Mueller Water Products Inc (MWA) 2007 Q3 法說會逐字稿

(Operator Instructions) I'd like to introduce your speaker, Martie Zakas.

Good morning, everyone, and thank you for joining us today for our third quarter earnings cal. Mueller Water Products currently has 115.3 million diluted shares as of June 30, 2007, which is comprised of 85.8 million series B shares and 29.5 million series A shares.

As you know, yesterday we issued our third quarter press release reporting earnings from Mueller Water Products for the period ended June 30, 2007. We have with us this morning, Greg Hyland, our Chairman, President, and CEO, and Mike Vollkommer, our CFO.

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 for the periods being reported. The reconciliations between GAAP and non-GAAP performance measures are reported in the supplemental information within our earnings releases 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. 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 the slides presented today, which are available on our website.

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 www.muellerwaterproducts.com for a period of about 90 days after the presentation. The slides also contain an Appendix, which you may want to view after the call.

Following the prepared remarks this morning, 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 to everyone. Thank you for joining us as we discuss Mueller Water Products' third quarter results.

I'll begin today's call with a brief summary of the results for the quarter and Mike Vollkommer will follow me with a detailed financial report. I will then discuss market conditions and key business initiatives and provide some additional color on the key drivers and outlook for our business. Then we'll open it up for your questions.

As summarized in yesterday's press release, third quarter net sales totaled $502.5 million. Operating income was $57.4 million, and diluted earnings per share were $0.17 excluding an $0.18 per share charge associated with the early extinguishments of debt.

Consolidated operating margin was 11.4%, and EBITDA margin was 16.6%.

This was a challenging quarter, but we executed our plans well. Shipment volumes declined as demand in our largest end market, residential construction, has slowed substantially. Housing starts have declined 24% from the peak of our fiscal third quarter 2006.

Additionally, as we discussed on last quarter's conference call, in the third quarter of last year we experienced strong distributor pre-buying in advance of May and June 2006 price increases.

Our results were also impacted this quarter by increased raw material costs.

During the quarter we were persistent in mitigating the negative impact of reduced volumes in higher raw material costs. We continue to reduce headcount, eliminate operating days and production shifts.

We also made significant progress on our inventory-reduction initiatives. While unit costs will increase in the short term as we reduce production, we believe that a heightened focus on improving cash flow is the appropriate course in today's market environment. Inventories were reduced by $27 million in the quarter, and we expect this trend to continue into the fourth quarter.

And, finally, we were successful in strengthening our capital structure by refinancing our debt with lower interest expense, increases of operational flexibility, and simplified our debt structure.

At this point, let me turn the call over to Mike Vollkommer, who will discuss our financial results for the third quarter in more detail.

Thanks, Greg. I'll first review the consolidated results and then discuss segment performance.

Consolidated net sales of $502.5 million in the quarter of 2007 increased 0.5% from $500 million in the prior-year third quarter. This increase resulted from higher pricing across all segments, U.S. Pipes' acquisition of Fast Fabricators, and increased volume in the anvil segment.

These benefits offset volume declines in water infrastructure products. The volume declines were principally caused by the downturn in residential construction as well as strong shipments in the third quarter of 2006 caused by pre-buying in advance of announced price increases in May and June of 2006.

Consolidated operating income of $57.4 million in the third quarter of 2007 declined from $69.4 million in the prior-year quarter. EBITDA of $83.2 million in the third quarter of 2007 declined from $97.4 million in the prior-year third quarter. Third quarter 2007 operating income and EBITDA margins have been negatively impacted by lower shipments of high-margin water infrastructure products, increased raw material caused, and the Mueller Co. and U.S. Pipe segments and reduced production throughput.

Higher pricing across all segments and lower fixed costs due to plant closures partially offset these factors.

Interest expense was $23.3 million in the third quarter of 2007, which includes a $1.7 million charge related to an interest rate swap adjustment decline from $27.8 million in the third quarter of 2006 primarily as a result of lower average debt levels.

