Welcome. Thank you all for standing by. At this time, all participants are in listen-only mode. After the presentation, we will conduct a question-and-answer session. To ask a question, you may press star followed by one. This call is being recorded. If you have any objections, you may disconnect at this point. Now I will turn the meeting over to your host, Marietta Zakas. Ma'am, you may begin.
Thank you, Mary. Good morning, everyone. Welcome to Mueller Water Products' 2015 third quarter conference call. We issued our press release reporting results of operations for the quarter ended June 30, 2015, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Mueller Water Products had 160.4 million shares of common stock outstanding at June 30, 2015. Discussing the third 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 slides two and three in their entirety. During this call, all references to a specific year or quarter, unless specified otherwise, refer to our fiscal year. Our fiscal year ends on September 30. A replay of this morning's call will be available for 30 days after the call at 1-800-396-1242.
The archived webcast and corresponding slides will be available for at least 90 days in the investor relations section of our website. In addition, we will furnish a copy of our prepared remarks on Form 8-K later this morning. After the prepared remarks, we will open the call to questions. I'll now turn the call over to Greg.
Thanks, Marti. Thank you for joining us today as we discuss our results for the 2015 third quarter. I'll begin with a brief overview of the quarter, followed by Evan's detailed financial report. I will then provide additional comments on the quarter's results and developments in our end markets, as well as our outlook for the 2015 fourth quarter. Our net sales performance for the third quarter was not as we had expected and was notably impacted by above-average rainfall, primarily in Texas, Colorado, and parts of the Midwest, which impacted Mueller Company's base business. Outside of these geographic areas, we experienced good growth in Mueller Company's base business. Despite the year-over-year decrease in net sales, adjusted EBITDA margin for the 2015 third quarter improved 160 basis points to 19.2% as compared with 17.6% for the 2014 third quarter.
We had particularly strong margin improvement at Mueller Company's base business, which includes our valves, hydrants, and brass products, with an adjusted EBITDA margin of 30%, an improvement of 260 basis points from 27.4% last year. Anvil's net sales for the 2015 third quarter decreased to $89.2 million as compared with $104.5 million for the 2014 third quarter due to lower shipment volumes, primarily into the oil and gas market. Anvil's third-quarter financial performance benefited from lower overhead and raw material costs, which partially offset the gross profit impact from the net sales decline. We believe that much of what we saw affecting net sales this quarter was more short-term in nature and that the longer-term expectations for our primary end markets and our growth prospects remain positive. I'll discuss this in more detail later in the call.
For the quarter, our adjusted net income per diluted share increased to $0.15, up 36%. With that, I'll turn the call over to Evan.
Thanks, Greg, and good morning, everyone. I'll first review our third quarter's consolidated financial results and then discuss segment performance. Net sales for the 2015 third quarter decreased $17.5 million, or 5.5%, to $301 million as compared with $318.5 million for the 2014 third quarter, due primarily to lower shipment volumes, the divestiture of our Canadian municipal castings business earlier this year, and unfavorable Canadian currency exchange rates. Gross profit for the 2015 third quarter was $96.2 million, compared with $97.3 million for the 2014 third quarter. Gross margin for the 2015 third quarter improved to 32%, compared with 30.5% in the 2014 third quarter. Gross margin at Mueller Company's base business improved 260 basis points year-over-year. Gross profit and adjusted operating income benefited from improved operating efficiencies, lower raw material costs, and higher sales pricing.
These benefits were more than offset by lower shipment volumes, especially at Anvil, and unfavorable changes in Canadian currency exchange rates. Selling, general, and administrative expenses were lower year-over-year, due primarily to personnel-related expenses.
Selling, general, and administrative expenses were $52.9 million in the 2015 third quarter, compared with $55.3 million in the 2014 third quarter. Adjusted operating income for the 2015 third quarter increased 3.1% to $43.3 million, compared with $42 million for the 2014 third quarter. Adjusted operating margin improved 120 basis points to 14.4% for the 2015 third quarter. Adjusted EBITDA for the 2015 third quarter increased to $57.8 million, compared with $56 million for the 2014 third quarter. Trailing 12 months adjusted EBITDA was $186.4 million. We have a tax-related receivable from Walter Energy from prior to our spinoff from Walter in 2006. In July 2015, Walter filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Subsequent to this filing, we recognized a non-cash write down for the entire receivable balance of $11.6 million in the 2015 third quarter.
