Welcome. Thank you all for standing by. At this time, all participants are in listen-only mode. At the end of the presentation, we'll conduct a question-and-answer session. To ask a question, please press star then one. This call is being recorded. If you have any objections, you may disconnect at this point. I'd like to hand the call over to Ms. Martie Zakas. Thank you. Ma'am, you may begin.
Thank you, Ray. Good morning, everyone. Welcome to Mueller Water Products' 2015 second quarter conference call. We issued our press release reporting results of operations for the quarter ended March 31st, 2015, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Mueller Water Products had 160.8 million shares of common stock outstanding at March 31st, 2015. Discussing the second 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 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 our non-GAAP disclosure requirements. At this time, please refer to Slide 2.
This slide identifies certain non-GAAP financial measures referenced in our press release, on our slides, on this call, 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 on our website. Slide 3 addresses our forward-looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward-looking statements, as well as specific examples of forward-looking statements. Please review Slides 2 and 3 in their entirety. During this call, all references to a specific year or quarter, unless specified otherwise, refer to our fiscal year. Our fiscal year ends on September 30th. A replay of this morning's call will be available for 30 days after the call at 1-800-396-1242.
The archived webcast 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, Martie. Thank you for joining us today as we discuss our results for the 2015 second 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 third quarter and the full year. Our overall results for the second quarter came in about as we expected. We experienced strong net sales growth in our primary end markets, but were faced with harsh winter weather-related expenses, a continuing decline in the oil and gas market, and unfavorable Canadian currency exchange rates. Sales to our primary water markets continue to grow as Mueller Co.'s domestic net sales of valves, hydrants, and brass products increased approximately 12% this quarter compared with the prior year.
We saw growth in demand for our products in both the residential construction and municipal markets. Anvil's net sales declined 5.9% in the second quarter compared with the prior year. We experienced growth of about 6% from sales into the non-residential construction market. This growth was more than offset by an approximately 40% decline in sales to the oil and gas market. With that, I'll turn the call over to Evan.
Thanks, Greg, and good morning, everyone. I'll first review our second quarter's consolidated financial results and then discuss segment performance. Net sales for the 2015 second quarter of $290.3 million increased $2.2 million, about 1% from the 2014 second quarter's net sales of $288.1 million, due primarily to higher domestic shipments of valves, hydrants, and brass products, partially offset by reduced volumes of products sold to the oil and gas market and metering products. We were also unfavorably impacted by Canadian currency exchange rates. Gross profit and gross margin were both essentially flat. Gross profit for the 2015 second quarter was $82.1 million, compared with $82.2 million for the 2014 second quarter. Gross margin for the 2015 second quarter was 28.3%, compared with 28.5% in the 2014 second quarter.
Adjusted operating income for the 2015 second quarter decreased 6.1% to $26.3 million, compared with $28 million for the 2014 second quarter. Gross profit and adjusted operating income benefited from higher domestic shipment volumes of valves, hydrants, and brass products, higher shipments of Anvil product into the non-residential construction market, and higher sales pricing at Mueller Co. and Anvil. This year's adjusted operating income was negatively impacted by Anvil's lower sales into the oil and gas market, approximately $1 million of higher costs associated with the unplanned plant closures at Mueller Co. due to weather, and a $1.2 million unfavorable impact associated with Canadian currency exchange rates. Selling general and administrative expenses were higher year-over-year, which included investments in our leak detection and pipe condition assessment businesses. Selling general and administrative expenses were $55.8 million in 2015 second quarter or 19.2% of net sales.
Adjusted operating margin decreased 60 basis points to 9.1% for the 2015 second quarter. Adjusted EBITDA for the 2015 second quarter decreased to $40.7 million compared with $41.8 million for the 2014 second quarter. Trailing 12 months adjusted EBITDA was $184.6 million. We also benefited from lower interest expense this quarter due to lower interest rates and lower amounts of debt outstanding following the refinancing that we completed in the 2015 first quarter. Interest expense net for the 2015 second quarter declined $6.4 million to $6.1 million compared with $12.5 million for the 2014 second quarter. Income tax expense for the 2015 second quarter of $7.2 million on income before income taxes of $19.5 million resulted in an effective income tax rate of 36.9%. This compares to an effective income tax rate of 24.2% for the 2014 second quarter.
Net income per diluted share for the 2015 second quarter increased to $0.08 compared with $0.06 in the prior year, and adjusted net income per diluted share increased to $0.08 from $0.07. There was a weighted average of 163.3 million shares of our common stock outstanding for the 2015 second quarter, compared with 161.9 million shares outstanding for the 2014 second quarter. I'll now move on to segment performance and begin with Mueller Co. Net sales for the 2015 second quarter increased 4.1% to $199.2 million, compared with $191.3 million for the 2014 second quarter. Domestic net sales of valves, hydrants, and brass products increased about 12% due to growth in demand from both the residential construction and municipal markets. These higher sales were partially offset primarily by lower shipment volumes of metering products.
Net sales were also negatively impacted by $1.7 million due to unfavorable CAD currency exchange rates. Adjusted operating income of $27.8 million for the 2015 second quarter was flat with the 2014 second quarter. In our base Mueller Co. business, which excludes metering, fixed leak detection, and pipe condition assessment technologies, adjusted operating income improved $3.7 million, largely due to higher shipment volumes of domestic valves, hydrants, and brass products. This improvement was offset by lower shipment volumes of metering products, harsh winter weather-related expenses of approximately $1 million, the unfavorable impact of CAD currency exchange rates of about $1 million, and investment in technology and business development in our fixed leak detection and pipe condition assessment business. The harsh weather-related issues resulted in two plants experiencing a total of six shutdown days.
