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Mueller Water Products Inc  (NYSE:MWA)
Q1 2019 Earnings Conference Call
Feb. 05, 2019, 9:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. At the end of today's presentation, we will conduct a question-and-answer session. (Operator Instructions) Today's conference is being recorded. If you have any objections you may disconnect at this time.

I would now like to turn the meeting over to Whit Kincaid. You may begin.

Whit Kincaid -- Senior Director of Investor Relation and Corporate Development

Good morning, everyone. Welcome to Mueller Water Products 2019 First Quarter Conference Call. We issued our press release, reporting results of operations for the quarter ended December 31st, 2018, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Discussing the first quarter's results and our outlook for 2019 are Scott Hall, our President and CEO; and Martie Zakas, 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 2. This slide identifies 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 non-GAAP and GAAP financial measures are included in the supplemental information within our press release and on our website.

Slide 3 addresses forward-looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward-looking statements. 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, which ends on September 30.

I also want to point out that our performance results do not include the acquisition of Krausz industries, except for the impact of the acquisition on our balance sheet and cash flow statements. Process results will be included in our operating results beginning January 1st, 2019. A replay of this morning's call will be available for 30 days at 1-800-219-6387. The archived webcast and corresponding slides will be available for at least 90 days in the Investor Relations section of our website. In addition, we will furnish a copy of our prepared remarks on Form 8-K later this morning.

I'll now turn the call over to Scott.

J. Scott Hall -- President and Chief Executive Officer

Thanks, Whit. Thank you for joining us today to discuss our results for the 2019 first quarter. I will start with an overview of the first quarter. So please turn to Slide 4. Overall, I am pleased with our team's performance this quarter, as their execution help deliver a solid start to the year. We generated 8.1% organic net sales growth, driven by higher shipment volumes and pricing. In the quarter, both sales growth and our improved manufacturing performance led to a 22.4% increase in adjusted operating income, with a 20.4% growth in adjusted EBITDA.

Both Infrastructure and Technologies reported growth in net sales and improved operating performance during the quarter. We have been working constructively with all of the parties involved in the ongoing dispute regarding the tax liabilities of Walter Energy, our former parent. The IRS provided a $37.4 million calculation of the tax liability, emanating from the activities of certain businesses of Walter Energy. As a result, we recorded the entire amount due to the operation of several liability under federal law.

Marty will discuss the details later in the call. Put simply, after many years of uncertainty, we believe we are in a position to settle this matter. During the quarter, we completed our acquisition of Krausz Industries. We remain very excited about having a high quality product portfolio for the pipe repair market and the potential synergies we can achieve together. This is our largest acquisition in over a decade, and we are working closely with the Krausz team members to plan and execute future growth initiatives, which we'll address later in the call.

After a solid start to the year, we are increasing our expectations for 2019 to reflect the impact of the Krausz acquisition. We announced additional price increases for many products, which will be effective in February in order to help offset anticipated inflation in 2019. Despite operating in an increasingly challenging economic environment, I'm confident in our ability to drive growth through continued focused execution of our key strategies.

With that, I'll turn the call over to Martie.

Marietta Edmunds Zakas -- Executive Vice President and Chief Financial Officer

Thanks, Scott and good morning everyone. I will start with our first quarter consolidated financial results including an overview of the Walter Energy Accrual and then review our segment performance. After that, I will touch on the Krausz acquisition.

Consolidated net sales for the 2019 first quarter increased $14.5 million or 8.1% to $192.8 million, driven by higher volumes at both Infrastructure and Technologies, as well as higher pricing at Infrastructure. Gross profit increased 8.5% in the quarter to $60.1 million, yielding a gross profit margin of 31.2%. Higher pricing, increased shipment volumes and improved manufacturing performance contributed to this increase, but was partially offset by higher material and freight costs and the impact of tariffs.

Material cost increased nearly 5% year-over-year in the quarter. Selling, general and administrative expenses were $41 million in the quarter, up $1.2 million from last year with the increase primarily due to higher volume related personnel expenses. SG&A as a percent of net sales decreased to 21.3% in the first quarter from 22.3% in the prior year quarter.

Adjusted operating income increased 22.4% or $3.5 million to $19.1 million in the 2019 first quarter. Both segments contributed to the improvement in operating performance. This was primarily due to higher volumes and pricing and better manufacturing performance, which were partially offset by higher costs associated with inflation.

Adjusted EBITDA for the 2019 first quarter increased 20.4% to $31.3 million. Over the last 12 months, adjusted EBITDA increased to $185.3 million or 19.9% of net sales. I'll now address the Walter Energy Accrual. As Scott mentioned earlier, for the quarter ended December 31st, 2018, we recorded a $37.4 million accrual related to the Walter Energy liability. After extensive work and discussions with the IRS, the Department of Justice, the Walter Energy bankruptcy trustee and other involved parties and experts, the IRS has provided us with the $37.4 million calculation of the tax liability, emanating from the activities of certain businesses of Walter Energy, our former parent.

The IRS calculation includes interest amounts calculated through January 31, 2019, which will continue to accrue until the matter is finalized and paid. The accrual we recorded includes $7.4 million for the underlying tax matter and $30 million of related interest. The company's previous activities and tax positions were not the source of the Walter Energy liability. However, we recorded the Walter Energy Accrual due to the operation of several liability under federal law.