Interest expense net for the 2015 third quarter declined $6.2 million to $6.3 million, compared with $12.5 million for the 2014 third 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. Income tax expense for the 2015 third quarter of $8.7 million on income before income taxes of $25.2 million resulted in an effective income tax rate of 34.5%, compared with 36.9% for the 2014 third quarter. Net income per diluted share for the 2015 third quarter decreased to $0.10, compared with $0.11 in the prior year. However, adjusted net income per diluted share increased to $0.15 from $0.11. As I just discussed, we had a write down of a non-cash receivable from Walter.
This write down and restructuring negatively impacted third quarter net income for diluted share by $0.05. There was a weighted average of 163.5 million shares of our common stock outstanding for the 2015 third quarter, compared with 162.2 million shares outstanding for the 2014 third quarter. We purchased approximately 524,000 shares of our common stock during the 2015 third quarter under our stock repurchase program. I'll now move on to segment performance and begin with Mueller Co. Net sales for the 2015 third quarter decreased $2.2 million to $211.8 million, compared with $214 million for the 2014 third quarter. Net sales at Mueller Co.'s base business were up 1% this quarter, with nice growth with brass products at our Pratt and gas businesses and exports outside North America.
Domestic net sales of our valves and hydrants were essentially flat this quarter, we believe largely due to the effects of the above-average rainfall and flooding in Texas, Colorado, and parts of the Midwest, which caused both delays in underground construction projects and resulted in the buildup of distributor inventory. Greg will discuss this in more detail. Additionally, net sales were impacted by the divestiture of our municipal castings business and $2.3 million due to unfavorable Canadian currency exchange rates. Adjusted operating income for the 2015 third quarter improved to $43.3 million, compared with $42.4 million for the 2014 third quarter. Adjusted operating income at Mueller Company's base business improved $4.9 million, largely due to improved operating efficiencies, lower raw material costs, and higher sales pricing.
This improvement was largely offset by lower adjusted operating income from our metering products and systems, largely due to product mix and additional investments in technology and business development activity related to leak detection and pipe condition assessment. Adjusted operating margin of 20.4% for the 2015 third quarter improved from 19.8% for the 2014 third quarter. Adjusted EBITDA for the 2015 third quarter increased to $54.1 million, compared with $52.8 million for the 2014 third quarter, and adjusted EBITDA margin for the quarter increased 80 basis points to 25.5%. We had particularly strong margin improvement at Mueller Company's base business, which includes our valves, hydrants, and brass products, with an adjusted EBITDA margin of 30%, an improvement of 260 basis points from 27.4% last year. The third quarter's adjusted EBITDA margin was the highest in a Mueller Company base business for any quarter since 2007. I'll now turn to Anvil.
Net sales for the 2015 third quarter decreased $15.3 million to $89.2 million, compared with $104.5 million for the 2014 third quarter. Net sales decreased largely due to lower sales of oil and gas-related products, which, as a reminder, were about 20% of Anvil's 2014 total net sales. Net sales to this market were less than 10% of Anvil's net sales in the 2015 third quarter. Adjusted operating income for the 2015 third quarter was $7.2 million, compared with $9.5 million for the 2014 third quarter. Adjusted operating margin decreased to 8.1%, compared with 9.1% for the 2014 third quarter. Although lower shipment volumes resulted in a decrease in adjusted operating income during the quarter, adjusted operating income benefited from improved operating efficiencies, lower SG&A expenses, lower raw material costs, and higher sales prices.
Adjusted EBITDA for the 2015 third quarter was $10.8 million, compared with $13 million for the 2014 third quarter. Adjusted EBITDA margin for the 2015 third quarter was 12.1%, compared with 12.4% for the 2014 third quarter. Corporate expenses for the 2015 third quarter were $7.2 million, compared with $9.9 million for the 2014 third 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 $48.8 million for the 2015 third quarter, compared with $46.2 million for the 2014 third quarter. The quarter-ending average of accounts receivable, inventories, and accounts payable compared with net sales over the past four quarters increased by about 40 basis points compared with a year ago.
At June 30th, 2015, total debt was comprised of $495.2 million senior unsecured term loan due November 2021, and $2 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. Net debt leverage was 2.3 times at June 30th, 2015. Using June 30th, 2015 data, we had $167.9 million of excess availability under the ABL agreement. I'll now turn the call back to Greg.
Thanks, Evan. Our overall third quarter net sales performance was not what we expected. We believe primarily due to the inclement weather in Texas, Colorado, and parts of the Midwest. Additionally, as we had expected, net sales were impacted by the decline at Anvil, the earlier divestiture of our Canadian municipal castings business, and unfavorable Canadian currency exchange rates. We did experience domestic net sales growth at Mueller Co. for valves and hydrants in those areas that were not significantly impacted by the weather, as well as nice growth with Mueller Co.'s brass products at our Pratt and gas business and exports outside North America. We estimate the above-average rainfall in Texas, Colorado, and parts of the Midwest resulted in about a $10 million net sales impact at Mueller Co. due to the delayed construction projects, primarily impacting domestic sales of our valves and hydrants, which were essentially flat.
