Mueller Water Products Inc (MWA) 2007 Q1 法說會逐字稿

Welcome and thank you for standing by. At this time, all participants are in a listen only mode until the question and answer session of today's conference. I would like to call over to your host for today, Ms. Martie Zakas. You may begin.

Good morning, everyone. Thank you for joining us for our first conference call as a stand-alone publics company. Mueller Water Products currently has 114.6 million shares trading on the New York Stock Exchange, as a result of Walter Industries -- the previous parent company -- distributing our stocks to its shareholders on December 14, 2006.

As you know, yesterday afternoon we issued our first quarter press release, reporting earnings from Mueller Water Products for the period ended December 31st, 2006.

This morning we have with us Greg Hyland, our Chairman, President and CEO; and Jeff Sprick, our interim CFO and Chief Accounting Officer.

Within our press release and on this call we made and may make references to certain non GAAP financial measures which have directly comparable GAAP financial measures. These non GAAP measures are provided so that investors have the same financial data that management uses with the belief that it will assist the investment community in properly assessing the underlying performance of the companies for the periods being reported.

The reconciliations between GAAP and non GAAP performance measures are reported in the supplemental information within our earnings release and are provided in accordance with Regulation G.

This morning, when we use the term EBITDA we are referencing the term adjusted EBITDA which includes acquisition and plant closure cost adjustments in fiscal 2006. You'll see these numbers provided in the press release. Additionally, management will discuss forward-looking statements that were made in yesterday's release and may make these and other forward-looking statements.

Please see the non GAAP disclosure and Safe Harbor language contained in our press release, SEC filings and slides presented today. This morning's call is being recorded and webcast live on the Internet. The archived webcast as well as the corresponding slides that we are presenting this morning will be available on our website which is muellerwaterproducts.com for a period of approximately 30 days.

After the prepared remarks will open the call to questions from our dial-in participants. I will now turn the call over to Greg.

Thank you, Martie, and good morning, everyone.

First of all, thank you for joining Mueller Water Products for our initial earnings call as a stand-alone company. As everyone knows we have successfully completed our spinoff from Walter Industries on December 14, 2006 with the remaining 75% of our shares distributed to Walter shareholders.

This morning we will talk about the financial and operational highlights for the quarter, discuss the status of our current initiatives and provide some additional color on the key drivers and the outlook for our business.

In the quarter just completed, we were pleased with our ability to increase EBITDA margins versus prior year despite a drop in revenues. Our ability to do so was primarily attributed to two factors. First, the success of our synergy plans as we reduced fixed costs and, secondly, our operational agility. We continue to make excellent progress on the implementation of our synergy plans as we see production at two plants and initiated the closure of a third manufacturing facility during the quarter.

Our current annual run rate for synergy benefits already exceeds $40 million as of December 31st; and we are confident that we will achieve the high end of the $40 to $50 million range by early 2008. Synergy benefits recorded in the income statement during the quarter were approximately $10 million.

At this point let me turn the call over to Jeff who will discuss our results for the quarter in more detail.

Thanks Greg.

Mueller Water Products revenues for the first quarter ended December 31st, 2006 were $411.9 million, down $68 million versus 2006. Overall our revenue results were affected by several factors. Notably, a decline in housing market partially offset by higher pricing.

In addition the first quarter fiscal 2006 results included approximately $30 million from ductile iron pipe sales associated with Hurricane Katrina. Consolidated operating income from Mueller Water Products or the quarter was $49 million versus a loss of $39.5 million in the first quarter of last year. Adjusting for certain acquisition and plant closure costs in the first quarter of fiscal 2006, operating income declined by $9.9 million versus last year.

However, our 11.9% operating margin remains comparable to last year. As well, our EBITDA of $73.4 million has declined $9 million but our EBITDA margin was slightly higher versus the same period last year, due to achievements resulting from our synergy plan, higher pricing and other plant cost reduction initiatives.

I will now address the results by operating segment. Revenues and operating income for the Mueller Co. segment were down primarily due to lower volumes. As you may recall, during this quarter last year our order boards were full trying to keep up with demand driven by all-time high residential construction volume. Valve and hydrant shipments for the first quarter 2007 were 15% lower than the first quarter 2006, where we entered that quarter with a very strong backlog. Additionally operating income margins were lower in the quarter as a result of a stronger product mix in the first quarter of fiscal 2006, primarily driven by a municipal water district project.

Mueller Co. saw pricing improvements of approximately $11 million during the quarter as price increases implemented last year have held and we are covering the increases in raw materials costs. First quarter fiscal 2007 also includes revenue in operating income, relating to the U.S. pipe valve and hydrant product lines that were transferred to the Mueller Co. segment on January 1, 2006.

And, finally, volume declines in the valve and hydrant segment during the quarter negatively impacted the operating income margins as compared to the fourth quarter of fiscal 2006.

