increase. Slide seven has a little more color on some key metrics for the remaining core businesses. For 2017 first quarter, with the divestiture, Anvil is now being treated as discontinued operations in our financial statements. While we are not yet in position to provide detailed first quarter 2017 earnings results, I can say that our operating income performance expectations for our two remaining segments, Mueller Company and Mueller Technologies, are in line with the outlook provided on our fourth quarter earnings call.
Specifically, we said that Mueller Company, we expected our adjusted operating income improvement would be in the high single digits. At Mueller Technologies, we said that we expected to see meaningful operating performance improvement in the first quarter year-over-year, similar to the year-over-year operating performance improvement that we achieved in the fourth quarter of 2016. First quarter net sales at Mueller Company are expected to grow slightly compared to first quarter 2016. First quarter net sales growth at Mueller Technologies is expected to approach 15%. Although net sales at Mueller Company is lower than the projections we discussed on the last call, we remain confident in the full year 2017 outlook we have given for the performance of our two remaining businesses. Our first quarter earnings call is planned for February 3rd, where we will give much more detailed information on the quarter.
The continuing operations of Mueller Water Products shows top-tier industrial operating margins, EBITDA margins, and return metrics. For example, in 2016, our pro forma adjusted operating margin from continuing operations was 14.5%, and our adjusted EBITDA margin was 19.4%. Our reclassified RONA for 2016 was 35%. Turning to slide eight. The board authorized share repurchases of up to $250 million and increased our dividend by 33% to $0.04 per share. We are focused on an appropriate balance between growing our business through organic investments and adjacent acquisitions and returning cash directly to stockholders. This significantly increased authorization gives us the flexibility to buy more shares should we determine that it is the best way to deliver long-term value.
We believe there are opportunities for investment and acquisitions that are adjacent to our core business that will even further enhance the products and services we offer our customers and the returns we generate for stockholders. The key criteria for these investments in the business will be that they deliver superior long-term value versus returning capital directly to stockholders. Turning to slide nine. I know I speak for the rest of the board when I say we are very pleased to welcome Scott Hall as our next president and CEO. We believe Scott will be an excellent leader for Mueller Water Products as it enters its next phase of growth. Scott joins us from Textron, where he most recently was president and chief executive officer of its industrial segment, a business with $3.8 billion in annual revenue.
Over his career, Scott has earned a reputation as both a strong strategic and operational excellence leader. Scott has significant experience in Six Sigma and lean manufacturing in diverse industrial businesses, as well as a track record of developing new products and growing businesses. In addition, Scott has solid experience in the telecommunications field, which is important for our technology businesses. Scott will be a great cultural and strategic fit for Mueller Water Products as we continue our focus on efficiency, safety, growth, and meeting the evolving needs of our customers. As executive chairman, I look forward to working closely with Scott, the rest of our management team, and the board to effect a seamless transition of CEO responsibilities. I also look forward to remaining involved with this great company, continuing in my chairman role.
Scott will be joining us on our next earnings call, and I know he looks forward to meeting and speaking with many of you in the near future. To sum up, as a pure-play water infrastructure company with a stronger financial profile, we believe we are positioned to capitalize on the attractive near and long-term market opportunities in our core business. As I hope you can tell, we are excited about these strategic developments and what they mean for our business and shareholders. We believe Mueller Water Products is poised for growth and value creation under our newly refocused structure, and we are excited that Scott has joined to lead the team into the future. With that, we will address any questions you may have.
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star and then one. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. To withdraw your request, press star and then two. One moment please for the first question. Our first question is coming from the line of Ryan Connors of Boenning & Scattergood. Your line is now open.
Great. Thank you. Congratulations on these big developments for the company.
Good morning, Ryan. Thank you.
Thank you. My first question has to do with just the mechanics of the break and how clean the break will be with Anvil. Obviously, they're two different businesses, but they've been together well over a decade now. To what extent are there shared services and that you'll be providing? Because in theory, private equity financial buyer doesn't have some of those, and can you discuss how clean that break will be and then how that's going to play out in terms of shared services, if any?