In June 2006 we completed an IPO and used the net proceeds to reinvest.

In the third quarter of 2007 we recorded a loss on the early extinguishments of debt of $36.4 million versus the loss of $4.1 million in the third quarter of 2006. The third quarter 2007 charges related to the company's recent debt refinancing, and the 2006 charge related to the redemption of debt with the net proceeds from the company's June 2006 IPO.

On May 24, 2007, we issued $425 million of 7 3/8% senior subordinated notes and used the proceeds to repurchase substantially all the remaining outstanding senior subordinated and senior discount notes.

The company also entered into an amended credit agreement, which lowered interest rate and had initial borrowings of $715 million.

The effective tax rate was approximately 42.2% for the third quarter and year-to-date 2007. In the prior-year third quarter, the company had an income tax benefit of $1.3 million as a result of adjusting the annual tax rate to 68%. This net tax benefit in the prior-year quarter was comprised at a 68% tax expense of $25.5 million on third quarter 2006 pretax income, which was offset by an increased tax benefit of $26.8 million from losses in the first two quarters of 2006.

Earnings per diluted share declined from $0.41 in the 2006 third quarter to a loss of $0.01 in the 2007 quarter. There were three significant non-operating factors that account for approximately $0.38 of this decline in earnings per share -- effective tax rate, $0.18; loss on early extinguishments of debt, $0.13; and an increase in average diluted shares outstanding, $0.07.

We provided detailed calculations for these items in the appendix of the slides that accompany this presentation.

We have already discussed the effective tax rate and debt extinguishments. The weighted average diluted shares outstanding increased by approximately 20 million shares due to the June 2006 IPO.

Now I'll turn to the results of each operating segment.

Net sales for the Mueller Co. segment were $208.1 million compared to $225.5 million in the third quarter of last year. Volume declines of approximately $37 million were partially offset by approximately $20 million of price increases implemented since May 2006.

Reduced volumes in iron gate valves, hydrants, and brass service products were the result of continuing weakness in residential construction as well as strong shipments in the third quarter of 2006 due to the pre-buying we discussed earlier.

Mueller Co. income from operations and EBITDA declined principally due to reduced shipments of higher-margin iron gate valves and hydrants. Lower year-over-year production volumes, and increasing raw material costs also contributed to margin compression. However, price increases do continue to cover higher costs of raw materials.

Turning to the U.S. Pipe segment, net sales, which now include results from the Fast Fab acquisition increased 7.4% to $154.5 million compared to $143.8 million last year. The Fast Fab acquisition and higher pricing more than offset volume declines of ductile iron pipe.

Income from operations for the third quarter 2007 was $8.9 million compared to $7.6 million in the prior-year period, which included $3.2 million of costs related to the closure of the Chattanooga Valve and Hydrant plant.

Additionally, the 2006 period included $2 million of related party charges that Walter Industries allocated to the U.S. Pipe segment. Subsequent to the spend from Walter Industries in December 2006, these services are now performed by Mueller Water Products.

EBITDA margins declined at a lower volumes and higher raw material costs.

Moving on to our Anvil segment -- net sales were $146.2 million in the third quarter of 2007, an increase of 7.1% compared to $136.5 million in the third quarter of 2006. Higher prices and volume growth from strong demand in commercial construction were the primary drivers of this growth.

Operating income of $17.4 million in the third quarter of 2007 increased 42.6% from $12.2 million in the prior year. Operating income margin of 11.9% in 2007 increased from 8.9% in the third quarter of 2006. An EBITDA margin of 15.9% increased from 13.5% in the prior-year quarter.

These results benefits from higher prices, volume growth, an additional $1.2 million of dumping duties from the federal government in the 2007 quarter.

Corporate expense was $10.4 million in the third quarter 2007. We expect corporate expenses to be approximately $40 million for the full year.