Although we were able to meet most of our deliveries, we incurred higher costs due to overtime and the unplanned shutdowns. Adjusted operating margin of 14% for the 2015 second quarter declined slightly from 14.5% for the 2014 second quarter. Adjusted EBITDA for the 2015 second quarter increased to $38.5 million compared with $37.9 million for the 2014 second quarter. Adjusted EBITDA margin for the quarter decreased 50 basis points to 19.3%. I'll now turn to Anvil. Net sales for the 2015 second quarter decreased 5.9% to $91.1 million compared with $96.8 million for the 2014 second quarter. During the quarter, we saw mixed results from Anvil. We believe we saw growth of approximately 6% into the non-residential construction market this quarter. However, this growth was more than offset by an approximately 40% decline in net sales to the oil and gas market.
As a reminder, in fiscal 2014, net sales to Anvil's address oil and gas market were about 20% of Anvil's net sales and less than 7% of Mueller Water Products' consolidated net sales. Adjusted operating income for the 2015 second quarter was $7.4 million compared with $8.6 million for the 2014 second quarter. Adjusted operating margin decreased to 8.1% from 8.9% for the 2014 second quarter. The decrease in adjusted operating income and adjusted operating margin resulted from this quarter's product mix as previously discussed. Adjusted EBITDA for the 2015 second quarter was $11 million compared with $12.2 million for the 2014 second quarter. Adjusted EBITDA margin for the 2015 second quarter was 12.1% compared with 12.6% for the 2014 second quarter. Total expenses for the 2015 second quarter were $8.9 million compared with $8.4 million for the 2014 second quarter. Turning now to our discussion of our liquidity.
Free cash flow, which is cash flows from operating activities less capital expenditures, was negative $21.6 million for the 2015 second quarter compared to positive $600,000 for the 2014 second quarter. The year-over-year change was driven primarily by an increase in inventory due mostly to an effort to spread production more evenly between the periods in anticipation of the upcoming construction season at Mueller Co. In the 2015 second quarter, net sales were weighted more towards the end of the quarter, which impacted the timing of receipts. We continue to focus on working capital management and efficiency by lowering the level of working capital needed for sales. The quarter-ending average of accounts receivable, inventories, and accounts payable compared with net sales over the past four quarters declined by about 70 basis points compared with a year ago.
At March 31st, 2015, total debt was comprised of a $496.4 million senior secured term loan due 2021, $15 million outstanding under our ABL agreement, and $2.1 million of others. The term loan accrues interest at a floating rate equal to LIBOR, subject to a floor of 75 basis points, plus 325 basis points. In April, we entered into a forward-starting interest rate swap arrangement to effectively fix the interest rate on $150 million of term loan borrowings at about 5.6% beginning September 30th, 2016, and ending on September 30th, 2021. Net debt leverage was 2.6 times at March 31st, 2015. Using March 31st, 2015 data, we had $172.8 million of excess availability under the ABL agreement. I'll now turn the call back to Greg.
Thanks, Evan. During the second quarter, we were very pleased and encouraged by the pull forward of orders that we saw at Mueller Co. in relation to the valve and hydrant price increase we implemented in mid-February. We estimate that orders our distributors placed ahead of the effective price increase date were up 18% year-over-year and up 11% for the quarter. This activity supports our belief that our distributors expect to see strong growth in the second half of this year. As we mentioned earlier, even though Mueller Co.'s plants were closed for a total of six days in the quarter due to weather, we were able to maintain our delivery promises.
Also during the quarter, three major cities elected to install our fixed leak detection technology as part of a program of the National Institute of Standards and Technology, or NIST, that is designed to promote smart cities. Water loss and energy are key focus areas of this program. Participants in this program include AT&T, IBM, among others. Echologics' fixed leak detection technology was selected to be utilized for this program. Two of these cities, including Las Vegas, have begun piloting our fixed leak detection technology, and one city is scheduled to begin its pilot shortly. We are pleased to be participating in this smart cities program and to start demonstrating more broadly the effectiveness of our fixed leak detection technology. We continue to see long-term potential with leak detection and pipe condition assessment, especially outside of the United States.
As mentioned before, we are investing in technology and business development to better pursue these opportunities. Also during the quarter, as we mentioned earlier, we continue to see growth in sales of Anvil's products that go into the non-residential construction market. It looks as if the rebound in this market is taking hold. We saw further deterioration of Anvil sales into the oil and gas market. We estimate sales of these products were down approximately 40% in the second quarter. During our last earnings call, we noted that we experienced a 25% reduction in demand for these products from mid-December to the end of January. Rig counts are now down 50% year-over-year, which indicates we may see further deterioration in sales into these markets. For Mueller Systems, we continue to have outstanding quotations on several large AMI projects, and we expect to win some of these projects.