Turning to the U.S. pipe segment, our ductile iron pipe revenues and EBITDA were lower during the quarter primarily due to approximately $30 million of revenue in the first quarter of 2006 when ductile iron pipe was substituted for PVC pipe as a result of Hurricane Katrina. We also transferred Irongate valve and hydrant production to the Mueller Co. segments which represented approximately $14 million of revenues.

Pricing increases and an improved product mix partially offset these events. The improved product mix is a result of a focused strategy to emphasize and sell higher margin value-added products which enable us to maintain margins on lower volumes. These products include our mechanical pipe locking system known as the [M. J. Field Lock] and the [TR Flex ductile iron pipe] used in horizontal drilling applications.

Despite the volume decline, the EBITDA margins at U.S. Pipe was in line with prior year. Additionally, first quarter fiscal 2006 operating income included the benefits from valve and hydrant sales and increased volume associated with Hurricane Katrina.

Moving on to our anvil segment, revenues for our commercial construction products business were flat as benefits from price increases implemented last year were partially offset by lower volume. EBITDA was positively affected by $1.2 million related to dumping duties received from the federal government during the quarter. Our EBITDA margin improved to 14.1% during the quarter, up from 12.1% the prior year.

The Company's effective tax rate for the first quarter of 2007 was 40.5%, in line with our expected tax rate range of 40 to 42% for fiscal 2007.

Turning to our balance sheet, inventory increased $37 million or 8% compared to September 30, 2006. These increases were partially related to level loading our plants, based on seasonal demand patterns. As Greg mentioned, we are closing several facilities and need sufficient inventory to cover demand during the transition.

Our Net Debt -- defined as total debt less cash to LTM EBITDA ratio -- is currently 3.1 to 1. As we have stated in the past our goal is to reduce that ratio to less than 3 to 1.

With that I will turn it back over to Greg.

Thanks Jeff.

As you know we have decided not to issue specific earnings guidance. The market in which we compete has excellent long-term dynamics and our team remains focused on delivering shareholder values. We will not miss long-term opportunities by only focusing on the short-term. We are committed to giving the investment community relevant information to understand our business, our management focus, the environment in which we operate, and our potential.

As we consider what is happening in the marketplace, we know that the slowdown in residential construction has impacted our volumes for the first quarter. As we have said we estimate that 40% of our revenues are derived from private investment and water infrastructure for new residential communities. Housing started to decline 23% from the peak of our first quarter 2006.

As you may recall last year we were in an environment of rising commodity prices which substantially impacted the cost of our raw materials. We implemented a series of price increases in the May June timeframe in order to cover these costs. Consequently our bookings in the third quarter were significantly higher than prior years as our distributors placed orders in advance of these price increases. We told you on last quarter's call that we had seen a buildup in our distributor inventories as we shipped orders received in the May June timeframe throughout the fourth quarter.

While bookings for our water infrastructure products were down in the first quarter of 2007 over last year, the largest declines were in October and November. December was close to being level. In January, bookings were up over prior year. We are encouraged by this trend which we leads us to believe distributors had worked through the inventory buildup which was exacerbated by the continued decline in housing starts.

Based on our level of January bookings, we are led to believe the distributor inventories are now more in line with market activity. However, distributors could be cautious if there are further housing starts declines.

We also believe we will benefit from projected spending increases in the repair and replacement market as we move into the construction field. Again, as you recall on our last conference call, we referenced the American Water Works association forecast that projects repair replacement spending to grow 11% in 2007.

In fact our public works flotation activity increased 10% during the first quarter in our U.S. pipe segment.

We anticipate solid growth in commercial construction and oilfield markets which are the primary drivers of our anvil business. These markets account for 28% of our overall revenues and various sources project growth of 6 to 7% in spending in these markets.

As I mentioned earlier, we implemented a number of price increases in fiscal 2006, primarily in response to rising raw material costs. Current prices are now covering the increases. In December we announced a 5% increase in valves and hydrants and an 8% increase in our brass products. In January we announced an approximate 4% increase in ductile iron pipe.

We are seeing positive signs on the raw materials front. Cost of our primary raw materials, scrap iron and brass ingots to decline from their 2006 peak. Scrap iron, used in manufacturing ductile iron pipe, is currently priced at $210 per ton down from a high of $249 per ton in 2006. Brass ingots is currently priced at $2.61 per pound down from the 2006 high of slightly over $3 per pound.

The synergy implementation actions we have taken during fiscal 2006 were instrumental in our operating performance and enable us to improve our margins despite the revenue decline in the first quarter. We reduced fixed cost [in] 2006 and we will continue to focus on this effort in 2007.