A payment settlement agreement has not been reached with the Department of Justice and IRS. The recent government shutdown did affect negotiations during this time period, and we do not have an estimate as to when or if a settlement agreement can be reached. We will continue to work constructively with all the parties involved in this matter in an effort to negotiate a settlement.

Turning now to taxes. For the 2019 first quarter, we reported a net income tax benefit of $5.9 million or 21.9% of loss before tax. This includes a $7.7 million benefit on the Walter Energy Accrual and a $600,000 favorable adjustment related to the one-time provisional expense of $7.5 million recorded in the prior year for the transition tax on previously untaxed, undistributed foreign earnings.

Our adjusted net income per share increased to $0.07 for the quarter compared to $0.06 in the prior year quarter. Our 2018 quarterly adjusted EPS excludes the Walter Energy Accrual and strategic reorganization and other charges.

Now I'll turn to segment performance, starting with Infrastructure. Infrastructure net sales grew 7.4% to $172 million in the first quarter, due to higher shipment volumes and higher pricing. Adjusted operating income for the first quarter increased 10% to $30.9 million primarily due to shipment volume growth, higher pricing and improved manufacturing performance, partially offset by higher costs associated with inflation and SG&A expenses. Adjusted EBITDA for the 2019 first quarter increased 10.5% to $41 million, yielding an adjusted EBITDA margin of 23.8% for this segment.

Moving on to Technologies. Technologies net sales increased 14.3% to $20.8 million in the quarter, primarily driven by higher volumes at Mueller Systems. Our adjusted operating performance improved $900,000 in the 2019 first quarter, primarily due to improved manufacturing performance and higher volumes, partially offset by higher costs associated with inflation. Adjusted operating loss for the quarter was $3.7 million compared to $4.6 million last year.

Now, I'll review our liquidity. Cash flow from operating activities improved $9.4 million to $9.9 million, compared to the prior year quarter. We invested $15.9 million in capital expenditures in the quarter, primarily to upgrade our equipment and manufacturing capabilities, as compared with $6.4 million last year. Free cash flow which is cash flow from operating activities, less capital expenditures was negative $6 million similar to the prior year quarter. At December 31, 2018, we had total debt of $445.6 million and cash and cash equivalents of $198.8 million, which is lower, primarily due to the Krausz acquisition. At the end of the first quarter, our net debt leverage ratio was 1.3 times.

I'll now turn to the Krausz acquisition. As Scott mentioned in early December, we completed the acquisition of Krausz Industries for $140 million before adjustments. We anticipate incurring $2 million to $3 million of future transaction and integration expenses, which do not include expense associated with the inventory step-up and any potential one-time tax payments for changes in tax structuring.

From a reporting perspective, Krausz will be part of the infrastructure segment and will be included in the Company's operating results, beginning January 1, 2019. The operating results of Krausz will be reported on a one-month lag, beginning in the quarter ended March 31, 2019. This means that the 2019 second quarter results will include Krausz's results for December, January and February.

For the quarter ended December 31, 2018, the consolidated balance sheet includes an estimated opening balance sheet for Krausz, and the cash flow statement reflects the acquisition. However, the consolidated statement of operations excludes the results of Krausz's operations.

I'll turn the call back to Scott to talk more about our results and updated outlook for 2019.

J. Scott Hall -- President and Chief Executive Officer

Thanks, Martie. We were pleased to start the year with 8.1% organic consolidated net sales growth, including a 7.4% increase at Infrastructure, and a 14.3% increase at Technologies. The increase was driven by volume growth at both segments and higher pricing at Infrastructure. As Martie mentioned, we are still experiencing higher inflation, although the rate of material cost inflation has slowed compared with the prior year, we anticipate higher inflationary pressures, driven by a combination of material costs, freight, labor and tariffs in 2019.

We recently announced additional price increases for many of our products, which will be effective in February, impacting US and Canadian markets. This is in addition to the price increases we announced in September. Our price cost relationship improved in the first quarter and we expect higher pricing will help offset anticipated inflation, as well as cover some of the material and freight cost increases we experienced last year. Going forward, we will remain focused on improving our conversion margin through price realization and productivity initiatives.

I'll now give a quick update on the Krausz acquisition. Krausz had another strong year of growth, generating double-digit net sales growth in calendar 2018 with healthy adjusted margins. We are working closely with Krausz's team members to execute growth initiatives with plans to enhance Krausz's efforts in the US and abroad, by generating sales and operating synergies that will expand future growth. The annual gross sales meeting took place in January. During the meeting, we made progress planning sales strategies for a number of key areas, including cross selling with our Mueller portfolio, leveraging our distribution and sales rep relationships and examining expansion into adjacent markets beyond water utilities.

The product management teams are also working together to identify opportunities for collaboration related to product innovation, upcoming product launch plans and new product developments, which will help further position us, as we prepare to penetrate new markets and introduce new products. I'd like to quickly touch on our capital allocation strategies. Since the end of calendar 2016, we have demonstrated a track record of strategic investments, with $108 million allocated toward capital expenditures and $163 million spent on acquisition. In addition, we have returned $147 million of cash to shareholders through a combination of dividends and share repurchases.