However, these utilities have extended their timeline for awarding these projects. I will now provide additional color on our second quarter performance. Net sales at Mueller Co.'s base business, which excludes meter, leak detection, and pipe condition assessment technologies, were up about 7%. This increase was driven in large part by domestic shipment of valves, hydrants, and brass products, which increased 12%. We also saw strong growth in sales of our water treatment valves. Additionally, we saw growth in valve and hydrant shipments in Canada, although we were affected by unfavorable Canadian currency exchange rates. For our metering products and systems, as expected, year-over-year net sales declined in the second quarter, largely due to the tough comparison we had relative to the timing of a large project last year. Mueller Co.'s adjusted operating income was flat year-over-year, and adjusted operating margin declined 50 basis points.
However, Mueller Co.'s base businesses, which again excludes metering, leak detection, and pipe condition assessment technologies, showed a 13.5% improvement in adjusted operating income, and adjusted operating margins improved 100 basis points to 18.1%. The strong growth in the base business was driven by domestic shipments of valves, hydrants, and brass products, although partially offset by the impact of our unplanned plant shutdowns and foreign currency exchange rates, as Evan described. The outlook for our macro drivers supports our expectations that we will continue to see growth in our key water end markets. Forecast for growth in housing starts in calendar 2015 now average about 14%. This growth rate is slightly lower than what was forecast several months ago, but still much higher than the 8.7% growth in calendar 2014.
It is also important to note, improved housing construction also helps bolster the health of municipalities and water systems as local governments benefit from increased property taxes, as well as connection fees and other ancillary fees associated with residential and non-residential construction. State and local seasonally adjusted tax receipts continue to increase, and the CPI for water and sewage rates increased 3.9% over the 12 months ended March 2015. Turning now to our outlook for the 2015 third quarter. I'll start with Mueller Co. For our base business, which excludes metering, leak detection, and pipe condition assessment technologies, we expect net sales percentage growth to be comparable to what we achieved in the second quarter. This growth is expected to be driven primarily by domestic demand for our valves, hydrants, and brass products from both the residential construction and municipal markets.
We expect Mueller Systems net sales to be roughly flat year-over-year. In total, we expect Mueller Co.'s net sales percentage growth to be in the mid-single digits, with sales of valves, hydrants, and brass products growing at a higher rate. When looking at adjusted operating income for Mueller Co. in total, we expect adjusted operating income to increase, driven by higher sales of valves, hydrants, and brass products. We expect this increase to be offset in part by additional investments in technology and business development activity related to leak detection and pipe condition assessment, and continued adverse impacts of unfavorable Canadian currency exchange rates. In total, we expect adjusted operating margin could be flat year-over-year. Moving to Anvil. While we expect Anvil sales into the non-residential construction market to continue to grow, we expect Anvil's total net sales to decline year-over-year, as previously discussed.
We expect Anvil's adjusted operating income to be down in the third quarter year-over-year, due in part to negative impact from product mix. Anvil's oil and gas products are domestically manufactured, but we tend to realize higher margin from sales of those products. Although we expect adjusted operating income to be down in the third quarter, margins should be up slightly. For Mueller Water Products as a whole in the third quarter, we expect net sales will be up only slightly due to declines at Anvil. Adjusted operating income and adjusted operating margin should increase year-over-year due to improved performance at Mueller Co. Additionally, we will also benefit from lower interest expense year-over-year. I will now provide an update on our outlook for 2015.
We expect that our consolidated performance for the full year will be comparable to what we outlined on our last earnings call. However, based on developments since our last earnings call, we think we may see a further drop-off in net sales and operating income at Anvil, as well as a possible drop at Mueller Systems. Although we believe that any of these declines will be offset by improved performance at our Mueller base business. At our Mueller base business, we continue to expect year-over-year net sales to increase in a range comparable to the 7.3% growth we saw in 2014. However, we expect domestic net sales of valves, hydrants, and brass products to grow at a higher rate, driven by demand from the residential construction and municipal markets.
Total net sales growth at Mueller Company could be slightly less than the growth we saw last year due to potential delays in the awarding of project orders from Mueller Systems. We expect Mueller Company's adjusted operating income and adjusted operating margin to increase in 2015 compared with 2014, as we expect to benefit from a favorable mix of our higher margin valves, hydrants, and brass products. We expect Anvil's net sales to be lower in 2015 on a year-over-year basis. We also expect adjusted operating income and adjusted operating margin will be lower in 2015, excluding the non-recurring $2.5 million gain we recorded in the fourth quarter of 2014. As we look at the full year, we expect that the growth in non-residential construction will not be sufficient to offset the decline in the oil and gas market.
For Mueller Water Products as a whole in 2015, we expect net sales growth in the low single digits with stronger growth at Mueller Company offset by a decline at Anvil. On a year-over-year basis, we expect higher growth in adjusted operating income and adjusted operating margin compared to 2014 due to a more favorable product mix. Again, in total, we expect full-year profit performance to be consistent with the outlook we presented last quarter. We believe any potential deterioration at Anvil and Mueller Systems will be offset by a stronger mix at Mueller Company. I will now highlight other 2015 key variables. Corporate expenses are expected to be $34 million-$36 million. Depreciation and amortization are expected to be $58 million-$60 million. Interest expense is expected to be about $27 million-$28 million. Our adjusted effective income tax rate is expected to be 37%-39%.
Capital expenditures are expected to be $36 million-$38 million. For 2015, we expect free cash flow to be driven primarily by improved 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 also expect to make only minimal cash contributions to our pension plan in 2015. Our expectation is for free cash flow to exceed adjusted net income. Subsequent to the end of the quarter, we announced an increase in our quarterly dividend. We also announced yesterday that our board of directors has authorized a share repurchase program for up to $50 million of our outstanding common stock.