We are in the process of migrating our James Jones service (indiscernible) and hydrant facility in California to our Decatur Illinois plant. We have accelerated transferring production of several anvil product lines from Canada to operations in Pennsylvania. We are targeting the completion of the consolidation of our Columbia, Pennsylvania foundry operations early in the third quarter. And finally we eliminated one anvil distribution center.

In addition to the synergy achievements on the manufacturing side, we are focusing on the combined purchasing power of our businesses, certain cross selling of products, and we will continue to evaluate other consolidation opportunities.

As mentioned in previous calls, we expect corporate spending of approximately $40 to $44 million and capital spending the range of $70 to $80 million. With the cash flow generated through business, we will look to do the following. Invest capital for future growth in efficiency, such as our recently announced mini-mill plant at U.S. Pipe. This investment will significantly improve production efficiency and meet the challenges of the evolving marketplace.

We will repay debt as we look for opportunities to lower interest expense and enhance operational flexibility. We will grow through acquisition and pay dividends. With respect to share repurchases we expect to find other priorities for our use of cash and are currently restricted under our debt agreement.

As you know, we recently acquired Fast Fabricators in order to complement our broad portfolio of water infrastructure product. Fast Fab significantly increases our ability to serve the water and wastewater treatment market. This market has good growth characteristics and uses high margin products. To achieve deal synergies we plan to close the U.S. Pipe fabrication shop at our Bessemer plant. This will take advantage of Fast Fab's lower cost and more efficient location. In addition, over time we will supply Fast Fab's pipe needs from our own manufacturing facilities and reduced its reliance on other pipe manufacturers.

We look to value acquisitions at a trailing EBITDA multiple less than the current Mueller trading multiple. In the case of Fast Fab we were successful in meeting this objective. We will continue to look at acquisitions opportunistically and in a manner consistent with the Fast Fab acquisition. It means we will target businesses that expand the depth and breadth of our products and services, provide synergy opportunities and meet our financial hurdles.

Let me close by saying that I am pleased with our operational performance in the first quarter and how we are positioned for the future. I remain very positive about the opportunities for Mueller Water Products. We have committed employees, a strong competitive position in an attractive industry, and the strategies in place to be successful long term.

This complete our prepared comments and we are now opening the call to questions.

(OPERATOR INSTRUCTIONS). (technical difficulties)

I have a couple of questions for you. I guess, first, on the demand side at anvil given its commercial focus would have expected it down a little bit better in this environment. Is there something unusual there that is holding the business back?

Keith, no. We don't see anything unusual. In fact what we saw if you look at this quarter over the previous quarter our imported products were up 30%. And we have always indicated that we expect to see a continued shift in the marketplace from our domestic products to our imported products. So, one, imported products go out at a lower price which would be reflected in our revenues; however we are still retaining the business.

Secondly, we did see in December a drop-off in our oilfield products. We think this is just a very temporary. We see nothing that would indicate that we are -- you know that we would not see the growth in demand that we expect.

Also when we look at our first quarter of our fiscal year 2006, we had a very, very strong quarter. So we had a tough comparison year over year. So to get back we have not seen anything in the market that concerns us. Nothing relative to our competitive position; and we are still confident as we go through the year that we will see the growth in spending in that market reflected in our overall performance.

Michael Gaugler. Please state your company name.

Hello Michael?

The Fast Fab acquisition. I was wondering what really drew that to you? Was it just an expansion of your product lines or were there any technologies like the coatings that were really appealing, that you thought you could maybe take across the rest of the business lines?

Thanks. That is a good question. I think the primary reason was, one, that Fast Fab over the years has developed a very strong competitive position in the value-added business of pipe fabrication. As you know, that treatment plants are a big user of fabricated pipe. It is a value-added product and it just broadens our basket of services that we offer to that very important market segment. And it is one where we have had limited participation, so it improves our participation.

Two, your point about coatings is a very good one. I think as we looked at the acquisition and continued to refine our due diligence that surfaces as I think in the long run a -- probably an opportunity that looked very I would say exciting as we continue to see the use of different coatings in the treatment facility. Especially glass lined coatings that Fast Fab we believe has really worked out the process to do this very well.

So we do think there is upside long-term. But I think in the immediate term that will take a lot more selling effort, marketing effort. Obviously when we bring that product within into the U.S. Pipe salesforce we've increased the number of feet on the street, so to speak, to be able to promote those capabilities. So as I said that's not something I think that we will see an immediate contribution in the next 12 to 18 months, but we do see that as a long-term growth potential.

Then, finally, I guess just to reiterate what I said in our prepared comments, that this also is a very nice outlet for our manufactured pipe. It will help us absorb overhead and so on.

So I don't know if that answered your question, but I guess the short version is that, yes, their linings capabilities we think will offer long-term growth potential. It is not one that we would expect to have significant contribution probably in the next 12 to 18, 24 months.