In fact, when we look at the domestic net sales growth for valves and hydrants in geographic areas other than those affected by inclement weather, we saw year-over-year growth of 12%, consistent with domestic valve and hydrant growth in the first half of 2015. Also, the Ivy Zelman land development survey from July noted that builders believe the significant rainfall and flooding in Texas delayed development timelines by about three months. Despite this decline in net sales, we delivered solid operating performance at Mueller Co. and improved adjusted operating margin. Greater manufacturing efficiencies, lower raw material costs, increased overhead absorption, and higher sales pricing all contributed to this year-over-year improvement in operating results. Adjusted EBITDA margin for Mueller Co.'s base business in the third quarter improved to 30%, which was 27.4% in the 2014 third quarter. As Evan mentioned, this was its best quarterly adjusted EBITDA margin since 2007.
We believe the fundamentals in our Mueller Co. end markets are strong because we continue to see positive signs for municipal spending and residential construction. We continue to expect municipal spending percentage growth in the mid-single digits and expect demand for housing to grow at a greater rate. In fact, current forecasts for housing starts in calendar 2015 range from 10% from Blue Chip Consensus and IHS to 15% from Ivy Zelman. State and local seasonally adjusted tax receipts continued to increase during the quarter, and the CPI for water and sewage rates increased 4% over the 12 months ended June 2015. At Anvil, we saw further deterioration of sales into the oil and gas market, which were down approximately 60% in the third quarter year-over-year. Our sales into this market have generally correlated with rig counts, which were down 59% year-over-year at the end of the third quarter.
We believe in this market, Anvil sales were further impacted during the quarter by distributors actively reducing their inventory levels. Despite the $15.3 million decline in net sales, adjusted operating income declined only $2.3 million, primarily due to the benefits of improved operating efficiencies and lower raw material costs. Turning now to our outlook for the 2015 fourth quarter. I will start with Mueller Co. We expect mid-single-digit year-over-year net sales percentage growth. We expect increased domestic demand for our valves and hydrants, although growth levels may be somewhat tempered by the lingering impact of the construction delays we saw in the third quarter due to the weather events we have discussed.
We believe distributor inventory levels at the end of the third quarter in parts of the country, primarily in Texas, Colorado, and areas of the Midwest, were higher both sequentially and year-over-year as a result of delayed construction activity. Many of our distributors in these locations indicated they entered the fourth quarter with higher backlogs, suggesting the construction delay is likely more of a short-term slowdown because the longer-term fundamentals remain intact. We expect net sales growth at Mueller Systems in the fourth quarter, primarily driven by recent AMI project awards. During the last 6 weeks, we saw a nice increase in the number of awards we received for our AMI metering systems. On a year-over-year basis, at the end of July, our AMI backlog, including recent awards, is up two and a half times or about $18 million.
We expect year-over-year adjusted operating income from Mueller Co. in the fourth quarter to increase, driven primarily by higher sales of valves, hydrants, brass products, and AMI metering systems. Moving to Anvil. We expect Anvil's net sales to decline in the fourth quarter, largely due to the oil and gas market. Rig counts were down about 60% year-over-year in July and were roughly flat in June. As expected, Anvil adjusted operating income will be lower in the fourth quarter year-over-year due to negative impacts from lower shipment volumes and product mix. We expect adjusted operating income to increase sequentially. As a reminder, in the 2014 fourth quarter, Anvil had a $2.5 million gain from the divestiture of its Bloomington, Minnesota facility.
For Mueller Water Products as a whole in the fourth quarter, we expect net sales will be essentially flat year-over-year, as growth at Mueller Co. is expected to be offset by a decline at Anvil. Adjusted operating income and adjusted operating margin should increase year-over-year due to improved performance at Mueller Co. We will also benefit from lower interest expense year-over-year. I will now highlight our 2015 other key variables. Corporate expenses are expected to be $33 million-$34 million. Depreciation and amortization are expected to be about $59 million. Interest expense is expected to be about $28 million. Our adjusted effective income tax rate is expected to be about 37%-38%. Capital expenditures are expected to be approximately $37 million-$38 million. For 2015, we expect free cash flow to be driven primarily by operating results and lower interest payments, offset by cash income tax payments.
