Mueller Water Products Inc (MWA) 2007 Q2 法說會逐字稿

Welcome and thank you for standing by. At this time all participants are in a listen-only mode. [Operator instructions] Now, I will turn today's meeting over to Greg Hyland. Thank you, sir; you may begin.

Hi, good morning, Candy, this is Martie Zakas and I want to welcome everyone to our call this morning. It's our second quarter earnings call for Mueller Water Products. We currently have 114.7 million shares trading on the New York Stock Exchange. As you know, yesterday afternoon we issued our second quarter press release reporting earnings for Mueller Water Products for the period ended March 31, 2007. We also issued a press release yesterday announcing cash tender offers for our outstanding public debt.

We have with us this morning 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 reconciliation between GAAP and non-GAAP performance measures are reported in the supplemental information within our earnings releases and provided in accordance with Reg. 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. These numbers are 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 Web site, which is muellerwaterproducts.com for a period of approximately 30 days. After the prepared remarks, we will open the call to questions from our dial-in participants. I'll now turn the call over to Greg.

Thank you, Martie, and good morning, everyone. Thank you for joining us as we discuss Mueller Water Products 2Q results. During the call, we will talk about the financial and operational highlights for the quarter, discuss the status of our current initiatives, including the recently announced tender offers for our outstanding public debt securities, and provide some additional color on the key drivers and outlook for our business.

We were very pleased with our performance, as net sales increased across all of our business segments and we expanded consolidated operating income and EBITDA margins in spite of falling demand for new residential housing construction. Second quarter results reflect our success with the steps we have taken to manage the business in light of prevailing market conditions. Our operating management team has done an excellent job of pulling the right levers and delivering solid performance during the quarter.

We continue to make progress on the implementation and delivery of our synergy plan. Our current annual run rate for synergy benefits is approximately $45 million as of March 31st, and we reiterate that we expect to achieve the high end of the $40 to $50 million range by early fiscal 2008. Certainly the benefits we have achieved from the actions taken as part of this plan contributed to the performance we delivered, despite declining volumes of some of our higher-margin water infrastructure products.

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' net sales for the second quarter ended March 31, 2007 were $459.7 million, up 5.7%, as compared to $434.9 million last year. This growth benefited from improved pricing, a favorable U.S. Pipe product mix, as well as the results of the Fast Fabricators acquisition, which closed on January 4, 2007. These benefits were partially offset by volume declines, resulting from continued weakness in residential construction.

Consolidated operating income from Mueller Water Products during the quarter was $52.9 million, versus $27.5 million in the second quarter of last year. Prior-year operating income included certain acquisition and plant closure costs of $18.7 million. Excluding these costs, operating income improved 14.5% from $46.2 million in the second quarter of fiscal 2006. In addition, adjusted operating margins expanded 90 basis points to 11.5%, versus 10.6% in 2006. As well, our EBITDA of $78 million improved 10.8%, versus $70.4 million in 2006, while EBITDA margins improved to 17% from 16.2% versus the same period last year. This performance was due to higher pricing, which more than covered increased raw material costs, achievements resulting from our synergy plan, and improved profit mix and cost reduction initiatives at U.S. Pipe.

I will now discuss results by operating segment.

Net sales for the Mueller Co. segment were $200.3 million, an improvement of 3.6% over the prior year. Mueller Co. benefited from pricing improvements during the quarter, as price increases implemented last year continued to hold and we were covering the increases in raw material costs. However, in total, unit shipments were down year over year.

Operating income for the Mueller Co. segment was $42.8 million, compared to $39.2 million in the prior-year period, which includes $6.9 million of acquisition-related inventory costs. Excluding these costs, current period operating income declined by $3.3 million, due to lower volumes, primarily in higher-margin iron gate valves and hydrants; $1.7 million in plant closure costs, substantially related to the James Jones facility; $600,000 of expenses related to sales training; and $800,000 of certain administrative costs that prior to being a standalone publicly-traded Company were allocated to the corporate segment.

Turning to the U.S. Pipe segment, net sales, which now include results from the Fast Fab acquisition, increased 11.4% to $133.3 million, compared to $119.7 million last year. Pricing increases and an improved product mix more than offset volume decline. As mentioned last quarter, the improved product mix is a continued result of our focused strategy to grow sales where valued-added, higher-margin products. These products include our mechanical pipe locking system, as well as ductile iron pipe used in horizontal drilling applications.