We also further strengthened our balance sheet during this period with the senior note refinancing and have a net debt leverage ratio of 1.3 times after the Krausz acquisition. Our capital allocation strategy remains focused on enhancing our position as a water infrastructure company and adding long-term value for our shareholders.

Moving forward, we will continue to balance our capital allocation among strategic investments to strengthen and grow the business, while returning cash to shareholders. As I have previously discussed, we expect near-term capital expenditures to be higher than they have been historically to help support our strategic growth initiatives, as well as to keep our facilities poised for manufacturing improvements. Additionally, we will continue to look for strategic acquisitions to expand our product portfolio and geographic footprint.

I'll wrap up my comments with a review of our current full year expectations for consolidated results. For 2019, we anticipate continued growth in all of our end markets. This includes residential construction growing in the low single digit range with municipal spending in the low to mid-single digit range. Finally, we anticipate mid-single digit range of growth for the natural gas distribution market.

Our expectations for residential construction are lower than we previously communicated, as residential growth has slowed in the near term. After a solid start to the year, we are increasing our expectations for 2019 to reflect the impact of the Krausz acquisition. We expect to increase our consolidated net sales between 8% and 10% in 2019.

We expect to deliver adjusted EBITDA growth between 14% and 17% with no change in our expectations for full-year organic adjusted operating income growth. As I mentioned earlier, we are facing an increasingly challenging operating environment. We will continue to focus on executing our key strategies to grow and enhance our business, by accelerating new product development, driving operational excellence, and improving our go-to-market strategies as a more customer focused organization.

Martie will now provide some final comments on our 2019 outlook.

Marietta Edmunds Zakas -- Executive Vice President and Chief Financial Officer

Thanks, Scott. For 2019, we expect the depreciation and amortization will be between $51 million and $54 million, which excludes amortization related to the acquisition of Krausz. Corporate SG&A expenses are expected to be between $35 million and $37 million, net interest expense is expected to be between $22 million and $23 million, reflecting lower interest income as a result of funding the Krausz acquisition with cash on hand.

Our adjusted effective income tax rate for the full year is expected to be between 25% and 27%. Finally, we expect capital expenditures to be between $58 million and $62 million and are considering some projects which would increase our expected expenditures for 2019.

With that, operator, please open this call for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question is from Michael Wood with Nomura Instinet. Your line is open.

Michael Wood -- Nomura Instinet -- Analyst

Hi, good morning. My first question is on the tax settlement, the tax reserve. Is this covering all of the tax years that were at issue. And is this figure based on a settlement that was proposed? Can you provide some more color there?

J. Scott Hall -- President and Chief Executive Officer

Sure. Martie, why don't you start? And, but the answer to the question at a high level, yes.

Marietta Edmunds Zakas -- Executive Vice President and Chief Financial Officer

Yes, so look before I get to your question specifically, Mike, I just want to reiterate what Scott said earlier that we are pleased to be in the position that we're in today. We know that the Walter Tax Liability has been an open question for an extended period of time. To give some perspective, we think we're in a good position today and importantly, we are working toward a reasonable resolution with the IRS in the Department of Justice. I hope that you're hearing from us and that you understand that we think we're on the path to a solid resolution of what's been a very challenging matter. It's complex, it's being managed by our attorneys and experts as well as the attorneys and experts for the Department of Justice, the IRS, the bankruptcy trustee and other parties.

You can also imagine that we're reluctant to provide detail regarding ongoing specifics about the settlement negotiations. But the $37.4 million accrual that we took this quarter was a number that the IRS provided us and that's their calculation of the tax liability that emanates from the activities of Walter Energy. The calculation does include interest amounts through January 31, 2019 and they will continue to accrue until the matter is finalized and paid. So we're working toward concluding the settlement negotiations, but we don't know at this point when or if a settlement can be reached.

Michael Wood -- Nomura Instinet -- Analyst

And when this is finally behind you? Scott, how does this impact or you view or the Board view the balance sheet in terms of the net leverage, leverage is in very high right now. I imagine this visibility could help give you some confidence that deploy some more capital.

J. Scott Hall -- President and Chief Executive Officer

Yeah, I think as we've answered repeatedly, I've been asked several times over the years, whether or not this was impacting our capital allocation strategy and it has not. So we have been looking at our M&A pipeline. We have been looking at our organic investment in capital expenditures. We've been looking at what we do in share buyback dividend policy. All of those things, because we believe that while we have these opportunities to reinvest in the business, whether through acquisitions or in these other matters (ph) we just discussed, that we would take a balanced approach and we would take the best path forward to us.

So I agree that, some would argue, we're underleveraged right now at 1.3 times. We're starting to see, I think that if we can get a deal at the right multiples we'll do that. We have interest in continuing to grow through acquisition. And if you were to look at our performance, we went through how we spent our cash over the last couple of years. You can see, we obviously have a somewhat of a bias to reinvest in the business in terms of our capital expenditures. And I think that's more an outcome of what was a prolonged period of debt pay-down from 2006 through, let's call it 2016, so that we still have a target rich environment from both productivity, product quality and manufacturing capabilities to in-source. So it really hasn't changed anything Mike, but it certainly it's good to get this overhang, which I think was impacting the investment community behind us. So I'm very pleased with the work that the General Counsel and Martie's team have done to get us to this point.