As we have substantially exhausted our federal NOLs, we expect 2015 income tax payments to approximate our reported income tax expense for the year. We have made only minimal cash contributions to our pension plans in 2015. We expect free cash flow in 2015 to exceed adjusted net income. During the quarter, our proprietary fixed leak detection solution was piloted in three cities, Atlanta, Las Vegas, and Los Angeles, as part of the National Institute of Standards and Technology Global City Teams Challenge. This challenge was designed to showcase how cities can use the Internet of Things to improve the quality of life and level of services for their residents. The Water Sustainability Project incorporated Echologics proprietary fixed leak detection technology, AT&T wireless connectivity, and IBM's Water Management Center.
We presented the results from the Las Vegas pilot in Washington in June and are pleased with the greater visibility these projects are giving our leak detection solutions. For the full year, we expect adjusted net income per share to show nice year-over-year improvements due to the benefits of higher adjusted operating income and lower interest expense. In summary, we saw excellent results from our Mueller Co.-based business. On a $1.2 million increase in net sales, adjusted operating margin increased 240 basis points. We continue to benefit from higher operating leverage, improved efficiencies, and higher sales pricing. As I said earlier, we have seen a nice pickup in awards recently for our AMI metering systems. We expect to start shipping a portion of these awards beginning in the fourth quarter.
We anticipate entering 2016 with an AMI backlog, including recent awards and those we expect to receive by the end of the quarter, of more than double than that of the prior year. Anvil continues to face challenges related to the decline in the demand from the oil and gas market. We have been lowering headcount at the plants where we produce those products and are looking for opportunities to further reduce costs. For the full year, we expect to see growth in our address non-residential construction markets and expect this growth will continue in 2016. Finally, we believe our long-term prospects in our water markets remain strong given utilities need to replace aging infrastructure, monitor and measure usage, and address asset management and non-revenue water loss, all areas where we are well-positioned. Operator, with that, we'll open the call up for questions.
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one. Please unmute your phone and record your name and company clearly when prompted. To cancel your request, you may press star two. Our first question coming from Kevin Sterling of BB&T Capital Markets.
Thanks. Good morning.
Morning, Kevin.
Greg, can we talk a little more about this distributor inventory situation? It's very understandable that that would be higher than normal in the weather-affected areas. How does it look in the non-weather-affected areas? Are inventory levels a little bit higher than you'd like to see there as well?
Actually, Kevin, when we look to the Northeast and the West, inventory levels are about where they have always been. I will say that a little bit in the Southeast, they ended the third quarter, I'd say maybe with about 15 days more of inventory than they normally hold. When we look at our central region and some of our key distributors in our central region, there, it was up almost double. The best we can tell, some of our major distributors, our key distributors, ended the third quarter with about 90 days of inventory. They actually, when we just checked recently, they brought that down to 60 days in July. Some of these projects are now starting to relieve. They're starting to ship some of that inventory. However, 60 days is still probably 15 to 20 days higher than what they would target.
I would think in that region, that we will probably still see some of an impact in the fourth quarter, and we've taken that into account with the outlook that we gave for the fourth quarter.
You mentioned some lingering effect of that. It's not just that it stopped raining, the water's receded, and we're just going to make up all of these sales as these construction projects get going right away. You mentioned three months or more of a lag you're expecting there?
We were quoting an Ivy Zelman survey that she just completed in the month of July, there she was surveying builders who said in the Texas area, that because of the rain, that they see some projects perhaps being delayed by three months. I think when we look at the overall impact, it's going to take us several quarters, I think, to recover. We don't think this business goes away, but we do think it will take some time, as I said, for us to recover it. When you look at contractors only have so much capacity. A number of those contractors report that they lost 60 days during this rainy period during the last quarter. When you stop and think about it, a lot of that is during the prime construction period.
I think it's going to take some time, because I think they were probably pretty fully scheduled already for the months of July, August, and September. I think that they only have so much capacity to handle this work. I think we hit upon another key point on your first question, that some of our distributors in these hardest hit areas will have some hangover of products that they have in distribution, and that will take probably another four, six weeks to work its way through. Just to remind everyone, we pointed this out on our last call, that on our price increase on valves and hydrants this year, we had about 20% more orders in this year than we did last year, which we think will fully support that our distributors were expecting a nice pickup in demand.
Lo and behold, we start getting into the construction period, and they lose 60 days, and they brought in more inventory this year than they did last year. It's going to certainly have an impact in those areas, as I said, where they ended the June quarter with 90 days of inventory. They've cut that down to 60, but that will still impact us, we think, probably in the fourth quarter in those areas.