(technical difficulties) from First Manhattan.

I have two comments and one question. My first comment is, welcome back Martie. Second comment is, I hope being public is as much fun for you as it is for most people. We will se. And third philosophically how would you like investors to look at your Company in terms of understanding the key metrics?

I understand that you don't want to give guidance because it's new and this, that, and the other, but just for those who are trying to hold the shares on a long-term basis and understand better what the demand drivers are. The things that you look at. Could you maybe spend a minute or so just giving us a little bit of an education on how to maybe look at your Company in a way that makes sense?

Sure. When you look at our business over 70% of our revenues come from the water infrastructure marketplace and water infrastructure that we defined from the source of water through treatment, through delivery, back to treatment again and into discharge. We have major market share products throughout that system. From the ductile iron pipe, from the valves that go into the treatment facility, from the hydrants outside -- hydrants outside in the system as well as the valves underground. We have two primary drivers in demand for water infrastructure.

That is, certainly, new residential construction. When a new obviously new development goes in the infrastructure needs to go in. So that accounts as I said earlier in our prepared comments for 40% of our demand. So that is certainly a key driver.

The second and one that we expect will continue to become a bigger percent of our overall demand is the need for investment in the upgrading of the existing infrastructure in the U.S. We reference from time to time a variety of studies that all come to the conclusion that we are reaching a point in United States that is going to require significant investment in repair replacement.

So those two are the primary drivers of our topline for our water infrastructure products. Now if you take that down one step further you look at our market share, we are No. 1 or No. 2 in all of those products which puts us in a very good position when it comes to repair replacement. We find municipalities tend to continue to want to deal with -- install the similar or the same products they have in their system.

So that puts us in a very good position on the repair and replacement side. So on the demand side, our drivers are going to come from those two sources.

Now when you look at our product side and again we have some products that are very, very high margin and can in fact account for some of our swings from quarter to quarter, based on what happened for demand in those products. Jeff referenced in his comment that we saw a 15% decline in our valve and hydrants business this quarter.

That will really -- that can clearly have an impact on our overall margin percentage and if you look at it year over year or if it's sequentially, but when you look at 2007, I think that we are seeing somewhat unusual characteristics in the market because we are coming off an all-time high of 2.2 million housing starts. Dropping to I think the current forecast is something like 1.4 or 1.5, around that rate.

So I think that we will see in a period like this a drop-off from year-over-year. I think that, typically, that would be somewhat muted and we would expect to say on average 8, 9, 10% growth given what we would I think expect to see in the normal dynamics of housing the residential housing construction, as well as repair replacement needs. So clearly the drivers are going to be the investment in repair and the water infrastructure and, probably for the foreseeable future, the primary driver of that will be the residential construction.

And just one other quick thought is, to what extent do you have backlog or -- I know municipalities typically don't move very quickly but how do you run your plants really to that part of your business just to understand that as well?

Our backlogs at our Mueller facilities -- and that's where we manufacture our valves and hydrants --- typically run into two to three week periods. About two, to three weeks -- sorry, time frame. 90 to 95% of our products under Mueller branded products go through distributors.

So we usually have a pretty short visibility relative to the backlog and future shipments.

Under U.S. Pipe, our ductile iron pipe business, that tends to be six weeks. So we don't have for the most part, our water infrastructure product, long visibility. So the distributor is very very important because they will tend to carry the inventory to meet that short delivery requirement at the municipalities or the contractors. And that's certainly the role that they play when you look at the channel dynamics.

Okay. I will get back in the queue because I just wanted to understand one other thing about (MULTIPLE SPEAKERS)

I do want to -- for those to understand we do have some distinct seasonality in our demand too. As you'd expect when you get to the construction season and most of the country between April and the October time frame, that's when we will see a spike in our revenues. So those are some of the dynamics that affect the demand for our products and hopefully that provides some insight.

Although you used distributors, they place -- the municipalities placed the order with you or do I not understand that?

You'll see for our valves and hydrants, typically, the municipalities will place the order with our distributors. On our ductile iron pipe and about 60% of the -- probably about 60% of our orders will be placed. Those municipalities will place those orders on our distributor. The other 40% will come direct to us.

Thank you.

Joel Tiss from Lehman Brothers.

It's actually Henry Curtin in for Joel today.

Question for you on -- you started to address this in the last question but on the seasonality of the business could you talk a little bit about from an EPS standpoint or EBITDA standpoint, how that would normally progressed to the year if it were just a normal year in the cycle? And then this year how it might progress otherwise from that?

Typically we will find our third and fourth quarters will be our biggest quarters. That's obviously when we are making the majority of our shipments and then that flows through -- obviously flows through the earnings. So, typically, we would expect our quarter, first quarter of our fiscal year probably to be our third, second quarter of our fiscal year probably be our lowest quarter and then it will shift between the third and fourth quarter as to which is -- which will be higher. Typically they are pretty close to being equal.