Michael Wood -- Nomura Instinet -- Analyst

One final question, are you able to break up the volume and price split within the infrastructure organic growth and just roughly where price-cost was for the quarter?

J. Scott Hall -- President and Chief Executive Officer

I don't give it specifically but suffice it to say that, as I said in the prepared comments, performance and price exceeded the inflation for the quarter, but it only exceeded it. Let me put it this way, exceeded it less than covering last year's behind. So, if you recall last year, we've been tracking this price increase or we lagging still how much of the inflationary period have we lagged, have we recovered it over the whole inflationary cycle. And I can tell you we did beat it, in the quarter, but we didn't beat it by enough to offset the ground given up in fiscal 2018. So, while it was positive, it was slightly positive. But I don't want to get into giving specific numbers on price cost, so I think it just gives too much competitive information.

Michael Wood -- Nomura Instinet -- Analyst

Okay. Thank you.

J. Scott Hall -- President and Chief Executive Officer

Yeah.

Operator

Our next question is from Brian Lee with Goldman Sachs. Your line is open.

Brian Lee -- Goldman Sachs -- Analyst

Hey guys, thanks for taking the questions and good morning. Maybe first on the Krausz details. I know you're providing an updated revenue outlook including the contribution, just wondering how you're thinking about operating margins? I know you're reiterating the organic view but if you could provide a bit of a similar view, including the cross contribution. And then maybe related to that, any early reads on synergies or cost reductions or when we could think about getting some clarity around that as you move to the integration process?

J. Scott Hall -- President and Chief Executive Officer

Sure. So first, we reiterate that we think that in the long-run the Krausz's EBITDA margins are like our consolidated margins. I think you should know, there will be pretty much close to one another. I wouldn't say that even but they're close enough for what we're talking about. Certainly, the other thing I want to reiterate is that, Brian, as I said in the last call, you don't buy this business for the cost synergies. We haven't got a big plan to consolidate manufacturing businesses or anything like that. We anticipate operating in Israel for manufacturing, for many years to come. This is really a sales synergy play and we still see those opportunities to continue to grow both of Mueller's presence, the amount of products that we sell into the repair market, being complementary to what Krausz sells.

And conversely when we think about the channel, we think it gives us more channel synergies, gives us little more channel power frankly, to have more and more of what the big distributors are selling to municipalities. And we also think that we get some synergies from a spec position, where we can go in and provide complete repair solutions along with complete repair techniques. If you think about insert valves and couplers and the grips, and you think about restrained and hydrants. And there is a lot of things that we think that we could do with this, in the medium-term.

So we are highly focused on that and we've compiled a team from both sides, it's the integration team, in fact we'll be meeting with them later this week and we'll be reviewing the status of where we are, not just with the tactical things like payroll and things like that, but also the more important things customer facing things as they relate to product development, process development and bringing our process based manufacturing processes to bear their facilities, get them in our productivity programs and get a status update basically on where we're going both from a market and manufacturing point of view.

So, I think we're right now, right around day 32, sorry, day 42 and I think we're in really good shape as far as the team's ability to get the important things on the -- get important things up on their radar for us to complete and the integration team has been knocking them out one-by-one.

Brian Lee -- Goldman Sachs -- Analyst

Okay, that's helpful. I appreciate that, Scott. I guess just on the EBITDA comment and the -- the new guidance around 14% to 17% growth. I appreciate that context, but is that meant to for us to read in that, you're not necessarily anticipating any additional growth on top of the 79% adjusted operating income growth with Krausz embedded in the numbers for the full year?

J. Scott Hall -- President and Chief Executive Officer

The 7% to 9% was the organic, you guys can use the 7% to 9% organic in your model, then you get the EBITDA growth with Krausz. And the reason I get it that way and the reason Martie's talking about that raise, we haven't got the purchase price allocation figured out, so what the amortization piece looks like, at the adjusted operating income growth completed yet. And when we have all that work done with opening balance sheets and things like that, you will have a better idea on the operating income line, but the 7% to 9% you heard in the comments, please here that was organic growth and that the acquisitive piece of that, at the operating line will have to be post-amortization calculations for the purchase price.

Brian Lee -- Goldman Sachs -- Analyst

Okay, fair enough. We'll look forward to more details on that. Maybe one last question from me and I'll pass it on. You mentioned the price increases to cover inflation and rising costs. Are these in line from, if you could quantify to any degree in line with the pricing increases that you implemented around this time last year? And then, can you talk a bit to how much of this is to address the labor versus raw material inflation? I know last year a lot of it was on the raw's (ph), but it does seem like that could be reversing some this year. So how much of this is backward looking versus how are you thinking about your positioning around raw material costs as we move through the year? Thank you.

J. Scott Hall -- President and Chief Executive Officer

Yeah, so, just to give everybody a little bit of color, I think that what you're referencing is that the inflation on a -- as a result of brass especially with where the copper import has kind of steadied now, and we don't really see massive movements in copper prices from a year ago. But we still see significant -- better than high single-digit inflation in scrap steel. So the majority of our pricing activities when we're talking to our customers, the majority of our pricing activities are still driven by increases in scrap steel. That's probably the biggest offender right now. The labor piece of it, while meaningful in the kind of 3% range for our union employees and 3% -- 3.2% range for all other is a piece of it. I think labor is still such a small piece of our overall cost of goods sold, that the inflation impact is relatively small. And so when we're out talking to customers about the real biggest reason for these, what has been a fairly rapid increase in pricing over the past two years, it is primarily driven by raw materials.