Got it. Just one more follow-on from me as it relates to inventory levels and destocking. In the oil and gas market, I guess that's very understandable. Again, there'd be destocking there. Maybe that hasn't run its course yet, but is it your expectation that if rigs are stabilizing and maybe they bounce a bit, that your demand will as well? Or will you continue to see demand remain very soft or even decline more because there's so much equipment out in the field sitting idle now, and that can be reused before you'll ever need to see demand for new equipment?
Yeah, that's a good question. We've been trying to dig in on there. I think we feel reasonably confident that a big portion of our distributors' destocking probably has occurred in the last four months. There still could be some carryover, but we don't think to the same extent that we've seen, as I said, the last three or four months. Rig count has been just an amazing correlation for us with demand for our products. I think that it would indicate that we still have a year-over-year issue, as we said in our prepared remarks, it's still down about 60% on a year-over-year basis. For the last month, it's been somewhat stable. I think right now, our view is that we're probably getting close to that point of being stable sequentially, but we still do have a year-over-year issue.
Okay, got it. Thank you.
Thanks, Kevin.
Thank you. Our next question coming from Mike Wood of Macquarie Securities Group.
Hi, thanks. It's Mike Wood.
Mike.
Hi. I agree with your assessment on the fact I've seen weather issues linger for a couple of quarters. Just wondering how you manage that through maintaining your own inventory and production levels. I'll start there, and then I have a follow-up.
Yeah. We ended the quarter in our Mueller business with a little more inventory than what we had targeted because of, I think, the surprise that we saw because we do build to a forecast. We will bring down in our planning process, Mike, that we've targeted bringing down inventory in the fourth quarter, because we expect that we'll make some of our shipments the fourth quarter from products that we've already built.
Great. On the oil and gas exposure in Anvil, can you just give us a sense of what you can do there to rightsize that cost structure, given the lowered size of that business?
Yeah. I will tell you on the SG&A side, we can really target this market, we don't have an extensive sales force. We probably have about four or five salesmen that just focus on this market, we really can't afford any disruption there because of our long-term relationships and their knowledge of the marketplace and all. In those plants that are focused on manufacturing products that go into oil and gas, we have taken down about 40% of that headcount, we're continuing to look to see where we can take out more.
Okay, thank you.
Thank you, Mike.
Thank you. Our next question coming from Joseph Giordano of Cowen and Company.
Hey, guys. This is Tristan Margot for Joe today. How you doing?
Good morning.
Good. Good morning.
Most of my questions have been answered, I guess. I believe you are adding a few people at Echologics. Can you talk a little bit about that and how organic growth is going there?
Yeah. Organic growth can be somewhat misleading because we are still dealing with smaller numbers. For this quarter, sales were up about 15% on a year-over-year basis. Relative to our investments there, we have really been focusing on increasing the size and effectiveness of our worldwide sales organization, and then on further developing our fixed leak detection technology. We have added salespeople in North America, Europe, and Asia. We have taken the sales force from 12 to 25 people in the last eight to nine months. We are making a significant investment because we are bullish about the upside opportunity. On the technology development side, we expect to spend about a million and a half more this year. This is more focused on further development in our fixed leak detection technology for both the domestic and international markets.
Prior to this year, our R&D development for our fixed leak detection technology was really focused on communicating over an RF network as well as cellular network for our transmission lines. We think that there is a significant opportunity, if we are able to have the communication over a cellular network. If we are able to transmit on distribution lines the leak detection data over a cellular network, we think that opens up a lot more of the market for us. That is where a lot of our R&D development spending has been going for the last six to nine months. In fact, we will have our first pilots with that technology in August. We have had third parties resources size the leak detection global market at $1 billion.
As I said, we're just in the very early stages of, I think, beginning to penetrate this market and very bullish about our upside.
Okay, this is a great color. Thank you so much.
Thank you.
Thank you. Our next question coming from David Rose of Wedbush Securities.
Good morning. Thank you for taking my call.
Good morning, David.
Just two questions. One is, if you can break out the margin improvement, how much was it from material costs versus lower fixed costs on the Mueller Co side? Secondly, address expectations on profitability for Mueller Systems for next year.
Yes. David, when I say that the greatest percentage of our year-over-year increase, I think came from operational efficiency, and I'll say overhead absorption, followed by, I think what we've seen in terms of increased pricing, and then raw material costs. On a percentage basis, I'm going to say we're probably about 40% from our operational efficiency, 40%-45%, about maybe 30%-35% from higher pricing. I'd say we can lump the rest in raw materials.
Given that raws have continued to be depressed, you've got the same sort of manufacturing levels, roughly, maybe you stepped down a little bit, but does this imply this is sort of the new norm for you? Is there anything here that we should look at that suggests otherwise?