This year, we may see a little bit of difference in that. Primarily because as I alluded to in our prepared comments, that we think that what was impacting our revenues and our bookings in the quarter just completed was some inventory leveling on our distributors. We saw a big increase as I mentioned in the June May timeframe of 2006. We shipped those in the fourth quarter.

What we think we have seen is a little bit of shifting from typical first quarter demand into the fourth quarter of our fiscal 2006. So as we sit here today, that we think we may in fact see a slightly different profile and expect this quarter may be our lowest quarter.

Thanks. That was helpful. I guess getting to that inventory question is, there anything in your toolbox right now where you would seek to minimize the distributor inventories? And I guess on your own inventory levels I saw that your own inventory levels came up this quarter. Is there a reason for that seasonally based on the order pattern coming in?

There is. When we will typically build inventory in our first quarter at Mueller, this is our practice. And as we just talked about our seasonal demand, actually, if you look at we don't have enough manufacturing capacity to meet our peak demand. So we have to build inventory in the slower periods.

This is especially true for the first quarter since we can't go back and recapture that capacity. So we build to our schedule. What we think our demand will be for the year in the first quarter to make sure that we are prepared.

Secondly, when you look at the quarter just completed we were building some inventory to be prepared for the plant shutdowns that we referred to. This is an area actually that we got behind last year and in fact there was one point where we had a purchase product to meet our customer commitments, as we were in the process of closing these plants.

So when you compare to our inventory build versus last year and versus the quarter sequentially, last year, we had very very strong demand in our first quarter and we got behind the curve. We, actually, in the second quarter last year saw a jump in our overtime of 30%.

This is not good for a manufacturing facility. You try to typically have that somewhat level because inefficiencies creep in. So what we did, going for this year, we built our forecast. And then we will make adjustments as needed as we see what happens to demand in the second and third quarter.

But, again, it all gets back to that we can't recapture that capacity once we let it go by. So in the first quarter that we are going to -- we build that inventory.

[Keith Hughes] from SunTrust.

Yes. Sort of a follow-up question while we are discussing inventory. The extra inventory you discussed in the quarter, what product category is that in?

You'll see it primarily in our Mueller branded products. So that -- are you talking about our inventory build?

Yes. That was what you discussed in the prepared comments.

More than our valves are hydrants as well as the -- in preparation for the closure of the James Jones facility so some of the brass, some of our brass products too. But we will have seen due to the primary build in inventory for Mueller branded part products and what gets into the products that are most susceptible to seasonal fluctuation, and that is our valves, and valves and hydrants product line.

Is the -- on that business, are we going to have to be running lower production rights to work that down in the second quarter?

We will have to -- that is something that we obviously look that. We monitor very, very closely and we will have to make that decision as we see bookings in the February and March timeframe. As I said that we were very encouraged with the level of bookings that we saw in January and but we will watch this. We will have to watch that very closely and we may very well make a decision that to cut back some production and cut back inventory in the second quarter.

(OPERATOR INSTRUCTIONS) At this time I show no one else in queue. There is one question now. One moment.

[Robert Maloney] from Morgan Stanley.

Given that you look to be well ahead of plan on your operating synergies I was surprised to see that you didn't increase your synergy guidance. Should we infer from that that most of the synergies have already been realized? Or is there a good chance that that number is coming up?

Bob, good question. I mentioned in my comments that we were always looking for additional consolidation opportunity, but I think when you look at what we implemented in 2006, we closed some of the bigger factories. The biggest was certainly the U.S. Pipe manufacturing facility in Chattanooga. That is probably -- that is certainly the biggest contributor of our synergy benefits.

So I think as we go along we are -- we will have less of an impact on our actions as compared to the actions implemented in 2006. But as I said we are confident in being at the high end of that range and continually analyzing where we are. And if we feel comfortable that we have an opportunity to exceed that, we will certainly let everyone know.

Both corporate expense and interest expense came in well below your guidance run rates. Maybe you can tell us a little bit about what your other deltas in the quarter and what we should expect for the remainder of the year?

I will let Jeff answer that one.

Corporate expenses were lower than we would expect the annual run rates to be during this quarter, primarily as to ramping up the corporate staff and dealing with the separation from Walter Industries. So we would fully expect the corporate expense run rate to hit that range of guidance that we gave in the call.

With respect to interest expense, there's some opportunity that we may be able to come in a little lower over the course of the year, but I think we are comfortable with the range that we have right now.

How should we think about the corporate expense ramp as we walk through the four quarters here -- or the remaining three quarters?