Yep. Great question, Ryan. We do have a shared services agreement with the buyer. They're currently for 60 days. As you pointed out, while these businesses have been together for 10 years, they've been operating pretty separately with each business having their own ERP system and so on. As carve-outs go, this one, I think, is on the cleaner side. We are hopeful that we will have the 60 days, that we will have most of this behind us. However, we recognize it may take another 30 or 60 days. We're confident that this will probably, we would think in a four-month period, be all behind us, hopeful that we can get it done in two.
Okay. Pretty clean. Great. That's good. Next question, one more housekeeping before I have a kind of bigger picture question. I believe I heard Evan there. Any tax basis issues to talk about here, Evan? What's the GAAP impact, and/or tax impact? Any elements there that weren't discussed?
Well, we sold the business for $315 million, but after taxes, fees, and other adjustments, net proceeds around $250 million. I would say that difference between 315 and 250, about $65 million, I would say roughly about 90% is tax-related. Effectively, it's tax on the gain, as well as a difference between the book and tax assets. Effectively, $7 million or so in transaction fees and the remainder being related to taxes.
My last question is just kind of bigger picture. You talked about the balancing of buybacks against what you call adjacent acquisitions. Can you talk about two things, Greg? First of all, is there a size that you and your successor here have in mind in terms of one of the negative outcomes here is that you do lose revenue and now go to sub $1 billion for the first time, I think, as a public company. Is there a certain size in mind where you think you need to be? Does that impact how you think about the urgency of acquisitions versus pure buybacks?
As an addendum to that, as you look at acquisitions, can you talk about your priority between the two platforms, one being Mueller Company and the other being Mueller Technologies, which of those two if either you think is the area where you're more aggressively on the lookout?
Absolutely, Ryan. Relative to do we have a predetermined size? We've never really talked about it in those terms. We do think we have the opportunity to get bigger. As the management and the board closely look at our expectation for the business for this year and the next several years, we are comfortable that our business will generate cash that will allow us the flexibility to drive shareholder value by investing both organically in making acquisitions as well as returning cash directly to shareholders. I think the course of action that is implemented will depend on the opportunities at that time. That's why the board was comfortable authorizing up to $250 million, based on our current cash position and the expected near-term cash generation.
I would say that if repurchasing stock up to $250 million is our best option to drive shareholder returns, we have the ability to do so. We intend to really focus on potential strategic acquisitions, as we said, in areas adjacent to our core businesses that would deliver improved capital returns and enable us to better serve our customers. Right now, I would say that our priority would be continue to look for water treatment products and services. We think that there are valve types that would fit very well within our portfolio, that we can leverage our sourcing capabilities, our manufacturing capabilities, as well as our distribution channels. That's a priority for us.
When we look at new technologies, we think that there's opportunity to add new technologies that will bolster our position that we have today in smart metering and in leak detection. Again, I would say that that would be focused on offering a broader solution to the end user to more effectively manage their operations. We see, and I think a number of our industry see over the next four or five years That utilities, water utilities, out of pure necessity, are going to be looking to operate more efficiently, and that means they're going to need the data to do so. We think that we have the platform with our existing technology to build upon that. I would say that, and this goes back a little bit to your question about size, I would say at this time, we do not expect to be looking at transformational acquisitions.
I think we feel more comfortable focusing on bolt-on acquisitions, again, that give us the opportunity to generate the types of returns and the margins that we do with our core Mueller business. It may take a little more time for us to become bigger. Clearly, we think that when we look at our current balance sheet, the cash on our balance sheet, the cash we expect to generate, that we really have a lot of flexibility to make our business bigger on the top line and to generate shareholder value by returning cash directly back to our shareholders.