Yeah, no. I think when we look at the next quarter, I think we don't see any real change in raw material costs one way or the other. I would think that in our fourth quarter, we should see raw material costs just about the same as we saw in the third quarter. You're right.
Great.
As we bring down, or reference to Mike's earlier question, we may cut back some manufacturing a little bit in the fourth quarter because of our higher inventories as a result of the drop-off in the third quarter. I don't think that that will be a substantial impact.
Okay. That's very helpful. Then on the Mueller Systems, from time to time, you do provide some guidance on expectations from profitability, and I think you pulled away from it when business was weaker, but now that you've got a growing backlog, or at least what looks like a nice backlog, can you maybe provide some color on expectations for profitability next year?
David, given the lumpiness of this business, given the outlook of 2016, I'd feel a lot more comfortable when we start getting into 2016. What I will say is that when we talk about the recent awards and the growth of our backlog, we highlighted AMI Systems, and AMI Systems are by far our highest margin product. I would say, sitting here today, when we look at the next year, based on some of the recent awards and what we have outstanding, I mean, quotations outstanding, that we feel that we're going to see a better year, certainly coming out of Mueller Systems because of higher AMI shipments that carry a higher margin.
Okay. That's perfect. Thank you very much. I appreciate it.
Thank you.
Thank you. Our next question coming from [Devon Dray] of Northland Capital Markets.
Thanks. Let's pick up right there with the Mueller Systems business. Your comment that you're going to see higher AMI shipments, can you just tell us what you're seeing in the market generally, in terms of tenders? Is the market now shifting in a meaningful way towards AMI from AMR? How are you thinking about your positioning in that market? What do you think?
Yes, great. We are seeing more requests for proposals. I would say that we're seeing a greater adoption rate in the smaller and the mid-size utilities. For instance, one of our recent awards came from Charlotte County, Florida, which represents about 45,000 endpoints. A nice award. Nice project. I would say some of the larger cities are talking more and more about AMI. I would say when we get to the larger cities, because you start talking instead of 45,000 endpoints, potentially 200,000 endpoints, that it becomes a much more drawn-out process because it becomes a larger political decision. I would say that yes, that we are seeing interest picking up. We're seeing it more in the smaller and the mid-size utilities because I think that they have greater control over their decision-making.
We're seeing the larger cities getting more interested, and we're seeing the request for proposals picking up. I would say certainly what has helped driving that is that we're becoming, and I imagine our competitors, we're just becoming a lot more efficient in terms of the range that our systems can communicate, and as a result, we need less infrastructure to do it, which brings down the cost point. I just think it's the natural evolution with new technology, and as I said on several previous calls, that if we would say our biggest disappointment is in how long it takes to get these decisions made. There's a lot of resources tied up in putting together a proposal, making sales presentations, and then making follow-up sales presentations. I would say right now that we think it's moving in the direction that we expected.
We'd like to see it move faster, I think it's making steady progress.
Yeah, that makes sense. We're also hearing from unis and utilities, just a greater desire for more open platforms, basically something to build off of for the future. I know you are now participating in the LoRa Alliance. Can you tell us, are you seeing that as well, and what are you doing with your own platform to kind of make it, A, more open and, B, more extensible?
Yes. We are, in fact, we have been a proponent of open standards. I do think open standards will help move along adoption. Utility just absolutely, I think, sometimes is very hesitant to put in a dedicated system that they can only use with one manufacturer's product. I think open systems will move adoption along. What we're doing, and you're right on the LoRa, adopting, and we have been spending, I'd say, the last nine months, doing what's necessary on the development side to be able to incorporate the LoRa chip into our communication systems. That has been probably the single reason that we have been able to significantly increase our range. The also benefit of that is that we think that it moves us much further along to be able to become a part of the Internet of Things.
In fact, I think the LoRa Alliance is moving along the adoption of the Internet of Things. It was the LoRa. I think that when we start getting to the Internet of Things, I think that's when we start seeing perhaps an explosion in terms of the adoption of AMI, because then a utility no longer has to have a dedicated RF network. I'd say the last 12-18 months, a lot of our development side has been on making sure we're Internet of Things ready, and being part of the LoRa Alliance, I think, positions us well.
Excellent. Thank you.
Thank you.
Thank you. Our next question comes from Ryan Connors at Boenning & Scattergood.
Great. Thank you. Good morning.
Morning, Ryan.
I wanted to talk a little bit about, I guess, the pricing side of the oil and gas equation. You've talked a lot about the demand issues, but I wanted to talk a little bit about pricing, if you could give us some color there. I guess specifically, have you seen any instances where Anvil is being asked to reprice or renegotiate pricing on business that's already in backlog?