A tough question to answer. A lot of it has to do with a few open positions that we have, and as we are working through our transition services arrangement that we have with Walter Industries as well as a number of other expenses that will occur as it relates to our Sarbanes-Oxley expenses as we continue to ramp up and see if we become compliant by September 30th, 2007. So I would say it would be a gradual ramp up into that run rate by the end of September of 2007.

Now one for Greg here. During the quarter I saw that anvil benefited from $1.3 million of antidumping duties. Is this going to be a recurring part of operating profit or should we think about this as a onetimer?

Bob, we will -- I think you can -- it's more of a one-timer. This actually goes back to antidumping suits in 2001. We had a favorable judgment in 2003. We saw -- as we saw in this quarter the liquidated duties will be received through 2007. Our best guess right now, though, is that we saw that the payment that we just received probably will do it for that suit.

Maybe you can talk a little bit about the competitive pressures you are feeling there? I know that imported products have been a competitive threat. Is that any better or worse than it has been in the past?

No, Bob, I think we continue to expect to see this shifting into demand in the U.S. markets more to offshore source product. And in fact, as I mentioned earlier in an earlier response to one of the questions that our imported products shipment were up 30% year over year. So we participate in that market by virtue of the acquisition that Anvil made in 2004 and we expect that we will probably continue to have a greater substitution or substitution may not be the right word.

But we would expect to see that we will have a greater, an increasing percentage of our revenues from products that came in from offshore.

Does that mean you are going to need to ramp up CapEx and the facility in China?

I think that primarily we will probably do it from using other people's manufacturing operations. We may be bumping up our sourcing activity so our investments will be more on the human capital side.

It sounds a little bit like price cost has improved pretty substantially since last quarter. That said, are you at parity in each of your businesses at this point?

We believe we are. We saw positive contributions in this quarter on the brass ingot. I think if you look back at 2006 that was the one raw material cost component that we got behind because it increased so significantly. We believe we are at parity. From what we have seen, we are at parity in the quarter we just completed.

On the U.S. Pipe side I think that we have been close to being to parity probably for the last several quarters. Because that is one where price increases flow through pretty readily. Those that business tends to be more related to different projects. We quote each project and that quotation generally reflects what we expect our scrap iron costs to be.

So we are typically pretty close to parity in that business and we believe we caught up on our Mueller branded products.

Can you remind us how much of your metals exposure you typically hedge and maybe when we can expect to see the impact of lower copper costs dropped to the bottom line?

We don't hedge. We don't hedge our raw material purchases. It is very difficult on the scrap side. We elected not to do it on the brass ingot side. So we think we're in a positive position. As we said last year that we had a 22% price increase in brass products between May and June and, typically, we have been successful in being able to hold onto those price increases. And we have seen a drop as I referenced in my prepared comments in the cost of brass ingot so we think that is an opportunity for us in fiscal 2007.

One final question. I didn't realize that Jeff Sprick was the interim CFO. Are you in the process of trying to find a new CFO? And if so where do you stand on that process?

We are. We announced in December at our spin that Jeff was going to take the full-time position of our Chief Accounting Officer and that we are I think we have a couple of very strong candidates. And we would expect to roughly to be making a decision soon.

(indiscernible) from Jeffries.

Most of my questions have been asked. You guys have got some fairly expensive subordinated debt out there. Are you able to buy it in the open market? Are you inclined to and is it allowed under your bank covenant?

I will let Jeff answer that one.

Right now there are some significant prepayment penalties associated with trying to repurchase that debt. Particularly the 14 3/4% debt as well as the 10% notes. One of the things that we are obviously always continually evaluating is whether or not it makes sense to try to refinance all the (indiscernible) of the debt or portions thereof to reduce our interest expense on a go-forward basis.

So we are actively working with, have been and are always actively working with our banks to determine if it makes sense to refinance those portions of debt.

Can you buy it in the open market?

We can't and there are some significant prepayment penalties associated with doing that.

Andrea Wirth from Robert Baird.

Just wondering if we can dig a little bit into the individual markets. It sounds like it's based on anvil commercial construction would probably flat for you in the quarter. The repair replacement was probably up 10. So would you guess residential is probably close to down 20 in the quarter?

That can be very difficult for us to ascertain because, especially as you know, that -- as I've said that our sale of our Mueller product going through distributors. So we have this variable of their managing their inventories. And we believe they went into the fourth quarter with inventory well in excess of market demand.

But when we look at the overall housing market, down 23%. We think that clearly, clearly in fact, that the time that are distributor it took our distributor to turn our inventory so that we would say that certainly. We saw an impact from the housing starts reduction. And with it being down 23% I don't know if it's necessarily to say there is a 1 to 1 relationship but I think that would certainly be in the ballpark.

Relative to commercial construction as I said that actually we did see a still a little growth in our market -- commercial construction market. However what we saw was a bit of the shift between our imported product versus our domestic product. That goes out at a lower price. So when you look at our overall revenues, we wouldn't -- that amount of growth would not bhe reflected.