Okay, great. Well, that's comprehensive, and I appreciate that. Best of luck on your transition, Greg. We look forward to meeting Scott, but you'll be missed as well. Take care.
Thanks, Ryan.
Thank you. The next question is coming from the line of Joe Giordano of Cowen and Company . Your line is now open.
Hey, guys. Good morning. This is Tristan for Joe today. Congratulations on the announcements this morning. I wanted to get your views in terms of municipal spending and where you think we are in the cycle and if it can accelerate from here.
Tristan, good morning. We're still very bullish on where we think we are in the cycle for municipal spending. In fact, when we look at our history over the last 10 years, I think it's been the exception when we haven't seen growth in municipal spending for repair and replacement. I'm not sure there is a cycle per se, because we think there's an ongoing need, and I think we are continuing to be comfortable when we give the guidance that we expect repair and replacement spending, which is primarily coming from municipalities, repair and replacement spending to be in that mid-single-digit growth rate.
Great, thanks. Then I had a quick one on Mueller Technologies. I wanted to know what drives a project win like the one you won in Florida recently, last year, I think that was early November, versus your large competitors. Is it based on price, delivery, technology, or closeness with your customers?
Tristan, I think it's a combination of all those. In some cases, I think the technology is differentiable. We have mesh technology. Some of our competitors have point-to-point. Sometimes the pure topography will lend itself to one technology over the other. In this particular case, which you're referring to, it was a more concentrated population, so we think that the end user thought that the mesh technology was more closely aligned with their needs. I think also, in this instance, there was technology that made the difference because this end user wanted the ability in some locations to use remote disconnect meters. Right now, we are one of the leaders in being able to remotely disconnect a meter over an AMI system. That also helped us, I think, differentiate our technology.
I think finally, also, when we look at our distributor and our salespeople, I think we had a very strong relationship with that particular end user. It's difficult to point out on any one project, or in general, is it technology? Is it relationship? Is it price? I think in this instance also, as we've been talking for the last 12 months, with the new technology that we introduced using the LoRa chip technology, that we've been able to reduce the amount of infrastructure that's needed. In this particular case, we were also in a, I think, competitive position from a price standpoint because our infrastructure didn't need to be as robust, perhaps, as some of our competitors. It was actually a little bit of all three, but it will vary, I think, by project.
Thank you for the details, and congrats again.
Thank you.
Thank you. The next question is coming from the line of Jim Giannakouros of Oppenheimer. Your line is now open.
Hi, good morning.
Morning.
Good morning.
Congratulations on the move. Greg, you will be missed. I echo earlier thoughts there.
Thanks, Jim.
For Mueller Co, the core growth, mid-single digits, it's kind of what we've been hanging our hats on. It is a healthy spending backdrop. Can you remind us or kind of frame what you attribute the near-term lower rates that you're seeing both last quarter and I think what you alluded to as far as what your 1Q was?
I think when we look at this, it's a first quarter, and we'll give more detail obviously on our first quarter earnings call. We did see growth year-over-year at Mueller Co. We do expect to hit our operating income, we're still seeing very nice conversion margins. It really came down to, for this particular quarter, timing of some shipments. Our orders, actually, the orders we received in the quarter met our expectations. We did see, in some of our plants, a buildup in backlogs. I think that we'll have some of those variabilities from quarter to quarter. Right now, as we sit here, and I think we'll confirm this in our first quarter earnings outlook, is that we do expect to achieve the full-year forecast of mid-single digits.
I think when we look back at this quarter, it was timing, we're pleased that we're timing in some shipments. We are pleased that we were able to hit the operating income expectations.
Thank you for that. Same question, if I may, on Mueller Tech. Slightly lower growth rate there. I anticipate it's a similar answer, but if it is, can you put some finer points as to what the dynamics are of those shipments, specifically in Mueller Tech, and what affects the timing there?