Brian Lee -- Goldman Sachs -- Analyst

Okay. Thanks guys.

Operator

Our next question is from Seth Weber with RBC Capital Market. Your line is open.

Brendan Shea -- RBC Capital Markets -- Analyst

Hi, thanks. This is Brendan on for Seth, I was wondering, a couple of things here. As we look toward your dealers, any commentary or more color you can give on how you're feeling right now about your channel inventory levels?

J. Scott Hall -- President and Chief Executive Officer

Sure, I think that, you know inventory levels are probably a little bit higher as we go here in the second quarter. I think that, it's a mixed bag in terms of what's going on. I think we still got a lot of tailwinds, as you think about employments in the economy, you think about the Fed recently, kind of steadying their outlook for rates. So I think there is a lot of good things happening economically that give us hope. But I think the shutdown along with what has been a loss of -- fair number of construction days, in this polar vortex that we saw in the Midwest and then made its way east. I think we lost on average three to five construction days in there. So I would imagine that we have a little bit higher channel inventories as a result of what's been through January and this part of February, a little bit more difficult selling environment for the channel partners.

When you take the natural build up that happened as a result of the price increases in September, maybe there was $1 million or so more in the fourth quarter inventories. I think on average now you could say there is 10 days to 15 days, more in the channel. That's kind of where our thinking is.

Brendan Shea -- RBC Capital Markets -- Analyst

Okay. Thank you. And then the growth in the end markets, kind of -- you lowered the -- some of those there. When we think about the products that you sell into muni and into the residential and into nat gas, is there a significant -- not a significant, but a marked difference in the margin profile for those products? Are they relatively similar or we expecting a headwind or a tailwind toward a shift in mix?

J. Scott Hall -- President and Chief Executive Officer

Yeah, as I've said repeatedly, if you think about iron and in particular deep valves and hydrants, they would be the best products. And then down from there, you get into what we call specialty and brass kind of similar, and then the Technologies, having a fairly high fixed cost, as a result of still needing a lot more volume out of their manufacturing base. So that's how we think about the three tiers of margins that I've said that to investors in the past. But when we think about what impact that the end markets are going to have? I think as long as that muni hangs in there, we're going to be not experiencing a great deal of mix vulnerability.

What's changed and I want to be clear about this to everybody is the only thing that changed in our outlook is we've taken residential down a little bit into that low single digit range and that's basically reflecting what was -- a very disappointing December from a housing starts point of view. But we are still looking at inventory and inventory would give us encouraging future signs, it says, even at this levels we could see more land development. So while we have taken our housing start look down and we think it's cautious, we are also sitting there saying, that we know we're early in the land development cycle when they put in curd and sour, that's when they put in water. And as long as inventories kind of stay at these lower levels, I think there is still some reasonable hope that, that could recover in the last half of the year.

Brendan Shea -- RBC Capital Markets -- Analyst

Okay. Thank you.

J. Scott Hall -- President and Chief Executive Officer

Thank you.

Operator

Our next question is from Brent Thielman with D.A. Davidson. Your line is open.

Brent Thielman -- D.A. Davidson -- Analyst

Thanks, good morning. Scott, on the muni related market, low-to-mid single digit growth, I guess you've seen and you're talking about for this year, is that fairly consistent across the country? Have you seen state or regional trends in a much wider range? Just trying to get, is there any reason to think maybe, in territories Mueller plays and you could see something somewhat faster than that?

J. Scott Hall -- President and Chief Executive Officer

Yeah, I think that, that's a great question. But the way we think about it actually is more as it relates to size of population and age of infrastructure. So the, the big old cities New York, Philly, Boston still going to have, they are O&M spending, their operations and maintenance spending is going to be highly, highly predictable, because they have such a large infrastructure. The maintenance of that infrastructure is kind of a fixed number and we know that the rate with which they're going to have to do, let's call it both their repair and replace and there were emergency replacement. So there are large enough networks that statistically you can kind of come up with your own model.

I think the contractor driven business tends to be more demographically run, and think about that as housing starts and those would be in the growing parts of the --, let's call that infrastructure build out. Some of that is muni driven, as they make more water available, you think about places like Colorado, where there is lot of population growth and Utah, where there is population growth. Great population growth in Texas and the Southwest. Southeast, Southwest, kind of this been this hotbed, if you will of municipal spending in order to increase supply because they have such large population growth.

And then last but not least, you basically have what is a difficult environment for the shrinking cities. And you think about the (inaudible) and you think about more and more of their spend is going to emergency, so it's not proactive spending. It's the result of water main breaks or distribution leaks and things like that. And these tend to be having to spend more of their O&M maintenance budget on emergency repair. And that's gotten a little bit more lumpy, I think, that recent cold snap we just saw through the Northeast and the Midwest, it will be interesting to see if we see a spike in muni spending as more and more water main breaks and distribution breaks occur, when you see a regular frost, even you see these extreme swings and temperature.