Operating income for the second quarter 2007 was $6.8 million, compared to a loss of $7.2 million in the prior-year period. The 2006 period includes $6.7 million of plant closures costs. Excluding the plant closure costs, operating income in the current period improved by $7.3 million. The improvement in operating income is attributed to greater sales of higher-margin products and lower fixed costs due to the plant closure. Additionally, the 2006 period included $2 million of related party charges that will Walter Industries has allocated to the U.S. Pipe segment. Subsequent to the standard from Walter Industries in December of 2006, these services are now performed by Mueller Water Products.

Moving on to our anvil segment. Net sales grew by 5.4% and both operating income and EBITDA margins improved at a higher pricing and volumes. The sales of our imported products continue to grow at a faster pace in the segment as a whole. These products tend to have more prices and margins than our domestically produced products.

Focusing now on the Company's consolidated results, the effective tax rate for the 6 months ended March 31, 2007 was 42.2%, which is in line with our expected tax rate of approximately 42% for fiscal 2007. Our tax rate is higher than the statutory rate, due to certain non-deductible expenses, which primarily include nondeductible high-yield interest expense.

On a year-over-year basis, inventory is up $50 million, with $20 million of the increase related primarily to higher raw material costs. In addition, inventory increased as a result of the Fast Fab acquisition. We'll also increase safety stock inventory for the preparation of the close of the James Jones manufacturing facility. Looking forward, we will be increasing our focus on reducing inventory levels.

With that, I'll turn it back over to Greg.

Thanks, Jeff.

Our positive performance during the second quarter demonstrates that we are operating our business well, especially in response to reduced market demand. Demand driven by residential construction has traditionally been our largest end-use market. As you know, there has been a significant slowing in new housing starts. In fact, starts are down 23% from March 2006 to March 2007.

Second quarter bookings for our water infrastructure products were essentially flat in dollars, which primarily reflects price increases implemented in fiscal 2006. However, for a number of products, unit orders declined. Unit bookings for our higher-margin Mueller branded products, which include gate valves, hydrants, and brass service products, declined on average 14% during the quarter. Unit orders grew sequentially in April, as compared to February and March orders, as we would expect, given the seasonality of our business. However, the sequential growth was less than we experienced in April last year.

Until we see a consistent improvement in the market environment, we are going to aggressively manage this business. As I have mentioned in the past, our first action is to reduce overtime in our manufacturing facilities, and we reduced overtime by 39% in our Mueller plant during the second quarter, and we will continue to do so.

We also told you that we build inventory at the beginning of the year because we can't recapture that capacity. Based on current inventory levels and bookings, we are increasing our focus on reducing inventory by adjusting operations as we move into the second half of the year. These adjustments could include reducing shifts and/or eliminating operating days. As a result, the throughput of our foundries will be reduced and could cause the average manufactured cost of our products to rise.

For Pipe's products, bookings were up 11% in dollars for the quarter, driven principally by higher pricing and an increase in larger diameter pipes. Actual tons ordered were up 3.7% for the quarter. In addition, quotation for public works was up 18% in tonnage. We are encouraged by these results because we think these increases are indicative of greater spending in the replacement and waste water treatment market, as well as the need to add transmission lines to tap into new water sources. However, we also experienced an increase in raw material costs in the quarter.

Scrap iron prices increased from $237 per net ton to a high of $313 per net ton, primarily in February and March. We responded by announcing a price increase in mid-March effective mid-April. Therefore, we could experience some margin pressure on shipments in the third quarter.

We continue to expect solid growth in the commercial construction and oil field markets, which are the primary drivers of our anvil business. Corporate spending is expected to be approximately $40 to $44 million, and the capital spending range is $75 to $80 million.

Yesterday, we issued a press release announcing tender offers and consent solicitations for our public notes outstanding, consisting of approximately $205 million of our 10% notes and $145 million of our 14.75% notes. These notes are not callable until 2008 and 2009, respectively. However, we believe the time is right to take advantage of the credit marketplace to tender for these notes and to refinance our debt.