Capital expenditures, which totaled $23.5 million in Q3 and $65.9 million year-to-date are expected to be approximately $80 million for the full year.

As we previously indicated, we are continuing to focus on inventory reduction based on current levels and bookings. Inventory levels decreased by approximately $27 million from the quarter ended March 31, 2007, which increased cash flow and contributed to our ability to repay debt.

The cash balance was $57 million on June 30, 2007, and our cash flow remains strong as we proceed through the fourth quarter.

In July 2007 we applied approximately $40 million of this excess cash to the reduction of indebtedness under the credit facility.

With that, I would like to turn the call back over to Greg.

Thanks, Mike. Looking ahead, we expect challenging market conditions and tough comparisons with the previous year to continue. Residential construction spending is forecasted to remain weak. Last year we entered the fourth quarter with a higher-than-normal backlog at Mueller Co. primarily due to third quarter 2006 pre-buy orders, which were then shipped throughout the fourth quarter.

Overall bookings for our pipe products were down for the quarter, driven by the volume decline in small-diameter pipe. However, our large-diameter pipe bookings grew. This growth, coupled with our increased quotations to the public works sector supports our belief that spending is growing in the replacement and water treatment markets.

We also believe that our overall market share has remained stable for our water and infrastructure products, and we expect to continue to see positive marketing conditions within commercial construction, which, as you know, is the primary driver for our Anvil business.

We have experienced volatility in our raw material costs. For instance, prices for scrap iron used in the production of ductile iron pipe for the fiscal year-to-date have ranged from a low of $206 per ton to a high of $313 per ton and are currently $227 per ton.

During the third quarter, scrap iron costs to U.S. Pipe were also approximately 10% over last year and up 8% from the second quarter of fiscal year 2007.

These trends are also true for brass ingots, which we use in our valves, hydrants, and brass service products.

While brass ingot prices dipped early in the fiscal year, they had steadily increased since then. Brass costs are up 15% year-over-year in the third quarter. The cost of other raw materials are also up year-over-year.

As we have discussed, inventory was reduced by approximately $27 million during the third quarter. We are targeting an additional reduction of at least that much in the fourth quarter.

In order to achieve our objectives, we will continue to reduce plant production levels, which will increase per unit production costs due to lower overhead absorption. Reduced production and increased raw material costs are expected to continue to impact fourth quarter margins.

We have been able to mitigate the impact of the market downturn with the short-term and long-term initiatives we have implemented. We have substantially completed the synergy plan, which focused on integrating certain portions of our operations, and we did so ahead of schedule.

Our current annual run rate for synergy benefits is now at the high end of our previously announced range of $40 million to $50 million.

During the quarter, we completed the migration of our James Jones Service Rack and Hydrant facility in California, to our Decatur, Illinois, and Alabama plants and completed the consolidation of our Columbia, Pennsylvania, foundry operations.

During the last 18 months, as a result of our synergy actions and response to market conditions, we've reduced headcount in our water infrastructure businesses by 12%. Last year we were able to meet increased demand through increased overtime, additional shifts, and outsourcing rather than increasing fixed costs or slowing down the integration plan.

This approach enabled us to quickly adjust operations in a response to the downturn in demand this year. For example, during the quarter in the Mueller Co. segment we reduced overtime by more than 100,000 hours, or 67%. At both Mueller Co. and U.S. Pipe, we also reduced operating days and the number of shifts worked, and we will continue to implement these actions in both segments in the fourth quarter.

Our disciplined and flexible approach has enabled us to respond to the market downturn as well as position us for the long term.

Our cash flow remains strong as a result of our inventory reduction action, and, again, as Mike mentioned, we applied approximately $40 million of excess cash to the reduction of indebtedness under our credit facility.

The performance of our Anvil business has been especially strong. During the past quarter, net sales increased 7.1% while operating income margins improved 300 basis points to 11.9%.