But then when you look at -- as I said earlier when you compare to our first quarter of our fiscal year 2006 we had a very, very strong on anvil. So I don't think that we are seeing commercial construction slowing down, being flat. I think when you look at our numbers that we saw a little bit of a mix between imported products and our domestic produced products. And when you look at the forecast that I referenced earlier of 6, 7% spending in these markets I think we are pretty comfortable in seeing that when we look at it for the year we'll be able to see that kind of demand for our product. And I'm sorry I may have forgot the -- your second question?

No. I was just going to start digging into the booking side of it. I'm assuming that on your residential sheet that's probably still reflecting more current market conditions. So just wondering what, especially when you talk about January been positive, what is driving that growth? Is it on the commercial side or where is it?

I'm sorry. When we talked about driving our growth there, it really was -- it's in our water infrastructure product. So it is in our Mueller branded products, our valves and our hydrants and some increase in our ductile iron pipe. We think as we said that, as you know we have in our Mueller branded product have a discipline of the price increase in December each year. And we give our distributors protection to bring in any orders that they give us in January we protect the previous price.

So we did that last year. We did that this year. That certainly causes a spike in our orders. But what we were most encouraged by that we say that our orders were greater this year than they were last year. So we think it reflects that what we saw in the quarter just completed wasn't truly reflective of an end market demand, but was reflective of market demand as well as inventory adjustment in our distributors.

So I think we are still -- I think the next couple of months will tell us -- give us a little more insight, relative to what is happening in our demand on the housing start side. I think that we are confident that we are entering the quarter with our distributors maybe their inventory more in line demand so we won't be exposed to that correction. But I think that we still -- we're still in a mode that we are going to have to wait and see for the next couple of months, specifically what is happening on residential construction.

On commercial construction as I said, I think we're still pretty confident that we will see continued growth and demand.

And then just to clarify, so, if you just looked at your bookings on the unit basis, would they probably still be down year-over-year when you talk about January?

No, on a unit basis they are pretty flat and that is again encouraging for us.

And then just want to dig a little bit into the U.S. Pipe profits this quarter -- the operating income. It was actually much higher than we were looking for it. 7.2 million. Just want to dig a little bit into what is driving that number? Is there some possibility some one-time item is in there or is that truly just a lot of your restructuring efforts coming through? I think we have also talked in the past about you moving some of the corporate expense from that business that had been with the (indiscernible) business up into corporate expense and thought that was coming out of your pipe. So just wondering if you know that movement happened and really kind of what is driving this operating margin?

Yes. First of all, if you look at this time last year we still had the U.S. Pipe Chattanooga facility for valves and hydrants. That facility was a real drag on our earnings. So certainly we benefited from our synergies by closing that plant. Secondly, we have continued to see a nice shift in our mix and our pipe business that we have a variety of products. The most basic is our ductile iron pipe that we have in our connectors and so on. We have done a very nice job of continuing to focus on penetrating I would say the market on higher margin products.

So we have had a very favorable mix in the quarter over quarter and it is a trend that has been developing for the last quarter. We expect we will continue to see that favorable mix. The other thing I think that our operations team as I said has been very very agile moving production around and taking out and closing some of our low-cost processes in our existing U.S. Pipe plant.

But relative to your question actually the corporate expenses are still in the U.S. Pipe results right now. So it's especially those that are -- were allocated to us for Walter from Walter Industries for the quarter just completed. So that, actually, is not contributing to the, I would say, the margin performance.

Are you still planning on moving that into your corporate expense line?

Yes. They will be out next quarter.

Next quarter. Is that about what? 2.4 million or so?

It is about $1.8 million every quarter. It is about 1.6 this quarter. Those were the charges that Walter Industries allocated to U.S. Pipe as part of their support activities. One of the other factors that impacted U.S. Pipe as well was shortly after the Chattanooga plant shutdown in the first quarter of last fiscal year. U.S. Pipe did go through and invested in cost-cutting production measures in their general office to reduce overall headcount and costs associated with SG&A.

So if I look at, really, what your number would have been for margins this quarter, excluding that corporate overhead you would have had something like 7.6%. You think that margin is sustainable throughout this year? Or I guess kind of what is your thought on that?

We do. We do think it is sustainable. It reflects the cost reduction actions that had been implemented. It reflects the favorable mix. We feel very bullish on what the Fast Fab acquisition will do for U.S. Pipe in not only pulling through additional pipe but also helping us to sell the higher margin products.

So we are very pleased with the progress at U.S. Pipe and we are confident that we will see that level of performance and believe we have some upside.

One last question. You had mentioned that last year in the first quarter in the Mueller segment you had a particular project that was a little bit more profitable. Do you know exactly what that impact was or how much that benefited or what margins would have been excluding that benefit?