With the plan tender offer and proposed refinancing of our existing credit facility and other facilities, we expect to lower our interest expense, increase our operational flexibility, and simplify our debt structure. The tender offers expire on May 31st. There is an earlier consent payment deadline of March 14th of this year. Under normal circumstances, the majority of the consent will be received by that deadline. We will provide you more information as it is available. As you may know, there are legal restrictions on what we can say now. Once the tender offers and proposed refinancings are complete, we will be able to provide more information regarding the expected interest expense reduction, the charges associated with the debt retirement, and any new agreement.

Let me close by saying that I am pleased with the revenue increase, operating income growth, and margin improvements we delivered in the second quarter. Clearly, we saw the benefits of our synergy plan and our ability to manage during challenging market conditions. As we enter the third quarter, we continue to implement the right plans to reduce inventory and address the uncertainty in the residential housing market. The increase in our public sector quotation rates for U.S. Pipe supports the expectation of increased spending in the water infrastructure replacement market. We will manage our business to ensure that we are doing everything possible to maximize our returns in a tough market, but we will be sure to never lose focus on the long-term opportunities in the water infrastructure market.

This completes our prepared comments and we will now open up the call to questions.

[Operator Instructions] Michael Gaugler, Brean Murray, Carret

Just two questions. First, I was wondering are you seeing any pockets of strength geographically in terms of demand, either on the residential or the replacement side of the business?

Michael, let me tell you, I think on the housing starts, on the residential side, I wouldn't necessarily clarify it as a strength, as I would clarify it as we haven't seen an erosion. When we look at the, I think the Texas area, that still remaining pretty consistent on a year-over-year basis. However, when we go on a weaker side to the west coast, as clearly -- when I say the west coast, I say the western states, we're clearly seeing a fall off there. So, yes, it does vary regionally on the housing side. And I would say though -- I would clarify it as we're seeing more weak areas than necessarily strong areas.

On the repair/replacement, that's tougher -- that's tough to say, primarily because on a quarter-to-quarter basis, it can move quite a bit relative to the projects that we may see that quarter. I can tell you in this last quarter, and we referenced that our orders were up 18 -- our quotation rate was up 18% and our orders were up. But we saw some real activity actually in the northeast on the replacement side, which is not surprising because, clearly, that's a part of the country that has some of the oldest infrastructure.

On the other hand, we did some activity on the -- out in the west and those were for orders that received for pipeline going to new water sources. So I think it's probably easier for me to say that there's no discernible trend that we can see right now.

Okay. You had said scrap prices went, I didn't catch the first part of it, from what price to $313?

Yes. It went from around the $220. Let me get that to get it exactly for you. Yes, Mike, it went from $237 per net ton to a high of $313 per net ton.

Okay. And the last --

Primarily, I said, in February and March.

Okay. And the last question, any updates on the mini-mill initiative?

Yes. We're moving along. We've received a number of quotations for the equipment supplier. They're coming within our budget. And so I think it's best to just classify that as we're on schedule.

Mike Schneider, Robert Baird

If we could first just start on, I guess, the concept of pre-buying in the quarter. Do you sense that with some of the price increases looming that either Mueller or U.S. Pipe enjoyed any type of pull forward this quarter as people tried to beat the looming price increases?

Michael, let me say that on the Mueller side, no. We increased prices on -- effective February 1st, and we did see the pre-buy in January, but that is consistent to what we have done for the last 16 years, so that's pretty comparable for a year-over-year basis. We did not anticipate, or I don't think the marketplace anticipated, any price increases in early second quarter, so we didn't see any pre-buy there.

On the U.S. Pipe side, we did announce a price increase, as I said, in mid-March to be effective in mid-April. I suspect that we did see some pre-buy on the U.S. Pipe side. It's interesting that you bring the pre-buy in, because that's certainly a situation that we were experiencing this time last year. As you know, we had significant price increases between May 1st and June 1st, and we had -- we saw a real spike in our orders in April of last year and May of last year in response to those pre-buys. And that's going to create probably a pretty difficult comparison for us the second half of this year.

Right. And on Mueller specifically, the price increase that went out on February 1, what was the magnitude and what do you expect to net and how does that compare with recent price increases? I'm just curious if softer market conditions mean you realize less net price this time around?