The stock repurchase program is part of a disciplined capital allocation strategy that seeks to enhance the value delivered to our shareholders by investing in both organic and external growth opportunities, as well as returning cash to stockholders through dividends, and with this program, repurchasing outstanding shares. This program reflects confidence in our strong financial position, long-term business strategy, and growth prospects. With that, operator, I will open up this call for questions.
Yes, sir. Thank you. We'll now begin a question-and-answer session. To ask a question, please press star then one. Please unmute your phone and record your name. To withdraw your request, you may press star two. Our first question is coming from Mr. Michael Wood. Sir, your line's open.
Hi. Good job managing through several headwinds this quarter. First, just would like your thoughts in terms of how Mueller's business might be impacted by the drought in California and other states. I understand there's a bill in the Senate there that requires the municipalities to conduct annual water loss audits and reduce leaks. Wondering if you're seeing any of that opportunity come yet.
Mike, yes, good morning. I think that right now we think that California could affect us in a couple ways. We think in the long term, probably more positive than negative. In the very short term, we're seeing more and more talk about it'll be very difficult for builders to get permits to build new housing, so as not to deplete the water supply any further. I think as we think longer term, we do think there's probably more opportunity. Interestingly, in the last quarter, we've had two major cities in California sign contracts to do pilots for our fixed leak detection. I think that this certainly ties in to they're possibly getting prepared to be able to perform these water audits and to be able to report. I think that also part of that is obviously to report on what they're losing, what they could potentially losing.
I think that when we look at where our technology is evolving on the leak detection, both from a fixed standpoint as well as pipe condition assessment and the other field work that we do, we think that this represents a real opportunity. As I said, in the last 90 days, we had two major cities sign contracts to pilot technologies, and we have appointments from several other cities in California that want to come in and talk specifically about our leak detection. When you look at over the $7 billion that was approved in November, I think by a vote of two to one by the voters in California to have money available to spend to upgrade water infrastructure, we think that our suite of products that we have and the technology, that this will be a benefit for us.
Probably not something that we would be able to point to substantially in 2015, because as I said, I think that the technology that may be most applicable to the situation out there, we're going into the pilot phase. It's very encouraging that we now have these major cities wanting to do these pilots.
Great. Have you seen yet or entered into that rush of projects coming to bid on the advanced metering side? Any early indications of success, particularly on the large city projects there?
As we said in our prepared comments, when we go back about nine months ago, we had, I'd say, a nice uptick in the number of large projects for AMI that we quoted, some of those including fixed leak detection. Of course, that's where we've been spending a fair amount of our R&D money. Unfortunately, none of those have been decided, and quite frankly, we're past the point where four or five months ago we thought they would have made a decision. From our perspective, we haven't lost any of those. A little disappointed that the process is taking as long as it is. We still are optimistic that we will win some of those, but nothing specific that we can report as of now.
Thanks. Final question from me, the buyback authorization. Any indication how quickly you might use that? Is this part of an ongoing capital return strategy even after this authorization is complete?
Yeah. Mike, it is part of our ongoing program. I think certainly when we look at it initially, we think a repurchase of stock could be used to offset any dilution from our stock compensation program. At this juncture, we don't anticipate implementing a formulaic repurchasing plan. I think we will approach it on a quarter-by-quarter basis as we consider all capital allocation options. Given the confidence that we feel with our balance sheet, given the confidence that we feel relative where the direction and demand's going for our end markets, our Board authorized us, as we said, to look at repurchasing stock as, again, an option for our capital allocation, how we allocate capital, and we'll obviously disclose any activity in this program in our quarterly reports to the SEC.
Great. Thank you.
Thanks, Mike.
Thank you. Next question is coming from Mr. Noah Kaye. Sir, your line is open.
Thanks so much. Nice job on the quarter. If we could first touch on the pull forward that you mentioned in the base business for valves and hydrants. Is your expectation now, it probably is implied by the guidance, but is your expectation now that kind of any drag after the price increase as distributors have stocked up in advance, has that sort of been worked through now? Do we expect to see for this next quarter and for the rest of the year kind of a normalized growth rate? Maybe you could just touch on that a bit.
In fact, when we look at our distributor inventory as we exited this quarter for our Mueller business, inventories were up at our distributors year-over-year. They typically will hold between 30 and 45 days, and we think a number of them were approaching 60 days. I think a combination of that, some of our distributors, obviously in the Northeast, I think had seen delays in construction due to the weather. I do think that we believe it is indicative of, as we said in our prepared remarks, that our distributors are pretty bullish about the activity they expect to see in the next couple of quarters. We would expect in the April time period that some of this inventory would have to move out before we start seeing replacement orders.
Our orders in April, when we look at valves and hydrants, actually are up slightly year-over-year. We think that that's positive, especially since they went into the quarter with higher inventory levels. We'll have to see how it plays out. It could have an impact depending on how quickly that they move it. Right now, we think it will smooth out during the quarter, and we should not see a disruption to our orders and shipments.
Okay, great. The next question, in the past quarters, you've commented on where capacity utilization's at in kind of your core product lines, valves and hydrants. Can you give us an update where that was this quarter?
In the second quarter in our Mueller business, we were about 70%. Anvil, probably slightly under 65%. There may have been even a slight drop in our capacity utilization because of the slowdown in our plants that manufacture products that go into the oil and gas market. When we look on a year-over-year basis, we used more of our capacity in the second quarter of this year at Mueller than we did last year, as I said, about 70%, and we think slightly under 65% at Anvil.