As Mike mentioned, we completed the successful refinancing of our debt in May. We were able to refinance in an attractive market environment, which provides us with a simplified debt structure at lower interest rates and enhanced operational flexibility.

Let me close by saying that I am pleased with how we have managed our operations during this business cycle. Clearly, our management flexibility and reduced fixed costs helped mitigate the impact of the market downturn. As we enter the fourth quarter we will continue to implement our plan to reduce inventory and focus on increasing cash flows even though this places pressure on margins in the short term.

We remain very positive about the opportunity through Mueller Water Products. We have a strong competitive position in an attractive industry, and the strategy is in place to focus on long-term opportunities in the water infrastructure markets.

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

(Operator Instructions) Michael Gaugler, please state your company name.

Brean Murray Caret, good morning, everyone -- a couple of quick questions, Greg. I know you mentioned that the replacement market -- you were seeing some strength there. I was wondering if you could quantify that a little bit more. Are you seeing a strengthening as the months go on in 2007, or is it pretty much steady state in terms of improvement?

Mike, as we look at both our internal data as well as the external data that we review, it supports our belief that the repair and replacement or probably work spending is growing. As we referenced in the script, our bookings of pipe business unit for small-diameter pipe declined during the quarter, but our bookings for large-diameter pipe increased by almost 6%.

Demand for large-diameter pipe is less influenced by private investment but more influenced by public investment -- so replacing transmission lines, tapping into new sources, and we believe that's driving the increase in bookings.

Back to your point, we also reference quotation activities in public works, and we referenced that our U.S. Pipe business, because we have more direct line of sight there, our quotation activity has continued to increase year-over-year for each quarter.

At our Mueller business, most of our business is conducted through our distributor, so we don't have a direct line of sight. The external data that we re-look at also supports our belief that we are seeing it continue to grow. In the June issue of the Census Bureau Water Report that was just issued reported, on an annualized basis, 10.7% increase in water supply spending. This is the area that we compete, so it's piping, pumping, water treatment plant investment.

So that's what we believe it has been growing throughout the year, which when you stop to think about it is just a natural, because we're in it, again, to the construction (inaudible). So we would expect to see this quarter and next quarter greater shipments to repair and replacement than we did in, say, the October and our first quarter of our fiscal year or second quarter.

To summarize the answer to your question, all of our internal indicators show that we continue to see the growth in this segment, and when you look at it throughout our fiscal year, we've seen our shipments grow more than anything else. It's just the seasonality of the business.

Are there any particular -- just kind of as a follow-up -- are there any particular geographic regions that you're seeing that are really kind of standing out in terms of order activity?

Well, for repair and replacement, I think we would see the Northeast, and that's not surprising. Look at the age of those systems. We have also, in the West, we have seen some activity of going to -- a need to tap into some new sources, albeit not the major projects that we think that we'll see probably in the future. I don't know if anyone was -- listened to or saw a copy of the comments that Governor Schwarzenegger made -- I think it was in the last week or so -- but he's talking about somewhere, I think, close to $6 billion to add in the 2008 budget, and I think a lot of that's a need just to tap into new sources.

We've seen a little bit of that, but so I would say, by far, (inaudible) more in the Northeast and as well a little bit of activity of going to new sources in the West.

Keith Hughes, please state your company name.

Suntrust Robinson Humphrey. I had a couple of questions. First, on capacity rates you talked in the prepared script about bringing inventories down more in the fourth quarter. Will you run a similar capacity rate at U.S. Pipe and Mueller to achieve that -- as what we saw on the current quarter?

Keith, I think that we'll probably run at a similar capacity rate at U.S. Pipe. I think that we will actually be running at a lower capacity rate at Mueller in the fourth quarter. And so we'll actually see some of that impact in our fourth quarter results but, as you know, that it gets capitalized and put an inventory, and it gets -- it runs -- flows through cost of goods sold when it comes out of inventory.