Well, let me address that on several fronts. First of all, we increased our gate valves and hydrants by 5%. We think that those will -- they will stick. And we'll probably net about 3% of that. I think that's our typical. Now, we also have announced in our last conference call that we put in an 8% price increase on our brass products. Unfortunately, I think our crystal ball was better than our competitors. No one followed that price increase and it was very difficult to get that in the marketplace at that time, because in January we actually had slighting falling brass ingot cost. So, as a result, we did not realize any of that 8% and had to rescind it. So, on our valves and hydrants, the 5% stuck, we'll probably net 3%. On brass products, we could be a little behind the curve. Now, our competitors are in the same situation, so there could be some movement on those prices soon.

It's also important to point out that we increased prices on our brass products about 22% between May 1st and June 1st last year. Because about that time, if I recall, brass -- our brass ingot cost per pound were around $2.80 to $2.90 per ton. I'm sorry, per pound, excuse me. At that time, those price increases were sufficient to cover that. However, I think as of yesterday, the brass ingot costs were around $2.80 per ton, so we're getting very close back to that same level.

So, in fact, copper closed at $3.77 yesterday, it's up 51% I think year-to-date, is that the magnitude you need to go out with, that is 20, 25% again?

No, not again. Because that 20, 25% -- that 22% probably put us in good shape for a brass ingot cost of $2.85 per pound. If you recall last year, it jumped from about $1.50, $1.60 per pound, to over $3.00 per pound. So that price increase we implemented back in the May/June time period put us in pretty good shape for a $2.85 per pound cost. But now if we see that above the $2.85 in the future, we will be in a position where we would have to pass that along to the marketplace.

Okay. And then, specific on U.S. Pipe, you mentioned the mix continues to benefit you. Can you just drill down a bit more and give some examples of exactly what is benefiting the mix?

Yes. If you look we have a product, what we call TR FLEX. It has more flexibility. The system has more flexibility when being installed than we'll say traditional ductile arm pipe. And we see a growth in horizontal drilling that this product becomes very, very desirable. So we're seeing a pickup in that product line. Our locking systems that we have proprietary, I think some very good designs on the locking systems, we can use those with our pipe as well as our competitors. We have really focused our sales force on selling that product, as well as some of our specialty coating pipe. So it's really an effort, a selling effort, to focus again on some of these higher-valued products.

And just final more macro question. Have you lowered your expectations, I guess, internally for what the residential and replacement markets are doing at this point? Certainly the macro is coming in below even the pessimistic expectations. It seems like most of the other product companies are trimming their forecasts. I'm curious what your assessment has been, kind of where the current data flow compares to what you had been consuming in your internal plans.

Mike, I think it's probably best, since we don't give any guidance, but let me address that. If we look at the second half of the year, we're just going to continue doing what we've been doing. And that means to make sure that we can respond to, as you appropriately described it, an uncertain market environment. We're in pretty good shape we think relative to responding.

As you recall, that we -- we've been eliminating fixed costs because we closed 3 plants over the last -- in the last 12, 15 months. We'll have our fourth plant close at the end of the third quarter. It's pretty important to point out that we started this process of closing plants when housing markets -- when the housing market was at their peak. So we didn't get caught behind the curve of adding capacity to respond to a market at its peak by not getting caught when the market comes down. We were actually taking the capacity out at that time.

So I guess from that standpoint, I think it's best for us to look at it to say that we're going to manage the business aggressively and respond to what it is at best, I think we can call an uncertain market.

Greg, I guess maybe the way to address the question differently is just to say have you accelerated your inventory reduction efforts, your production cut efforts, your plant closing efforts to deal with an even more disappointing market or is it simply you're executing on the plan you set out on several months ago?

Michael, again, I would say certainly we're executing on our plan, but we said in the last conference call that when we saw the bookings increase in January that it led us to believe that we thought distributor's inventories were coming into equilibrium with demand. But we also said, though, the key would be how quickly those inventory turns. We wouldn't see that until April or May. We reported in our prepared comments that, sequentially, that we did see a pickup in orders in April versus February and March, as we would expect seasonally, however, that based on that order intake we decided to even take more operating, to really address our manufacturing capacity and reduce inventory and take some operating capacity out of the business. So I think it's to say that we think right now it is a more prudent approach for us given the uncertainty to take most costs out and take inventory. I don't know if that answers your question.

It does. Thank you again.

Keith Hughes, SunTrust Robinson Humphrey

Kind of building on the last question. When you look at going -- pushing down inventories, it's going to be both within the Mueller segment as well as the U.S. Pipe segment? And which one would you go after more aggressively?