As you look in relation to your forecast for Anvil for the rest of the year, does that continue to be the case? Obviously, rig counts are where they are. Do you think you maintain that utilization level throughout the rest of the year, or do you see that picking up?
Yeah. As I look at it I think that there is a chance that in aggregate, our capacity utilization may go up at Anvil because we do expect to continue to see growth in demand from the non-res construction. I would say right now, looking at it probably will be around that capacity utilization rate for the rest of the year. Could be up slightly, but pretty difficult to tell right now.
Okay. Finally, I think I ask this every other quarter or so, where are you seeing opportunities right now from a technology addition or a lateral addition on the water technology front? What areas are really getting your focus right now?
Yeah. I would say that as Mike asked in the very first question, we're seeing more and more cities, we're having discussions with more and more cities and seeing a greater interest in piloting our fixed leak detection technology. Most of this right now has been driven on the transmission line side. We're also moving into distribution. Our first big order from American Water in West Virginia on the distribution side, we're just about finished installing that. I think when we look at California especially, we've seen much more interest, but across the country too. We're also focused outside the U.S. Part of the higher SG&A costs that Evan referenced are due to some of the sales resources and business development resources we've added outside the United States. We're particularly very bullish about the opportunities that we could have in the U.K.
As we've said on previous calls, the U.K. seems to be much further along in monitoring leak detection, in fact, applying penalties to water systems whose leakage rates start to increase, and they set certain targets. Having more and more discussion in France. In fact, we just received some initial results from a nice project that we were awarded in Malaysia, the good news for us is that we started finding some leaks that they were unaware of. That's good news for them, though I'm sure they're disappointed they had those leaks. I would say we're seeing more and more interest in fixed leak detection, both domestically, and I would say that as compared to six months ago, we're having more discussions and getting more interest internationally.
Okay. Thanks so much. Nice job on the quarter.
Thank you.
Thank you. Next, we have Mr. Ryan Connors. Sir, you may proceed.
Great. Thank you for taking my question. First, Greg, just wanted to ask you about the California situation. You mentioned the longer-term aspects of this and how it will obviously spur some investment and opportunity. In the near term, you talked last quarter about some headwinds in the Southwest on the residential side, and I wonder whether that's, in the short term, this isn't as much of a headwind as a tailwind, given that the negative impact it could have on new home construction. There's been some talk about lack of water availability and tough problems getting zoning for new water resources for new development, things like that. Can you talk about the shorter-term ramifications of that situation?
Sure. The best I can, Ryan. Just to put last quarter in perspective, we still saw growth in our west region last year. It was, though, the growth was less than what we had forecasted. Actually, in this quarter, we saw our greatest growth for our valves, hydrants, and brass shipment dollars of any of our regions in the U.S., and was up 20% year-over-year. That was back to more of a rate that we expected to see last quarter, but we came in, I think, around 5%, 6%. I think that, as I had mentioned earlier, our hypothesis is, in the very short term, we could see a bit of a slowdown in the growth rate we have been seeing in the west if, in fact, we start seeing a cutback in housing developments due to water availability.
We don't have enough visibility to say, "Hey, in the next six months, how much of an impact this may be?" I'm not familiar enough to know if land is already under development, where they've gotten the permitting and haven't put our equipment in yet, if that's going through, and it could be an impact maybe three or four quarters down the road. I think that there is that possibility in California that we could see, in the very short term, a little bit of a cutback in land development for residential development. I think that we're still in a wait-and-see mode. I know that the builders are countering, saying that the homes that they're building today are so much more water efficient, and it would be a mistake not to add. That may be a good argument. We'll see how successful it is.
I think in the short term, and probably not in the next six months, I don't think, but it could be a bit of a negative if the builders don't get permits to put in new housing developments.
Great. Those are some good points. Over on the Anvil side, this oil and gas issue, I just wonder if you could expand on it, just because I'm trying to understand what's happened in the last few months. I know you talked about a 25% decline rate in orders on the last conference call. If I recall correctly, part of what you were saying was that some of that was due to inventory destocking, and so that it might have actually overstated the decline in end user demand. We were a little taken aback by the sticker shock on the 40% decline. I guess you could just give us any color you can on what happened, how much of that is destocking versus end user demand, and at what point we might see stabilization there.
Yeah. Just to go back, what we said in our last earnings call, we talked about the 25% decline. Specifically, we said that from mid-December to the end of January, we saw a 25% decline in our shipments from Anvil into oil and gas. We said, "If that continues, here's the kind of impact it would have on us." I'm sorry if that was taken as a forecast, because at that point, we sure weren't in a position, and we're not in a position now to forecast what's going to happen in the oil and gas business in general. I'm not sure there are many that are in a position to forecast what's going to happen in oil and gas. What happened is, if we look at the last quarter, rig counts dropped. They're down now about 50%-55% on a year-over-year basis.
Our demand for our products correlate reasonably well with rig counts. Because when they're putting in the new wells and start production, that's when demand for our products, so that's what drives demand for our products. In fact, the 40% we saw for the quarter, if we look at our March orders and our March shipments and month-to-date in April, we're down about that 50% range. We are correlating with the rig counts.