So instead of calling it, kind of the migration pattern, I think you can say that you've got a really highly reliable base in O&M, you think about that as your old vibrant cities, New York, Boston, LA, Philly, that kind of thing. You have the kind of emerging demographic markets, when you think about the Southwest and the Southeast. And then you have this kind of lumpy piece on top, which is really going to determine the degree with which we have seen, how much muni spending goes up or down, based on kind of the more difficult demographics with population declines, but still meaningful infrastructure in the ground.

Brent Thielman -- D.A. Davidson -- Analyst

Okay. That's helpful commentary. The -- that the specialty valve business, that has the longer lead times, I know you mentioned that, that you were slightly positive on price cost. Are you still see a negative price cost comparisons there? Or you beyond that now in that business?

J. Scott Hall -- President and Chief Executive Officer

No, as I said last quarter we have in front of us, probably another six months, we had nine months is what I said at the last quarter, we probably have another six months at the end of this quarter. And that's as we make our commitments on those orders, we took that had that 9, 10 month lead time for those big projects. So with scrap steel where it is, with the elements that are subject to tariffs, where it is, if tariffs go up, even more in May as threatened. Those are all things that specialty valve business still has left to digest in front of it. But I don't expect when we -- to be frank, when we gave you our guidance, we anticipated making good on our contracts in that business, so that's rolled in.

Brent Thielman -- D.A. Davidson -- Analyst

Okay. And I know you're not providing segment level guidance. Is there any qualitative -- quantitative commentary about order trends, major wins and backlog and the tech side or I guess some sense of as we kind of model out that the growth in that business you would be thinking about sort of a prior three year average you can use going forward. Just some sense there.

J. Scott Hall -- President and Chief Executive Officer

Yeah, I can definitely give you some qualitative information. We expect that business to grow faster than the Infrastructure business. Just as you saw in the second quarter, those kinds -- sorry, first quarter, those kinds of growth rates, I think are to be expected. With that said, we are very happy that we were able to win business and continue to grow both our awards and backlogs year-over-year in the first quarter. I think in the technology business when you think about what's going on with Echo awards for the lead detection, both in East Bayamon (ph), San Jose, American Water places like that, along with the awards in the AMI business.

We expect that business to be a 20% plus business growth for us for a while. And we've got to continue to invest in the engineering cost and invest in the manufacturing infrastructure in order to make sure it's making high quality products for a long period of time. And take our let's call it our natural share in that space. At the same time they do that, we're starting to see for the first time, good growth on things like Hydro-Guard where we actually have pressure monitoring, communication system, where we'll actually flush hydrants and flush over pressure situations using the Technologies, radio infrastructure. You can have that available either in your AMI network or you can have it available over the cellular network.

So, as I've been talking about for some time, saying you're going to start to see Technologies products integrated into infrastructure, traditional areas we're starting to see that. Now we're starting to actually have, it's not much couple of hundred thousand here and there, but you're actually starting to see our customers understand the power of putting information in the Infrastructure as opposed to keeping it just at the meter point. So yeah, very, very positive.

I think the team has a long way to go. So I've resisted any segment calls I know before I got here. There were all these proclamations around or it will be breakeven by this point or breakeven by that point. What I want to get everybody level set on, is that we will invest in the technologies that we think will be key to making the infrastructure meter business and leak detection business, an integrated informatics company for our customers. So that's the investments we'll continue to make. And we need to put pressure sensing and turbidity or alkalinity or chlorinity sensing in the distribution network. And the only way we're going to do that is to continue to invest in the product developments in this segment. Hope that...

Brent Thielman -- D.A. Davidson -- Analyst

Okay. I appreciate the color. Yeah. Thank you, Scott.

Operator

Our next question is from Bryan Blair with Oppenheimer. Your line is open.

Bryan Blair -- Oppenheimer -- Analyst

Hey. good morning. Thanks for taking my question. I respect that the legacy Walter Energy tax and liability hasn't affected capital deployment strategy to date. But it certainly had some impact on your valuation in the credit, that's you've received for an improving balance sheet and what you can do with that. That in mind, I was hoping you could provide some color on trends in your deal funnel? And whether it's realistic to expect some more strategic M&A, Krausz as to come through in your fiscal '19?

J. Scott Hall -- President and Chief Executive Officer

Well, I think the most important thing, before I will get to answer your question, but the most important thing we need to execute on, as a team, first, is the successful integration of Krausz. It's fine to have these deal machines and we certainly have lots of the next deal in mind, but excellence of the execution means that when you go and spend $140 million that you're exquisite in your execution of the integration plan. And we have spent a lot of time as a senior management team involved in the day-to-day, the members of my executive leadership team, that are involved in the integration planning and activities, is the most important thing we have to do in the next three quarters. That is mission critical.

We are also going to be exquisite in our execution of the opening of the large casting foundry, you'll recall we talked about Chattanooga capital project, I think now about six months ago. And we do our weekly updates in our monthly project reviews as a senior leadership team around that, too. So to give you some color to answer your question, yes, there are more things in our deal funnel that we would do. All in line with the guidelines that I have outlined to you, all in the past, as they relate to geographic expansion, as they relate to bolt-ons as they relate to adjacencies. So the pipeline is still full of those things, and I do think we can get some deals done, where value will be in line with what we think we should pay.