Yes, it would be both, but I think that we'll be going more aggressively on the Mueller side.

Now, why would it be on the Mueller side versus U.S. Pipe?

Well, when you look at the -- 95% of our shipments on Mueller go to distributors, so the -- we will build more inventory at those facilities and anticipate -- at our Mueller plant in anticipation of distributor demand. I think that you will see on the -- we see that on the Pipe side, this is more project-oriented and we ship directly to the job site, that we are closer aligned to market demand on the Pipe side than perhaps on the Mueller side. So, on the Mueller side, we have to not only look at our inventories but have a pretty feel on what we think is happening on our distributor's inventories. And I think in that case that we think it's more likely that our distributor's inventories will turn less, which will mean, then, we have to take out inventory at our Mueller plant.

Okay. And within the reported quarter of U.S. Pipe, what did units do in the quarter?

Our unit shipments were actually down, tonnage shipped, we're down about 4%. Our bookings in tons were up about -- almost -- slightly under 4%.

Okay. And the tender offer that you had discussed earlier, that will be for both the senior subordinated notes as well as the senior discount notes; is that correct?

Yes.

Now, currently the senior discount notes, you're not accruing any interest payments, either cash -- either accruing or making any cash payments currently, correct?

Jeff?

On the 14.75% notes, we are not making any cash payments, but we are creating interest.

You -- excuse me, say that one more time.

We are not making any cash payments on the 14.75% notes, but there is interest expense associated with that. That's in our numbers.

Okay. That's what I thought.

Joel Tiss, Lehman Brothers

Maybe just, I have, like, 20 questions, but maybe just like 2 or 3. Is the inventory reduction going to be concentrated more into the third quarter or is that going to be spread out over the rest of the year?

Right now, Joel, it will probably spread out over the year, but, again, I think that based on what we see in the marketplace, that plan, we will make adjustments to that plan.

Okay. And then, can you try to add together some of the pieces for us? I mean, you've given us so many pieces and it feels like between inventory reduction, a little bit tougher comps, you do have some price increases but you'll have lower production over the rest of the year to work off the inventory, mix, etc. Can you give us a little bit better sense? Will the third quarter feel a little more difficult than the fourth quarter or is there enough end-to-market strength where we shouldn't feel it.

What I can say is that I think it will be -- it's tough for us to -- I mean, right now to compare third to fourth quarter, again, as I said, we'll have to adapt to what I would say right now is an uncertain market environment. We can say, and again, that we will have -- when you talk about third quarter, we will have a very tough, tough third quarter this year to third quarter last year because of the significant spike we saw in orders in April and May last year that would really carry us through the third quarter and the fourth quarter last year.

Okay. And last, can you give us just sort of a ballpark on free cash flow expectations for 2007?

Yes. Joel, again, I think that falls into our not giving guidance.

Okay. Any even sort of ballpark sense? Better than last year? The same?

Well, I can say, when you look at the seasonality of our business, the second half of the year we generate significantly more cash than what we do in the first half.

[LeeAnne Carnes], [Colestar]

Actually I have two questions. One, on the cash tender offer for the notes, can you give us a sense, are these two the ones that are affected by the non-deductibility of the interest? Will this have an impact on your tax rate?

The 14.75% notes that we have generates the nondeductible high-yield interest expense. So when we get rid of those notes that will, hopefully, positively impact our tax rate.

Great. And then a more macro question. If you assume the $180 billion or so expected spending that the EPA has estimated in the next 20 years for the repair/replace market, how do we look at the Company's market share of that, not so much against competitors but substitutes and other spending that would need to happen that wouldn't relate to Mueller?

LeeAnne, that's a good question, and I'm not sure I have that -- a complete answer for you. But I will say that probably the largest component of that spending would be on labor. We would not -- we, obviously, don't participate in that. I can give you just a broad estimate that when you look at probably the equipment and the equipment where we could compete in that, it could be 25 to 35% of that total. But I have to qualify that. Right now, that's an estimate. But I'm pretty safe in saying that you could look at the -- that the biggest component of that would be labor.

Rob Maloney, Morgan Stanley

Just wanted to get back to the repair and replacement question here. You mentioned that you saw a substantial amount of repair/replacement work that benefited the U.S. Pipe segment. Were any of those large project orders that we might not expect to repeat?