Okay, great. That's helpful. Then just one last one for me, if I could. On the leak detection business, taking that global, I think it makes a lot of sense and it's strategically compelling. Can you give us any more granularity on that program and that investment program? What exactly those investments entail? Is it sales? Is it distribution? What exactly those investments are and what specific regions you're targeting and maybe the magnitude of the dollar spend on those things.
Yes. When you look at that, we are targeting at a point where if we look at both in North America, Europe, and Asia, we're looking to double the size of our sales force or business development people. To put that in perspective, we're looking to increase from 12 full-time dedicated people to 25. A lot of that spending we've already hired a number of those people, and we're now seeing the expense of those people hitting us on a year-over-year basis. We think that we are locating them in markets that have a, we think, a real need and a positive disposition to using the latest leak detection, and the U.K. was one that I referenced a little earlier.
On technology development, we look like we're spending probably in the range of a million and a half to possibly $2 million more this year. Most of this is focused on our fixed leak detection technology for both domestic and international markets. A lot of that is in addition to the, I'd say, the core technology on the acoustical technology, but probably more on how we communicate that data and extend the battery life and be able to operate on frequencies around the world. Adding our number of salespeople will help us across the board from our leak detection we do in the field, from our field pipe condition assessment, and also promoting our fixed leak detection.
More on the development side, R&D, it's more on further developing our fixed leak detection, taking what we're learning from these initial pilots and incorporating what we learned to that into the technology. As we've said, that we think that in total, that will impact us by about $5 million year-over-year.
Okay, great. Well, that's exciting stuff. We look forward to hearing more about it in the future. Thanks for your time.
Thanks, Ryan.
Thank you. Our next question is from David Rose. Your line's open.
Good morning. Thank you for taking my call. Couple questions on, one is just housekeeping. What was the net earnings drag from the Anvil LNG decline? Would you ballpark it?
Evan, go ahead.
Yeah. If we look at our Anvil business on a year-over-year basis, our operating income declined about $1.2 million. That was about $2.4 million down from volume. We saw a 6% increase in non-residential construction, which is roughly about 80% of Anvil revenues. For the other 40%, which is oil and gas-related, we saw a decline of about 40%. I will say that the margin difference between our non-res and oil and gas business is about 800 basis points. For the non-residential business, we manufacture domestically as well as source from offshore. Our oil and gas business is all domestically manufactured product, and so we do experience a higher margin of about 800 basis points.
Okay. I'll back into the number then. That's helpful. How many production days would you estimate that you lost last year due to weather?
Actually, we did not lose any production days last year. Our production that we lost this year was in the Southeast, actually five in Chattanooga, Tennessee, one in Albertville, Alabama. We thought that was a pretty valid year-over-year comparison. We didn't make an attempt to try to determine how much revenue we may have lost year-over-year, because certainly we know that there was a revenue impact last year also. We think that this year, the weather impact from a revenue standpoint probably impacted Mueller Systems and Echologics more than it did Mueller, because Mueller did make shipments to our distributors.
Okay. That's helpful. Lastly, if we can go over to Echologics again, can you maybe just touch upon maybe the significance of the relationship with the Las Vegas Water Center of Excellence?
Yeah. We're very excited about that relationship because as we look around the country, Las Vegas seems to be, we'll say, one of those early technology adopters. They have tested, we think, a number of leak detection technologies. They tested our technology for some time before they made the commitment that they did. Plus, we think that Las Vegas, the water authority there and the water people are very proactive and looked at as leaders. We think that what they do can influence not only other utilities in the U.S., but also I think water systems outside the U.S. I think that it's been a longer-term relationship.
They have been one of the first to test a number of our leak detection technologies, both from our fieldwork and the fixed leak detection, and we're pretty excited, I think, because again, I think they're generally viewed as being much more proactive in addressing and applying new technologies into managing their system.
Do you have any other plans similar to Las Vegas that we might be seeing soon?
Yes. As we mentioned in our prepared remarks about the National Institute of Standards and Technology Smart City program, Las Vegas was one of those cities that are participating with our leak detection. There were two other major cities that one we have already installed the pilot, the other I think is being installed this week. A lot of those results are expected to be made public in June. I think that we'll be able to talk specifically about what those cities are doing. As I've said, that we're getting more and more inquiries about the fixed leak detection, and hopefully we'll have permission to share with everyone what those cities are doing.
Okay, great. Thank you, Greg.
Thank you.
Our next question is from Kevin Bennett. Sir, your line is open.
Hey, good morning, everybody.
Morning, Kevin.
Greg, I wanted to dig in on metering a little bit, if I could. Can you potentially quantify the decline in sales in the second quarter?
Yes. Kevin, on a year-over-year basis, sales were approximately down $4 million. Somewhere between three and a half and $4 million. A lot of that was due certainly to, as you recall, the big project that we had in Mississippi. We were in full shipment mode in the second quarter of last year to that project. As we sit here today, we don't have a project of that size to replace it, though we have several quotations outstanding that are for projects larger than that one.
Got you. I think last quarter you talked about you were looking for 20% growth in the back half of this year. Is that still a good number, or is it probably a little bit lower than that?
Yeah. I would say right now that's cloudy. Our 20%, when we were on our earnings call three months ago, we knew what projects, what quotations we had outstanding. At that time, based on the best information we had, we had an estimate of what time that those projects would have been awarded, and on some of those, or at least one of those large ones, we expected it to be awarded during this last quarter. It was not. That's being stretched somewhat. Our shipments the second half of this year, to get any real growth in our shipments, we will have to be awarded and to be able to start shipping those.