So we'll see that impasse in Q4 and probably some of that will still go into -- it will go into Q1 of fiscal year 2008.

Okay. Within U.S. Pipe, can you break out how much the acquisition added in revenue and what volume was within U.S. Pipe?

Yes, U.S. Pipe was down in volume, and the acquisition made up -- we've been pretty sensitive about giving that competitive information, but the acquisition accounted for more than half of the volume increase, and then the rest, of course, was pricing -- I'm sorry -- the revenue increase.

Revenue increase, okay.

Yes, sorry.

And, I guess, finally, within U.S. Pipe, you broke out the bookings of small and large diameter. I guess, first, how much of the business, in just rough terms, is large diameter, and why would there be -- is the difference the end-user market primarily there?

Yes, yes, by far -- most of the -- 70% -- and it can vary -- 70% is small diameter, and there is a difference in the end user. Small diameter, we're talking 12 inches and below, were really driven by housing starts, and you'd think that they're more in the distribution line.

The large diameter is transmission line, so we'll see that that will be the lines bringing the water from the source into -- I'd say into the different communities. So, yes, there are different drivers there and, in fact, just to reiterate, I think what I brought out when I was answering Michael's question is that we'll see large diameter will be driven more by repair and replacement and tapping into new sources. Small diameter will be driven more by residential construction.

Okay, and, again, it's 70% small diameter within U.S. Pipe, correct?

Yes.

Michael Schneider, please state your company name.

Hi, Mike Schneider from Robert Baird. Maybe we can stick with this production topic. In terms of operating days, so you expect to be roughly the same at U.S. Pipe and lower in Mueller. Can you first just describe why you would still be, I guess, running at lower production rates within Mueller? Is it just a more difficult model to flex during a quarter?

No, Mike, actually when you look at it, when you look at our first two quarters, and as you go back to our -- actually, our first quarter conference call, we talked about it has been our practice to build inventory in the first and second quarter in our Mueller business -- our valve, our hydrants, and our brass products -- in order to be prepared for the buying season.

And so, again, when you go back, and you look, you will see that our inventories increased in the first and second quarter at Mueller. Given where our inventories were when we entered the third quarter and given where the bookings that we saw in April at the time, we said that we were going to focus on bringing down inventories.

So it really is both a combination of U.S. Pipe. We're a little more in a build-to-order mode, though we do build some inventory there, and at Mueller, we build to primarily almost to a forecast, so it's a combination that we build inventories the first half so that we will need to bring down more inventory as well as I think that we'll see probably distributors really playing it very tight in terms of the inventory they're carrying. So we may see even, you know, more of an impact on demand, a drop in demand at Mueller, too.

Okay, and as you look out, then, to finish the year, it seems safe to assume that the Mueller operating margins will head lower before we turn the corner, just given the lower production rates in Q4?

Yes, we think that their margins will be pressured from lower production rates and, again, as we said, we just think it's the right thing to do to free up the cash flow.

And, again, I think, as I answered in the previous question, those lower production rates, those variances, get capitalized, go into inventory, so that we probably see them coming through cost of goods sold, maybe even six, eight, to 10 week after we actually bring down production.

Okay, and sequentially lower margins, though? In other words, we haven't seen the bottom yet given what needs to be done on inventory?

Yes, I would think that we're still going to see a little bit of continued decline in production that will impact margins.

And at U.S. Pipe, the same series of questions. I guess I was surprised given the amount of inventory that was taken out, to see that margins were up sequentially. Can you give us just some insight as to 2Q versus 3Q and then, again, if you're operating at the same levels, you've got some pricing coming through, would you actually expect margins to sequentially increase at U.S. Pipe?

Well, we don't have -- first of all, we (inaudible) -- on the pipe -- price of pipe, I'm going to say that, as we said in the last conference call -- that we saw a spike in raw material costs, so we implemented a price increase, announced it March 15th to be effective April 15th. I would say that that price increase is spotty at best. So I mean our ability to be able to get it through the marketplace.