We had several orders for -- larger orders, and as well as we saw a real shift in our mix to larger diameter pipeline. So the larger diameter, as you would expect, would grow both the dollar volume of those -- the dollar of those orders as well as the tonnage. So I think it's safe that given the influence that a major project can have that this could be lumpy from quarter to quarter.

Okay. That's great. The -- over the past several quarters, Greg, you've been talking about the AWWA's 11% municipal water spending growth number.

Yes.

Given that you guys, I guess, saw 18% growth this quarter, does it look like we should be increasing our expectations for municipal repair and replacement or is that 11% number still the right number to be using as we look into the second half?

Rob, that 18%, it was the growth in our quotations. I think that that could be a much -- reflect, again, the size of the pipes. Because if year-over-year if we're seeing quotations for larger diameter pipes than we did in the previous year, that could influence it. So I think that right now that we're comfortable with that -- the AWWA 11%.

Okay, thanks a lot. The next question I've got for you is with regard to the tender. I know that your tax rate has been artificially high due to the 14.75 bond. With those bonds coming out of the capital structure, is there anything to do on the tax rate? And if so, how long should we expect for you guys to see some improvement and perhaps how much?

Yes. I'll let Jeff address that.

Well, probably the biggest change you'll see in the tax rate will probably not -- you probably really won't see a big impact until fiscal 2008. Because by the time we tender the bond, we'll be through part of the third quarter. And so you'll still have a lot of the nondeductible interest expense in the fiscal 2007 results. So we should see somewhat of a change and a reduction in the tax rate going into fiscal 2008.

Will you guys be moving closer to a statutory rate or will it be a step change, a slow progression down?

No. I think you'll see one change once the nondeductible high-yield interest goes out. There are a few other smaller items that offset each other with a net tax rate and so it can vary from time to time, but I would expect it to drop a little bit.

Any early review on where that rate might go?

Not yet.

Okay. Just one final question, a housekeeping issue. Maybe you can talk me through what percent of your 11% growth in U.S. Pipe was from price?

Yes. Actually, Rob, I can give it to you. First, I want to point out on the U.S. Pipe, yes, I'll have a rough time giving it to you on price, but I'll say price and mix would have been all of it because our actual tons shipped were down 4%. So I could say that -- I'm going to say that three-quarters of it probably came from pricing and then the other -- the rest of it from an improved mix.

Debra Coy, Janney Montgomery

Just following up on the overall direction we're going in the pipe business. Greg, can you talk about the timing of when quotations are up 18% what kind of timing we would expect for those projects to come through. And, secondly, what kind of pricing you're seeing on the forward projects?

Yes, Debra, we've -- we would typically expect that those quotations outstanding, we have a 60-day validity period on those. So let's say, on average, 30 to 45 days, and then once we get those orders, typically our delivery lead time on projects is about 6 weeks. However, some major projects can go over a period -- longer period. So I would say that the most quotation activity, it probably takes up a month and a half for that to turn into an order, if we're successful. And then I would say -- probably say, on average, another 2 months. So what we're seeing -- I think what we're seeing in the quotation activity in the second quarter, we're probably turning the shipments in the fourth quarter.

And you're not seeing project delays?

We have not. But I'll tell you that we have seen a nice spike in some quotation activity for -- as I reference a little earlier, going to new sources.

Right. New supply.

That's a nice -- that probably doesn't fall into the replacement market, but it certainly doesn't fall into the new housing start market either. And we're also seeing, and I think this is a natural phenomenon in the Pipe business, that after you see explosive growth of putting in the infrastructure for housing developments, generally there has to be a catch up for the larger diameter pipes because there is more volume of water that's needed. And this is at a time when I think the municipalities catch up, so we're seeing a little bit of that. But I would say we're pretty encouraged by what we're seeing on public works quotation activity.

And forward pricing, you did mention you're putting, with the spike in scrap prices, you're putting in price increases, and there is probably going to be some lag, but are you overall expecting that the market is still such, the demand is strong enough, that you will get the price increases that you need?

Well, I think we have to look at it -- of course, we're increasing our prices because of the rising scrap iron, scrap field prices.

Right.