Yeah. Ryan, I would say no repricing because we don't have, in that product, a long backlog. We'll get the order, and we'll ship it within a couple of weeks, and it goes out to our distributors. I think what our distributors have been doing, as I referenced earlier, they've been bringing down their inventory at a greater rate and not replacing it. We've seen some pricing, I think, some pricing pressures. I think we've seen maybe a little more of our end user or distributors maybe looking a little closer, or end users looking a little closer at an offshore product rather than a domestic product. Generally, this market will tend to favor domestic-produced products. We estimate for the third quarter that we may have seen about a $200,000 erosion from pricing in the oil and gas market at Anvil.
Okay. That's interesting. Thanks, Greg.
Yeah.
I guess this is a tougher one to answer. I appreciate that there's not too much you're going to tell us on a quantitative basis, but the 4Q color's appreciated, given the fiscal year, obviously 2016 is arguably more important for the stock right now. I mean, recognizing you don't want to quantify anything, can you give us some qualitative kind of perspective on how you're looking at 2016? I mean, you've talked about some of the tailwinds. I mean, do you think it's a significant growth year in Mueller Co, given some of these headwinds we've had, and the comps will be relatively easy, or is it single-digit? I mean, any kind of perspective you can give us would be helpful.
Let me preface my remarks. I'm making an assumption that we're not going to have to build any arcs next year.
Okay
because of 40 days of rain. When we look at the drivers, certainly, I think that from the housing and municipal spending, we think that looks to be at least as strong as we saw in 2015. If we don't have, as I said, if we don't have the weather disruption, certainly we're not meteorologists, we would think we should see nice continued growth on the Mueller Co. side. On the Anvil side, I think we continue to expect to see growth in non-res construction. When we start getting to the middle of the year next year, we're going to have a lot easier comps on the oil and gas side.
I think when we look at Echologics, a lot of our big investment will be behind us, and the investment that we put in salespeople as well as I referenced earlier, the development of cell technology for our fixed leak detection for water distribution systems. We expect to be going into 2016 at Mueller Systems, at least on the AMI side, with backlog and awards double where we were. I'd say right now that, again, difficult for me to put percentages, percentage growth, but I would say that with the exception of the question mark on oil and gas, will there be further deterioration? We feel pretty comfortable in what's happening in our end markets. As I said, that if we don't see further deterioration in oil and gas in the second half of the year, we should have easier comps.
Okay. Down the P&L a little bit, also looking at 2016, going back a year or more, you talked about where you saw Mueller Co. margins getting to in the peak of the cycle. I think I recall seeing, hearing 20% would probably be as good as it would get. Yet here we are there, at I think an earlier point in the cycle than we'd expect. Can you comment on the margin outlook longer term for Mueller Co.? Then, I'll add to that, any outlook you provide on the corporate unallocated line, because it's come down, and should we expect those savings to continue into next year?
Sure. When we look at the results, especially this quarter at our Mueller-based business, we continue to see the benefits of increased operating leverage. We're also seeing the benefits of our lean initiatives. We're in our fourth year of lean initiatives, so we're just getting much more productive. I'll say, when we look at our Mueller-based business, we said we always felt comfortable with that getting back to 25% EBITDA margins. We hit 30% this quarter. We should be able to do better than the 25% that we previously said for Mueller Co. When we add Systems and Echologics, we're confident that we'll be going in with a much higher backlog, so we should see better performance on those businesses.
Our investment in Echologics should be behind us, the big investment that I talked about. When we look at that, we should perhaps do better than what we guided in the past. I'm sorry, Ryan, your other question?
Just on the corporate expense line.
We always strive to streamline corporate operations. Sometimes we will have some quarter-over-quarter variability based on a project we may have done here at corporate. We did one a year ago in the third quarter. That didn't repeat this quarter. That helped contribute to down. Evan, any comments there?
I'd just say that last year, corporate expenses were just a little over $39 million, and we expect corporate expenses to be $33 million-$34 million in fiscal 2015. Going forward, as Greg mentioned, we're always focused on improving our efficiency here, reducing costs, and I would say, wouldn't see any significant movements in corporate, perhaps a little inflationary impacts, but in that $33 million-$35 million range is about the run rate for us now.
Okay. That's very helpful. Thanks very much for your time.
Thanks, Ryan.
Thank you. Our next question coming from Kevin Bennett of Sterne Agee Capital.
Hey, good morning, everybody.
Hey, Kevin.
Hey, good morning.
Greg, last quarter, we talked about the California drought and how near term that could negatively impact you guys if home building slows down. I was wondering if you had an update on that front in terms of what you saw in the quarter and what you're hearing now.