Our outlook right now is for our full year shipments to be flat, as I said, for the full year, though we would still expect to see greater shipments in the second half, shipment growth second half year-over-year, while in the first half of this year, we had a decline. The 20% growth, I think it depends on our being awarded these and to be able to start shipping. I think that if these aren't awarded in the next six to eight weeks, I think that we probably won't have time to be able to ship them this year.
Sure, that makes sense. Greg, can you remind us about the big contract you have with American Water for meters? When does that come up for renewal? How is that business going? I think last quarter we talked about how they were potentially pushing out some of the meters, just an update on that.
Yeah. That arrangement runs through the end of this calendar year. At this point, we don't know if it'll just be extended or how they'll handle that. I think the push out we saw, I'd say this time last year, we believe, based on the order pattern that we've seen now that we're in the construction season so far in April and March, that they're back to procuring or releasing what they have historically. We think that that business should play out as we expect for the rest of the year. Sometime between now and we think the end of this calendar year, we'll have a handle on whether or not the current contract or the current arrangement will be extended or how they'll handle that. The arrangement runs through the end of this calendar year.
Great. Thanks for that. Last question for me, moving to Anvil, and more specifically, the non-res piece. You said we had 6% growth in the quarter. I was wondering if you could elaborate on that a bit, maybe talking about different verticals or different geographies that you're seeing strength in, or is it a broad-based recovery or still spotty?
I would say that we didn't see anything that would suggest one region is stronger than the other. When we look at it, our fire protection shipments were up over 9%, and our mechanical, just slightly under 5%. That fire protection goes through, obviously, a number of verticals, from warehouses to high-rise buildings. I would say that what we can interpret it is that we probably saw more of the traditional non-residential construction and less industrial construction, because then we tend to see a bigger spike in demand for our mechanical product when it's driven by industrial spending versus the, I'd say, the more traditional non-residential. Kevin, I'm not sure if that gives much help. Tough for us to say anything regionally, but we saw even a greater increase in our fire protection products than we did on the mechanical side.
No, that's great. That's all I had. Thank you.
Thank you.
Thank you.
Thank you. Our next question is coming from Mr. Joseph Giordano. Thank you.
Hi, guys. Thanks for taking the question. Quick on Mueller Co. You talked about the 12% in hydrants and valves and brass products. Could you maybe parse that out, price versus volume? I was wondering what kind of impacts you're seeing on the cost side of lower raw materials.
Yeah. Joe, on the volume side, again, it was probably in the volume side, I'm going to say it's in the 8%-9%, and the rest of that would've been pricing.
When you take a look at raw materials, we are seeing lower purchase prices for scrap steel and brass ingot. However, we are seeing our purchase component costs being slightly higher. Overall, net for raw material and purchase components, which account for about 50% of cost of goods sold for Mueller Co., I would say in looking at it from a full year perspective, maybe a slight tailwind, but the significant tailwind from scrap steel and brass ingot, a little bit eroded due to purchase component costs being higher.
Okay, that makes sense. Just a question in California, just to build on what we've been talking about. The decline that you're looking at potentially in new residential construction, how much of that do you think can be offset by increased spending at the municipality level to combat some of this?
Yeah. Just to put it in frame, right now, when we look at our next couple quarter, our outlook here, we don't think we'll see a decline. We think that there's certainly more and more discussion that could creep into this six months. I think it's a little more speculation right now. That's a good question. When you look at the $7 billion that was approved by the voters, a lot of that obviously going to maybe some new infrastructure, but a lot of it to repair and replace the existing infrastructure.
Looking at it right now, we could say, if it plays out this way and builders are unable to get permits to put in new developments, we're pretty confident given the money that's been approved and the need and the focus on reducing leakage rates and upgrading the existing infrastructure, that demand for those products could in fact offset it. Right now, it'd be premature for us to, I'd say, make that specific comment because we're still learning on what's happening out there.
Great. Thanks a lot, guys.
Thank you.
Thank you. Next, we have Mr. Walter Liptak. Sir, you may proceed.
Hi, thank you. Wanted to ask about the Anvil business with exposure to oil and gas. Specifically, I think you've addressed the volume part of it pretty well. I think a lot of these companies that they sell to are also trying to get prices down, and I wonder what your view is of price, and if there's more deterioration, what's the breakout of price versus volume?
I would say we really haven't seen price deterioration yet. It would be reasonable to expect that we could. Right now, we're not forecasting it. We haven't seen it. I think certainly when you get into markets like this, you start seeing some negative movement on pricing.
Okay, got it. Thank you. Just to follow up on the weather issue during the quarter. I'm not 100% sure on how we should be taking the six days where you had unplanned shutdown. It sounds like you maintained deliveries, so you didn't lose revenue, or is there some revenue that pushed out into this quarter?
I think that that's right. I think that we really didn't lose revenue, because we wanted to make sure, as I said, we made our delivery promises so distributors had it in inventory entering the construction season. I think the impact we saw was we earned less margin in the second quarter than what we would have expected on that revenue because of the unabsorbed overhead when the plants were shut down, as well as the overtime that we had to work in order to make those shipments. Walt, we don't think that that impact flows into any way into Q3. We think that we saw the impact in Q2, and it impacted somewhat on our margins.
Okay, thank you.
Thank you.