So I'm not so sure that we may see higher pricing on our pipe products. I think that we're looking to -- we're really looking to stabilize, make sure prices are stabilized.

If you look sequentially on U.S. Pipe, the real driver -- and, again, this gets to the seasonality that we had our volume was contributed to the margin improvement, and while we did it, it was somewhat offset by raw material -- higher raw material costs, I think it was more the volume and, I would say, overhead absorption that drove a slight increase in margin sequentially.

Okay, and, again, looking into Q4, would you expect margins to be sequentially better just because you have taken the bulk of the inventory out at U.S. Pipe?

U.S. Pipe, I think we'll see continued reduction in inventories, but I think where we may have some real exposure at U.S. Pipe could be some higher, slightly higher, raw material costs flowing through, because we had a real spike in the end of the second quarter, if you recall, that I referenced in the -- what I referenced in the script that we saw a high of $313 per ton. That was late in Q2. We saw some of that in Q3, we'll see some of that coming in in Q4.

So relative to margins in U.S. Pipe, I don't think we see any factors where we may see much of an increase but, on the other hand, we don't see any factors where we think it may drive it down substantially.

Okay, and when you look at inventory levels at $484 million now, they still are up year-over-year and, yes, you've done an acquisition or two in there, but can you give us a sense of how much of that increase, if you pro form it for the acquisitions, is due to unit increases versus just higher cost of materials flowing through the inventory balance?

Mike, if you look at that year-over-year, probably the increase, more than a third of it, is just higher raw material costs. Probably not quite as -- slightly less than a third of it is the acquisition, and then the rest of it would just be still the increase of inventory that we -- unit inventory from, primarily, the Mueller business, and that's what we're bringing down now.

Okay, and then final question -- just in U.S. Pipe you mentioned that public works orders and quotations are up year-over-year and still rising, but with the excess capacity in the industry and even within Mueller reducing inventories, can you give us some description of what the pricing looks like on these public works bids that are being accepted? Because I presume market pressure is placing probably excessive pressure on pricing in these bid projects.

You know, Mike, I think that that's fine, and I think we all have a pretty sharp pencil when we look at these projects, and as we've said in the past that -- especially from the Mueller business, that pricing will be slightly below what we get on day-to-day business. Our distributors will quote these projects, and they'll come back to us from time to time and say, "Give us a better environment." They may need some price concessions.

So I think it's safe to say that on these projects, the pricing may get a little tighter than what we would typically see in our normal day-to-day business.

Joel Tiss, please state your company name.

I'm still at Lehman Brothers. One thing that might be helpful -- can you talk a little bit about your pricing in the marketplace, like, where your price levels are in Mueller versus the competition?

Sure, Joel, we typically are, I'll tell you, at least about 5% higher than our competition, and that's a level that we've maintained for quite some time. And I think if you look at our balance in the hybrids, that, again, as we mentioned on the last conference call we increased prices for the 16th year effective February 1st, and I think our competitors did follow that price increased and maintained that level.

So I would say that on the Mueller, probably about 5% higher.

Okay, and my last question, just sort of a philosophical -- why not just take a little bit of a bigger negative hit in the fourth quarter and try to accelerate the inventory cleanup and just get it all done and start 2008 with more of a cleaner slate?

Joel, that's a very good comment, and the reason that will be difficult is the fact that, again, as I mentioned, the reduced production, the unabsorbed overhead, goes into inventory, then flows through cost of goods sold as it comes out of inventory.

So as we -- for instance, the production that we may drop in August, we may see that coming -- flowing through cost of goods sold in late September and carry over into October. So it really is this phenomenon more than anything else that impacts the timing of when it will hit margins.

There's a two- to three-month lag on production coming down to when the effects of that on the overhead is often rolled through your cost of sales. The action taken in Q4 really largely impacts cost of sales in Q1 with respect to that reduced throughput.