Our competitors are facing the very same input. And you look in the ductile pipe business, raw material is over 40%. So we're all pretty subject to those same pressures on input costs. So we would assume that the pricing would hold. It's probably too early for us to tell. As I said, it was just effective in mid-April. But certainly we're hopeful that they will.

Okay. And then, my last question is, with the announcement a few weeks ago that Home Depot the wholesale distribution business, are you seeing any change in behavior from those guys, since, obviously, their future is uncertain?

That's a good question and I don't think that I can necessarily answer that across the board. But I think maybe in some regions we may see a little bit of, what will I say, maybe an uncertainty could begin in what's happening on the business side. But it would be difficult for me to say -- make an across-the-board statement.

And uncertainty having the effect of making them easier to deal with or more difficult to deal with?

Oh, I'm sorry. I thought you meant from, perhaps, are they losing focus on the market.

Well, right, yes. And in terms of, obviously, ultimately what the impact is on you.

No. Relative to how we're operating, I would say that it's the very same as it was a year ago. I would say that we have a -- there's a pretty strong partnership and we continue to operate that way. I think from us, as looking at them as our largest distributor, that we think it will be better for us, once they become settled, when people in the field know exactly what their future holds.

Seth Weber, Banc of America

Greg, going back to the previous question on Pipe, the discussion Pipe, can you talk about, given raw material costs and everything, can you talk about any sort of change in competitive landscape from PVC or any other substitute product? And then I just have a clarification question. Can you give us the contribution from the Fast Fab acquisition?

Yes. Let me -- probably what we saw in the last -- what we saw in the real price increase in raw material, scrap raw materials, in the last 2 months, and I'd say it was pretty -- it's been pretty stable for that -- for at least 12 months before that. So the 2 months would be too soon for us to see if we were going to have any vulnerability to substitution. But, generally, we believe on the PVC pipe that there is such a cost advantage in the smaller diameter sizes that the [dev] gain probably most of that is share already. Now, when we get into the larger diameter, there are reasons to continue to use ductile arm pipe. So I would not suspect that we would see a big shift on substitution.

And also it's important to keep in mind that I think the PVC is probably seeing some of the same cost increases because of what's happening to crude oil. And crude oil certainly is the primary feedstock for their raw material. So nothing that we've seen, maybe too soon, but we wouldn't expect to see I think a big shift.

Relative to, and that's a good question, we have not given specific on Fast Fab. All of our competitors are private. We think that it would give a -- it would be more competitive information than what we would want to give our competitors. But relative to Pipe, as we -- Fast Fab relative to revenues niche, we still had organic growth in Pipe year over year, but if you look at an absolute dollar basis, Fast Fab contributed most of the growth year over year.

Okay, that's helpful.

And, Rob Maloney, if you're on the phone, I think that that answer, it goes back to -- I realized I don't think I answered your question exactly relative to Fast Fab, but if you look at our year-over-year growth in shipment, that the Fast Fab did, as I told Seth, it did count for a greater percentage of that growth.

Tom Brinkmann, Davenport & Co.

Just wanted to ask a clarifying question about the press release regarding the notes and the repurchase of the notes. Can you elaborate at all on the consent payment of $30 per $1,000 principal amount? What is that?

Tom, this is Martie. That's just, as you look at what the overall tender price is, that is just a component of the overall tender price for those holders that tender at the early payment date of May 14th.

Okay, now, are there any -- okay, so you're not talking about calling the notes. There is not an early redemption that's being discussed here, right?

You have to remember the notes are not callable. These are tender offer. They consent to solicitations that we have issued. The early consent deadline is May 14th, and the tender date is May 31st, unless it is extended for any reason.

Okay. Now, in terms of the sales gain you had in the quarter of 5.7%, can you break that out into organic growth versus price increases and perhaps any currency effects you saw?

Well, first of all, we had no currency effects. And, essentially, with the exception of some volume growth at anvil, it was all primarily pricing.

I see. Okay. And you say anvil is the only segment where you actually saw unit volume growth; is that correct?

Yes, we saw some there.

Okay. Is that due to the commercial strength exposure in the anvil portfolio versus the residential?

Yes.

Good quarter.

Thank you. We're showing no further questions. I'd like to turn the call back over to Greg Hyland. Thank you.

Well, again, we just want to thank everyone for their interest and we'll see you all soon.

Thank you. Once again, that concludes today's conference. You may disconnect.