Yeah. Actually, Jim, on Mueller Tech, we expect to get very close. I think our outlook was about a 15% growth. Right now we're looking that's probably going to be 13%. Very close. Again, that gets down to a shipment. It could be a half a project. It could be one shipment. We don't have the details. We will give you the detail. The larger project that Christian referenced, it could be a delay of one week on shipping that. I think when we look at Mueller Technologies, that we were pleased again that I think it was going to come in around 13%. Expectation was 15%. When you look at a business of this size of an annual basis, around $90 million, that kind of miss is shipping at just a few meters.
Got it. Thank you. That's all I had. Congrats again.
Thanks, Jim.
Thank you. The next question is coming from the line of Walter Liptak of Seaport Global. Your line is now open.
Hi. Thanks. Good morning, Congratulations from my perspective, too. I wanted to ask about in your strategic actions slide, you kind of alluded to the dilution of the transaction. I wonder how internally you looked at the dilution from this divestiture and how you'd like us to view it.
Yeah. I think we'll go into a little more detail on how dilutive it is. There will be an immediate EPS dilution. Ultimately, we believe that we can use the capital to deliver better returns than we had before. Obviously, any share repurchases will help mitigate some of the EPS dilution. I think additionally, the continuing operations at Mueller Water Products will show a higher margin as we pointed out, higher EBITDA margin, return metrics will be higher than we did with Anvil. Walt, when we look at it, we believe with a stronger balance sheet and an overall stronger operating performance, we believe and are hopeful that Mueller Water Products will be looked at more favorably by investors. While we see that in the short term, we'll have EPS dilution, we're hopeful that we'll see a higher valuation on the business.
Okay. Great. I wanted to ask about the timing of the buybacks. Do you guys have an idea of how long you want to take to put the $250 million to work, or is that something?
Obviously our board will continue to look at that. We'll be able to give more detail on our earnings call when we're through our blackout period. As we said in the press release, we would expect that the share repurchase will be both a combination on a 10b5-1 as well as open market purchases. Again, I want to point out, we're authorized up to $250 million. We will see what our opportunities are as we evolve to determine how much of that $250 million we want to use for share repurchases.
Thank you, guys.
Thanks, Walt.
Thank you. Once again, to ask a question, please press star and then one.
Well, again, we want to thank everybody for being available on such short notice, that we know when you have the opportunity to digest what we said here this morning and fit it in your schedule. Oh, sorry. More questions.
Okay. The next question is coming from the line of Seth Weber of RBC. Your line is now open.
Hey guys. Thanks for fitting me in here and congratulations everybody.
Yeah.
Most of the questions asked and answered, but I'm just wondering how we should be thinking about the working capital intensity of the business going forward. Are there anything that we should be thinking about with respect to the free cash flow generation profile of the new company? Whether you expect CapEx to start to rise going forward, and is this a business going forward that should still be able to generate free cash flow ahead of net income for the next couple years?
Seth, good question. I'll let Evan go in a little more detail. As you know, in our investor relations deck, we always talk about our goal being generating free cash flow at least equal to or greater than the net income. We have pretty consistently been able to meet that. Our ability to do that actually is slightly better if we look historically with the way we're configured right now. We don't see any necessarily increase in capital spending. At least from, we'll say, the amount of free cash flow that we generate from the existing businesses, probably, Evan, on a percentage basis, we're even in a better position.
No, that's correct. Seth, on our first quarter conference call, we'll update guidance with respect to capital spending and free cash flow and maintenance capital as well. We do not anticipate any higher level of capital spending for the existing businesses. As you know, Mueller Company has really been the main key driver for that cash flow for the past several years. I think we'll be in an overall better position, when we look at free cash flow, and then certainly capital spending will come down in light of the Anvil divestiture.
Terrific. That's all I had, thanks very much, everybody.
Thanks, Seth.
Thank you. The next question is coming from the line of Mike Halloran of Robert Baird. Your line is now open.
Good morning, everyone. Thanks for letting me in.
Good morning, Mike.