Kevin, I don't think yet it's impacted positively or negatively. On the positive side, we're having a lot more discussions about leak detection. We referenced earlier that we have a pilot at Los Angeles. We have a pilot that's going on at East Bay Mud, which is outside Oakland. We're seeing more and more interest there. When we look at our year-to-date in California, on our water side, our sales are up about 6%, and they were 7% through our first six months. They were up 5% in the third quarter. I gotta say we really haven't seen too much movement either way from the drought yet.
Okay, great. Moving to Anvil, can you give some commentary on what you're seeing on the non-res side, maybe what it did in this quarter, and what kind of growth you're looking at going forward?
When we look at the non-res side at Anvil, sales of our fire protection products were essentially flat in the third quarter year-over-year, and sales of our mechanical products were slightly down. We believe that there may have been some negative weather impact, we just don't feel as comfortable making an assessment on that impact on the Anvil side as we do with the Mueller business. Our mechanical products are more widely used, and we go across, as we've talked in the past, the institutional hospitality industrial applications. We actually think that our sales were down on the industrial side, which we may be having an indirect impact from oil and gas because oil and gas cuts across a lot of manufacturing industry, and that we may have seen a bit of an impact there. We think it's more timing.
Through our first six months, we believe we were up about 5%-6% year-over-year. We've seen a little bit of a pickup in our July daily shipments, up between 4% and 6%. I think when we look at the fourth quarter, we still think that we're going to see growth from non-res construction, and as we said a little earlier, it looks like the indicators are that we should see some growth in 2016. From what we're seeing, with the exception of what we saw this quarter, it's still looking like mid-single digits.
Okay, great. That's helpful. Last question from me. On the M&A front, I know you can't comment on anything specific, but any color you could provide there, and whether you're having more conversations than you have in the past, or if you're not really focused on that, or what you're thinking about M&A?
I can't really say we're having more conversations. We continue to look to see where the strategic fits. We've said in the past that if we have the opportunity to grow on our water side, that's obviously our priority. If we have a chance to enhance our competitive position on the, I'll say, the technical side, on the smart metering, smart systems, on leak detection, that would be an opportunity for us, we think, to enhance our international exposure. I would say that right now, there's probably not much change than where we have been in the last 12 months, other than we feel more comfortable in talking about it because our balance sheet's in a lot better position.
Got it. Okay, perfect. Thanks, Greg.
Thanks, Kevin.
Thank you. Our next question coming from Seth Weber of RBC Capital Markets.
Hey, good morning, everybody.
Morning, Seth.
Most questions asked and answered, just going back to Anvil, can you give us an idea where you're at with capacity utilization there? I'm just wondering, margins in that business have been kind of 8% here for three quarters, I guess. Is this the new normal for Anvil, assuming that energy, oil, and gas prices don't inflect higher from here? The margins in the business from 2012 to 2014 were double digits, is 8% a kind of a better range to think about going forward?
Seth, I'd say, certainly, as we've pointed out, that when we're down in the oil and gas, even though it's 20% of Anvil International's sales, those products carry about an 800 basis points higher gross margin. Yeah, we are impacted more on the gross margin line than perhaps the sales line when we see a downturn in that market. I think if we increase our capacity utilization, and in total, Anvil International's about 65%, but when we look at our oil and gas, we have two facilities that primarily manufacture for oil and gas. They're well below the 50% level. If oil and gas stays flat and we see some growth in non-res construction, I think that we'd see some margin improvement because of capacity utilization at our largest facility that's dedicated to manufacturing those products.
I would say, on the other hand, if the oil and gas will have an impact to keep it down, I would think margins below what we saw several years ago.
Get it. That's helpful. Thanks, Greg. In the past, you guys have given the margin drag on Mueller Co. for the systems and Echologics business or dollar drag. Is that something you can update?
Yeah. If you look from an adjusted operating margin, it was about 300 basis points this quarter.
Terrific. Just lastly, the share buyback, half a million shares or so, that was good to see. Is that a sort of run rate we should think about going forward?
I don't know if it's a run rate. As we said in our prepared remarks, we don't anticipate implementing a formulaic repurchasing plan. I think we'll approach it on a quarter to quarter as we consider all of our capital allocation options. It's something that, obviously, we have the authorization from our board, and it's something that we look very closely.
Okay, appreciate it. Thank you very much, guys.
Thanks, Seth.
Thank you. At this point, there are no further questions.
Well, again, thank you very much for your participation today, and look forward to seeing you all soon.
Thank you, and that concludes today's conference. Thank you all for joining.