But with that said, you shouldn't expect in the next 90 or 180 days a deal, as we have to do this growth thing well. And if I've learned anything in my experience is that just simply on-boarding companies and on-boarding companies and on-boarding companies as a strategy are generally leaves the heavy lifting to a later date, and that has to be done upfront. So you're going to see us acquire Krausz, integrate Krausz and acquire the next thing.

Bryan Blair -- Oppenheimer -- Analyst

Okay. That's very helpful color.

J. Scott Hall -- President and Chief Executive Officer

So shouldn't see too near. Then with that said, to answer your question directly, we still see a -- a fairly healthy organic investment, if you think about our CapEx environment as well, where we think that both cost and technology, flexibility could come from further investment there. So to the extent, that there is more CapEx that we could do, we're evaluating those opportunities as well.

Bryan Blair -- Oppenheimer -- Analyst

Alright. Very good. Thanks again.

Operator

Our next question is from Andrew Buscaglia with Berenberg. Your line is open.

Andrew Buscaglia -- Berenberg Capital -- Analyst

Hey guys. Just want to ask a -- maybe a little high level strategic one with regards to your technology business. First off, I -- metering specifically within that business for you is a bigger chunk of the piece of Technologies. How do you guys see yourself fitting into the landscape, given there is a significant amount of competition out there. There are players out there with a lot more market share than you have. So can you talk a little bit about why -- what's your plan to compete and how you view your pricing power relative to competitors, just given, again, how your share is the lot smaller?

J. Scott Hall -- President and Chief Executive Officer

Yes, so I think that, I can talk a little bit about how we got to where we are and that will hopefully help you understand where we're going. So I think that everybody who is larger than us -- for three players, I think you're referencing those are larger than us, basically all got their move. We were up in that Top 3 as a meter company, when private equity owned us, then the drive by AMR Technologies emerge, where you could just do a collection. And basically private equity on the business standpoint didn't invest in that technology. And so we had visual read meters, we weren't really a player in AMR. And we basically didn't win any new cities. So we missed an investment cycle and we came up with the AMI products as they related to Mi.Net, Mi.Host, all of the radio technologies for AMI.

Basically the strategy has been, if we can win AMI at faster than the market is growing, we will eventually get back to where we were, before we missed the AMR investment cycle. And we're doing that. So I'm happy to report that if you look at most of the high-teens, low '20s depending on what report you look at the growth for AMI adoption in the market. And you look at our growth, our growth in AMI products is actually significantly higher than that.

So we're taking share in AMI, albeit from slow numbers, but that's not the important thing. Let me say it again, that's not what's important. What's important is to have collectors out there, that are agnostic and what information you're sending them, whether it's a meter reading or water temperature or whether it can cure a leak from a fire hydrant Echologics DX node or it's communicating over an Echologics DX node or it's a pressure sensor or is it turbidity sensor and it's integrated. So if you buy our system, you are buying the ability to not just read and build your meters, but you are buying the ability to listen to your network, and to have pressure sensors in your network and to see what your water quality is in your network. And you only have to invest once. You don't have to go buy a SCADA system. You don't have to do.

So as we get this Integrated Technologies platform, delivered to customers, we will grow faster than the market. And the people that continue to define the information infrastructure, as a meter only market. I believe will leave the potential behind, potential for growth and the potential to perform analytics on networks. And that is what we believe we're investing in, that is why I have been steadfast in my refusal to continue to look at the Technologies segment, as anything more but the linchpin to the future of our infrastructure business, being more than just iron, in the functional thing. It will actually be information points that will allow you to analyze your network. And that's why I believe we are different than everybody else, because we are the only player who can marry intelligence and infrastructure management with a software platform and with communications technologies. We are the only people who can do it, so we think our offer is compelling.

Andrew Buscaglia -- Berenberg Capital -- Analyst

Yeah, that's a really helpful answer. And presumably I mean it sounds like the leak detection business for you is, first of, it sounds like you guys have a higher market share than most think, I think. Secondly, that seem to be, like you said, the kind of the linchpin of the whole thing. So presumably you would be probably investing in that area specifically over time. If it means, whether it's M&A or internal investment? So what areas within leak detection are you -- were you missing within that specific segment, that you need to invest in still?

J. Scott Hall -- President and Chief Executive Officer

Yeah, that's a great question and it's one that I'm not going to dodge on you. I'm simply going to say, I would like for instance have a hydraulic model, so (inaudible) buy software that had a hydraulic modeling. But then at the same time, I would like to do that, I'm going to tell you straight up that we are dependent on a lot of the consultant community, who have their own hydraulic models, that provide those services, that go in and look at 1,000 miles of pipe for municipality. And we are dependent on them to say come and use us for our pipe condition assessment.

So when you think about that inverted funnel with hydraulic modeling at the top and then pipe condition assessment and then lower in the pyramid, you've got, your other leak detection methods where you put devices out there and at the very point, you can send crawlers and image the insides walls of pipe. Those are all part of telling me what the health of Infrastructure is. Whether go from a theoretical to an averaging method and then to a pinpointing method to say. Here's where all your pinpoints are and your pipe walls are, here is where your leaks are, those kinds of things.