Okay, and most of the inventory is in finished goods inventory, right?

Yes, when you look at our Mueller Water Products, I would say not so much finished goods but as in finished components. So we will have -- it will be a hydrant body, a valve body, but not an actual assembled valve or assembled hydrant.

The next question is from Robert Maloney, please state your company name.

Morgan Stanley. Earlier this summer, you guys spoke about having some trouble getting price increases through on Mueller's brass products. Can you walk us through the competitive dynamics you're seeing in the market?

Yes, Rob, you're absolutely right. We announced about -- and I referenced our price increase on valve hydrants in February. We did announce a price increase in brass. That price increase, our competitors did not follow. So about six weeks later, we had to rescind that price increase.

I would say that the pricing has been stable relative to the levels that we would have seen in November, December, January. But we're seeing no upward movement in pricing. So year-over-year when you look back in May/June timeframe, we increased these prices on brass products 22%, and our competitors followed, but there has been no movement in price since that time.

That's great, thanks, Greg. Given that that is a fairly oligopolistic industry, do you have any sense as to why your competitors failed to follow on that price increase?

Yes, Rob, if you go back to the January timeframe, in fact, we referenced it in our script, where we saw a dip in brass ingot prices early in the year, and they steadily increased. Well, again, I think even used the term -- the same terminology that I used in our last conference call -- evidently our crystal ball was a little better because we increased prices when actually brass ingot was about $2.38 a pound, $2.39 a pound, in that range, and that was down from the $2.80 to $2.85 that we saw in May/June of last year.

So I think that our competitors just elected to say that they weren't comfortable increasing prices because brass ingot costs at that given time had declined. Of course, as we know, they're back near to the $2.70, $2.75. So I think that was the rationale, and we went out once, so I think that we will probably be a little more cautious when going out the next time with a price increase on our brass products.

Greg, how do inventories look in the distribution channel? Do you have a sense as to what your distribution partners are telling you about what they're seeing, and about the inventories that they feel like they have on hand?

Rob, as you know, it's more qualitative data rather than very specific data that we can get, but, generally, we get the sense that inventories today -- brought down inventories and in line with demand, but I think that they probably have a pretty conservative outlook so they're managing very closely. So as we sit here today, that we don't think that we're going to see a need for a major adjustment in inventories that we think probably brought them down over the last four or five or six months.

Okay -- one more -- I saw that receivables picked up a bit during the quarter, and I'm assuming the vast majority of that is seasonal. I just wanted to find out whether you were feeling as if there was an increased stress among your customers in terms of their businesses?

No, it was seasonality. We looked at our -- we're pretty comfortable relative to -- we don't see any real concerns on the horizon.

Seth Weber, please state your company name.

Banc of America, thanks, good morning, everybody. Most of my questions have been asked, but on the Anvil business, margin there continues to be a lot better, frankly, than we thought it was going to be. Has something changed there on the competitive front where you're really not seeing the pressure that we might have thought you were going to see from imports, or are you using China more, or can you just elaborate on that a little bit?

Yes, a little bit. Relative to imports, we actually, in the last quarter, have seen an increase in prices from China, and I think that's in line with -- I think the government there is offering less subsidiaries, I think the manufacturers over there are learning that prices have to be greater than costs.

So I think that we haven't seen -- I would not say the pressure has gone away, but we haven't see any increased pressure. I think that when you look at the components at Anvil, certainly, we've had very good volumes, because we've had a strong market demand and, really, if you look at the -- there's a second component -- I think has been the volatility of steel scrap and pipe prices that has given us and the rest of the industry the ability to raise prices. I'd say after, probably, the previous years, some really, I'd say, pricing pressure the other way.

So I think that both are volumes has been very good, and that we have been getting selling price increases ahead of cost increases, and I think that's certainly improved markets.