Yes if you exclude that benefit that margin year over year, margin percentages would have been flat.

(indiscernible) from Janney Montgomery.

Greg, can you follow up a little bit on the margin issue, relative to the shift in demand that, obviously, was residential construction coming down and repair and replacement municipal market going up? Is it a different set of distributors, contractor versus municipal buyers at the end market? Are there different margins associated with those end markets or, really, when you swap out one source of demand for another, does it have no impact on margins?

Deborah, let me -- we can find from time to time that the public work can go out at slightly lower pricing than driver work. So, yes, that shift can have a bit of an impact on margins. Not that I would say significant but a bit of an impact. But when you look at, first, at the overall margin at Mueller we have such high [TV] on some of our products that if we have any kind of a shift quarter to quarter that is going to be reflected in the margins. And that certainly was true this year, what just happened this quarter at Mueller because we were down over 15% in our valve and hydrant shipment.

Relative to your question about distributors, it will go through the same distributor. I think typically though what we will find again as on the on public works, if we can get into a situation where it gets a little more price-competitive it can have a bit of an impact but I would not say an overwhelming impact.

On the public work side you mentioned your AWWA forecast and what you are seeomg. Is that coming from stronger budgets? Are you seeing longer term capital spending programs that are building in demand throughout the year? Is it more related to some Gulf Coast work? I mean kind of where are you seeing the municipal side coming from? Is that geographically differentiated or is it all over in the country?

Right now I would say that we are seeing it all over the country. We have a better insight on what is happening from our U.S. pipe business because we will quote those we will tend to quote those more direct rather than having them go through a distributor. As I said our flotation activity for public works was up 10% the quarter we just completed versus the previous year. And I think when we dig into that it would be hard for us to say that it was coming from any one particular region or any one particular project.

We think it's -- we say it's pretty much across the country and we would expect to see this build throughout the year because, again, I think that we are just -- probably just starting to get some insight into the requirements as we enter the construction season.

Seth Weber. Bank of America.

Couple of just tie up questions. Greg, is it possible to quantify the bookings numbers from the fourth quarter? You kind of gave us some directionally that October, November were soft. December was a little kind of close to level but is it possible to put some numbers around that?

The second question on the pricing side. Excluding material cost recovery, are the price increases that you put through in December -- 5% of valves and hydrant, 4% of pipe -- is that kind of difficult to what you would usually see? Is it better, worse than you would see over the course over the last decade or so?

My third, final question is there any Katrina benefit in the March 2006 quarter that we should think about as a comparison? Thank you.

First of all, relative to the booking, you know -- as you know we are the only publicly traded company and so we prefer not to -- elect not to give that information out because we just think it's a little too much information for our competitors. But I can say, directionally, that we probably year over year as I said had our largest GAAP in October. Got a little lower, a little smaller in November. Pretty close to being even in December.

So from that standpoint, we still came in under in the quarter versus the previous quarter. And we are not surprised given the level of inventory that was in our -- out in the field as we entered that quarter. So I think it is safe to say we are encouraged about the trend. The pricing is pretty consistent. We have, on the Mueller side, been in that 5 to 6% range. This is our 16th year that we have had that level of price increase in the December timeframe.

So it is consistent. Relative to U.S. Pipe, that is more in line with what is happening to raw material costs and so on. So that one is much more variable and difficult to make any comparisons with a year-to-year basis other than to say in the last 18 months to probably almost getting now we are approaching two years that we have been successful in passing along scrap iron raw material costs to the marketplace.

And, again, I think it is important to point out when we announced our price increase of the 5% on valves and hydrants, 8% are brass products, that we will typically realize something less than that.

Finally on your last question, no. From the Katrina effect for U.S. Pipe that was all in October and November last year with maybe a little bit in early December. But it is completely out of our comparison of now going forward.

Thanks. One just quick follow-up on the pricing side. Is it your sense that your competitors have also pushed through price increases? Everybody is on the same page there?

Varies by product. Ductile iron pipe, I think it's pretty consistent. On valves and hydrants it is consistent. Other products I think we are still on a wait and see mode.

Thanks very much.

I show no further questions at this time. I'll turn the call back over to Greg Hyland.

Well, again, thanks, everyone, for your interest in Mueller Water Products. As we said, I guess, and again in summarizing, we were very pleased with our operational performance in the quarter, that we believe that we have seen an adjustment in our distributor inventory. However I think that we will -- and we think it's more in line with demand. I think that the next several months, though, will give us much better insight relative to what impact housing starts will have in our eventual demand. That we have seen some very positive impact of our synergy programs and by reducing fixed costs that clearly came through in this quarter and we are bullish about the long-term for Mueller Water Products and, again, thanks for your interest.

That concludes today's conference. Everyone may disconnect at this time.