Two quick ones. One, maybe just some thoughts on the corporate expense line from here. How much of that line gets allocated out to this Anvil divestiture and goes with that? And/or what's the opportunity set for you guys on that line going forward?
Yeah. Actually, very little gets allocated to the business units. We've always tried to keep them as clean as possible and hold them responsible for managing their expenses. It would be under their control. We do think there's certainly opportunity for us. We always look at the opportunity to become more efficient, and we do think with this transaction, we have opportunities to continue to get even increasingly efficient, especially in the G&A areas. Mike, we'll probably give a little more color to that and guidance, I'd say, on our first quarter earnings call.
Well, that's fair. Then, second one, I think that the answer to this is no, but just wanted to make sure. There's no debt going with the transaction, is there? It's just pure cash and you're maintaining all the debt?
Yes. Pure cash. Yes.
Perfect. All right, thanks. Appreciate it, and congrats.
Thanks, Mike.
Thank you.
Thank you. Our last question is coming from the line of Jose Garza of Gabelli. Your line is now open.
Hey, good morning, guys. Congratulations.
Hi, Jose.
Good morning.
Just wanted to get your thoughts on just kind of the balance of the portfolio in terms of exposure, municipal versus industrial, as you're thinking about maybe these acquisitions going forward.
Yeah. I would say that our objective Jose, maybe you help me answer this, if you give me a little more clarification, when you're talking about the distinction between municipal and industrial.
You'll be much more muni-based overall in the portfolio than obviously.
Yeah
Now that you've taken away Anvil. Just talk through how you're thinking about the acquisitions.
Yeah
That discussion with the board.
Absolutely. Our primary focus would be growing on water infrastructure. It would be both municipal spending and obviously spending on new infrastructure that's driven by housing. We may get to a point where we find that we're moving in both directions, in several directions. I would say right now, the primary focus is for us to expand our products, our services, and our technology that go into water infrastructure. I think that, as we've discussed on other calls and in other investor conferences, when we look at our leak detection, that we think that we have an opportunity to become a global player. We participate globally now. If we can enhance our position around the world, we think that that'd be very important. We think that there really are solid fundamentals when we look at the water infrastructure market in the U.S.
We think that that is a very good place to be for the next several years and the foreseeable future. Our goal and our focus will be to make sure that we're in a position to leverage, I think, our strong position we have today with end users. In the near term, I don't envision that we'll be moving too much in the industrial. Perhaps down the road, we may find attractive opportunities there.
Okay. Just one on the dynamics in terms of the board. You're adding Scott to the board. Does that mean that you guys will be one larger on the board, or are you leaving the board, Greg?
Actually, one of our board members, Joe Leonard, will not stand for reelection. He's retiring from the board effective our annual meeting here in a couple of weeks. The board will stay the same.
Okay. Thanks very much, congratulations.
Thanks, Jose.
At this time, there are no questions in queue.
Okay. Well, sorry that I jumped the gun before. Again, we said we appreciate everybody making time to join us on short notice. Obviously, very important transactions for the company. We're very excited about the transactions. Just reiterating what we said on today's call, we believe we're ideally positioned to capitalize on the attractive near-term and long-term market opportunities on our core business. Back to Jose's question, our current strategy is to continue to grow our Mueller Water Products by enhancing our core offerings, or acquiring or developing new technologies and improving our processes, primarily in water infrastructure and water. We think by increasing the dividend and the share repurchase authorization, our board has demonstrated its commitment to returning capital directly to shareholders as well. We see great potential in the water infrastructure business as housing starts continue to increase and infrastructure around the country continues to age.
We believe there's robust demand for increased investment and improved operating efficiencies throughout the water infrastructure industry. As we've said, the business that we have is a top-tier industrial business when we look at it in terms of our profitability and return, and we think, at least in the near future, our growth profile. Thanks again, and we look forward to following up with you on any other further questions you may have.
Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.