All of those are in scope for our investment, but each one of them come with their own challenge. For instance, at the very end point where you get into imaging pipe, whether you sent a crawler or a ball or whatever up a pipe, those are service intensive industries where you need crews, you need trucks, you need geographic diversity, you need to be able to carry those salaries through the low periods, as well as make money through the half -- full employment periods. So they all have their own challenges and each one of those investment opportunities to us, is something that we have to look at and it has to make sense on its own, because to the extent that it can actually be accretive fairly quickly, we'd be interested, but to the extent that it can't, well, then we would probably be better-off building from an organic perspective.

And so we look at that investment opportunity, if you will from both angles, so yes, we remain interested in the space. No, we can't do it just really -- nearly there are market dynamics involved and then there is also the economic dynamics that we have to take into account.

Andrew Buscaglia -- Berenberg Capital -- Analyst

Okay, got it. Alright, those are great answers. Thanks for the help.

J. Scott Hall -- President and Chief Executive Officer

Thank you.

Operator

Our next question is from Andrew Cohen with Northcoast Research. Your line is open.

Andrew Cohen -- Northcoast Research -- Analyst

Hi. You kind of touched on this, but I just looking for maybe a little more clarity and I hope I'm not putting words in your mouth. But when the holding furnace went down last year, there was kind of the impression that there was perhaps some CapEx catch up, that needed to be done for prior years. Obviously, there is always more that you want to do, but do you feel like what's in places up to date or along those lines?

J. Scott Hall -- President and Chief Executive Officer

No, I still think we're target -- I don't want to give anybody the impression that the elevated levels of CapEx that we've experienced is over. As I said about, I think it was a year ago, I said Andrew, that I think we still have some upgrading to do. I'll give you for instance, and I'm not saying we are doing this straight away. But if you look at coreless furnaces and state-of-the-art in foundry today, you would look at our energy usage and look at our water footprint and look at our non-peak energy usage and still say, Technology to be invested in your furnaces is something that you should consider. And it's something that I think will pay for themselves. We got to look at those economic models, I would expect to do that over time, or over the coming three to five years.

When I look at where we are from a machining point of view and that is a repeatability as far as phase quality, things like that, I would expect to continue to invest in that. So there is a target rich environment out there. The limiting factor is our capacity to implement. I'm not going to sit here and say we can do it all and do it all greatly, in a matter of a quarter or two. I think we have a multi-year CapEx plan in front of us that remains to be fully flushed out. But I've been very pleased with where we are from a productivity perspective. If you think about the last two years, we have hit our -- kind of 100 basis points target that we talked about. We've had some headwinds with inflation and other things that muted it, but we have been able to get the cost savings as a result of making intelligent investment in our manufacturing footprint. So I continue to think that we have some opportunity there.

Andrew Cohen -- Northcoast Research -- Analyst

Thank you. That's helpful. I guess the other question I have and just may be tougher to measure, but I had to sit through the middle of this polar vortex and you did mention that it, knocked some construction days out. But I would think, longer-term, not just water main breaks, but leakage opportunities, do you see this as something that's ultimately going to be a positive for business or negative for business or how you guys looking at this incident (ph)?

J. Scott Hall -- President and Chief Executive Officer

Yeah. So all of our data would indicate that you're right. In the quarter, it's going to hurt business. And beyond that quarter it's actually going to help business. Whenever we see large swings in temperature, I think last year's data in St. Louis, as we saw the intake temperatures and the Mississippi River get down into the high 30s. The amount of pipe breaks troubled, this is well known science that the more you vary the temperature of the underground and the more rapid that temperature swing takes place, the more damage it does to the underground infrastructure, which unfortunately is good for us, because it drives through replacement cycle, it actually speeds up the replacement cycle. And so it should be a positive in those areas impacted in the long-run for the business.

Andrew Cohen -- Northcoast Research -- Analyst

Thanks very much.

J. Scott Hall -- President and Chief Executive Officer

Thank you. So I think that's 9:59, I think we're right at the end there. So I'd like to thank everybody for joining us this morning. I'm very happy with the solid start to 2019, 8% organic consolidated sales growth and a 20% plus kind of EBITDA growth, where all things that I think were testament to execution in the quarter. Very happy to have finally gotten this Walter Tax thing where we could shed some light on it. And to mention it for all of you, because I know it's been top of mind in the past. And I think the $37.4 million, which is inclusive of the years 1984 through 2016, can finally put this in perspective for our investors, because it was something always asked, a great deal. I think we're really excited about where we are taking the Company and everything we can achieve and so I just want to thank you once again for your interest and hope that you have a great week. We'll talk to you next quarter. Thanks.

Operator

Thank you for participating in today's conference. All lines may disconnect at this time.

Duration: 61 minutes

Call participants:

Whit Kincaid -- Senior Director of Investor Relation and Corporate Development

J. Scott Hall -- President and Chief Executive Officer

Marietta Edmunds Zakas -- Executive Vice President and Chief Financial Officer

Michael Wood -- Nomura Instinet -- Analyst

Brian Lee -- Goldman Sachs -- Analyst

Brendan Shea -- RBC Capital Markets -- Analyst

Brent Thielman -- D.A. Davidson -- Analyst

Bryan Blair -- Oppenheimer -- Analyst

Andrew Buscaglia -- Berenberg Capital -- Analyst

Andrew Cohen -- Northcoast Research -- Analyst

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