Thank you. Next, we have Seth Weber. Your line's open.
Hey, thanks. Good morning, and thanks for extending the call.
Sure. Morning, Seth.
Good morning. I just wanted to go back to the Systems and Echologics business. The path to profitability, it seems like it was not EBITDA positive this quarter. Is that correct? Are you still expecting that to be EBITDA positive this year? Bigger picture, as you make a lot of these investments, can you just talk about how we should think about the trajectory of the margin for that business going forward? It sounds like maybe the cost and the investment is a little bit higher than where I was thinking it would be six or 12 months ago. Does that change the ramp on the margin that you see ultimately getting to?
Yeah. I'd have to break down the answer by Systems and Echologics. Let me talk about, because the investment that we pointed out going into this year is really all on the Echologics side. We did a lot of work on looking at the leak detection market, the global leak detection market about a year ago. Looking at outside sources that they size this market around the world somewhere around $1 billion, a billion and one. I think that we have some debate, but if that's the exact number, but anyhow, it's pretty big given that we had $10 million of sales, $10 million-$12 million of sales last year. We think there's a lot of upside. As we look at the leak detection market, in the leak detection market, we've seen no clear leader.
In fact, we've seen no clear technology, no technology taking a clear lead. Some are putting meters at two different points, and they're measuring what the water loss between those points, but then they have no idea where they're losing that. Seth, from that trajectory, I'm gonna say that right now that we're certainly in the investment phase in 2015. We think when we get in 2016 that we're gonna generate more revenue. We think a lot of those investments will be behind us. I would expect right now that Echologics could be breakeven to slightly positive in 2016, and it is beyond that I would expect to see this business really ramping As we make the inroads in international markets as well as domestic markets.
What gives us confidence that we do see this ramping up is the pilots that, for instance, in the two major cities in California in the last several weeks, that have signed contracts to do the pilots. Mueller Systems, I think we're in a different place. Mueller Systems, we've developed a lot of technology, we've invested, so we're not really investing that much in the R&D and business development on Mueller Systems. I think at Mueller Systems, where we are, is we need additional volume, and we need the additional volume on the AMI, because that's our higher-margin product. If you look, as we said, if we look 9 months ago, we've seen a nice pickup in our quotation activity, and we're bullish about winning several of those large projects.
I think that as what we said earlier on our call, 90 days ago, we would've thought we would've been at least awarded one of those and start shipping those in 2015. I think right now that's cloudy, and we may not. For us to be profitable at the operating income line for Mueller Systems this year, we will need to win at least one of those. We'll know in the next 6 to 8 weeks whether or not we have a chance of doing that. I think on Mueller Systems, again, when we look out beyond 2015, that we expect these projects to be awarded, and we'll start seeing some pretty significant upturn in the performance of that business.
I think that we're still, as we've said, I think the last couple years, that we think in 3 or 5 years, that business can be anywhere between $130 million and $160 million in revenue. We currently, last year, we were about $95 million revenue. When we get to that $130 million to $160 million, we think that we can be in that 20% EBITDA margins for that business. That was a long-winded answer. I think that this year, for us to be EBITDA positive on these combined businesses will be based on what happens, we think, in the next 6 months on these major projects. Relative when we look out in the next several years, we think that both of them should provide some very nice growth for us.
That was actually very helpful. Thank you. Then just going back to the 3 pilot cities that you have going, are those single-sourced? What's the expectation on timing? I think you mentioned maybe June, there would be some feedback to you. Is the expectation then it goes out to another RFP, or is that basically just revert back to you to get a contract going forward?
Let me go back. We have more than three cities right now doing pilots. What we referred to in our prepared remarks is this is a program that's being spearheaded by the National Institute of Standards and Technology out of Washington, D.C. IBM, AT&T, I think GE Lighting was selected to participate on the energy side. We were selected to participate on the water side, water loss side. This is a very specific pilot where a number of cities are participating. All of them are participating on leak detection. Some are doing it on the lighting, some are doing it on leak detection. Then there will be a report out by NIST on what they found on smart cities. I will say, that's one group of pilots.
I would suspect since those pilots at that time will have only been going on for about three or four months with these cities, that they'll continue to run those pilots for a few more months before they make a decision on how they want to move forward. I don't want any confusion that the one we referenced on those three cities was part of a much bigger program, a smart city program, and our technology was selected to be part of that. As I said, we're running other pilots. I can put it in perspective that, for instance, at American Water, we received our first big order for distribution leak detection in October of 2014. We had been running the pilot there for six, seven months.
I would say that when we look at our pilots that we have installed, that those pilots will run through the end of our fiscal year. Then I would suspect that we would start seeing that some cities, it'll vary, some cities may go out for an RFP. Some cities will say, "Okay, here's what I want to monitor. What's the cost to do that?" Right now, I'd say it's a little more speculative, but what I can say is that the feedback that we've received from our pilots is those that are participating are pretty impressed with the technology, and we're finding leaks that they were unaware of.
It's going to be a, I would say, as I said earlier in my answer, that I don't think this is a big growth for us that we're going to see in 2016, but we sure think we're putting in the foundation. We'll see growth in 2016 and would expect we'd start seeing much greater growth in 2017 and beyond.
Okay, that's terrific. Thank you very much.
Thanks, Seth.
Thank you. At this time, there are no further questions.
Well, that concludes today's call. Thank you for your interest in Mueller Water Products and for joining us this morning.
Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.