Again, I want to point out that, as we said in our script, that this quarter we had the benefit of $1.2 million of dumping duty in this quarter and that certainly helped margins, too. But I think as we look at our Anvil management team is doing an excellent job of finding the opportunities in the marketplace to get the higher pricing, and we're also, certainly, benefiting from higher volumes.

Okay, is that $1.2 million -- you've booked that in previous quarters, as well. Is that going to be an ongoing --?

Not necessarily ongoing. In fact, we're not sure where it stands. We'll get a notification from the government, and this ties into the -- I think the Byrd amendment from several years ago. We believe that actually most of it is behind it, and the government is more likely going to discontinue the distribution of this money.

Okay. A separate question -- so the debt paydown in July, I think you said $40 million -- does that signal a little bit that you're pulling your horns in a little bit on the acquisition front? Is that a change in strategy or is that just being opportunistic with your cash balance?

Seth, more opportunistic. We've always been pretty consistent when asked about the priorities of our cash with wanting to pay down debt. But, two, again, that we're looking at every opportunity to continue to add to our footprint in the water infrastructure market both in the U.S. or if there's an opportunity to make best internationally.

But I think that you said it best -- it was more opportunistic.

Brett Reese, please state your company name.

Good morning, gentlemen, I'm from Janney Montgomery Scott. I've got a couple of just margin of safety questions on the debt. Your debt, at $1,135,000,000, I assume that's composed of the $425 million senior subordinated notes and that $714 million bank line of credit, and do you have an average cost of debt figure in your capital structure? And I've one or two other questions on this subject.

Sure, I'll ask Mike Vollkommer to address that.

The average cost of debt before the cost of amortizing -- the fees up front plays that debt is in the low sevens -- 7.1%, 7.2%.

Okay, and the $21.6 million of net interest charges this quarter -- is that kind of the high-water mark the next couple of quarters of what your interest charges are going to be, since you seem to be contracting working capital?

The interest this quarter has a mix of all debt and the new debt structure, and we have got one off of the new debt structure, and it also has that swap adjustment of 1.7. We're pretty much at a net interest run rate of about $20 million a quarter right now with our current situation. Obviously, over time, depending on where our LIBOR goes, that can change.

The senior notes are fixed at 7 3/8, but we do have -- and a big piece of the term is under swap, but there is a variable component as well of about 159. Depending on what LIBOR does, up or down, it will help us or hurt us, but, yes, absent any additional borrowings or acquisitions, we're at the high-water mark.

Okay, and it sounds like you'll look, really, above any covenants that you have on your debt -- to the ratios?

The [latter paid] on the covenants.

Todd Vencil, please state your company name.

Davenport & Company. Most of my questions have been answered. A quick question -- I mean, the expenses on the debt refinancing came out a bit higher than you guys had estimated. Can you talk about what the moving parts were on that?

What we had in the earlier filings was -- when you refinance the debt, you have to take a look -- there's an EITF that dictates how much of the old debt placement fees roll into the new debt, and there's a range of that, and we ultimately -- the EITF required us to write off about $9 million more.

So while that's a noncash charge, there's a P&L associated with it. It helps ongoing because it will reduce the amortization of those fees, going forward.

So, actually, it's an answer -- we dip into what we first estimated, but as we work through the EITF we came out with an answer, I think, is a good one.

Okay, and that additional expense was noncash?

Yes.

How much of the expense there was cash versus noncash -- for the whole charge?

That was driven by consent and call premiums. But the cash piece was about $48 million.

Thanks very much.

That's the pretax number, of course, you're going to get tax benefits from that.

Keith Hughes, please state your company name.

Suntrust Robinson Humphrey -- just to follow-up on SG&A, it was flat year-over-year, in dollars. Given the demand environment, is that something that could go down as we go into the fourth quarter compared to prior year?

Keith, we'll look at that very closely, and we may have some opportunities, of course, on the other hand, that we think a market environment like this, that we want our salespeople out there just working full bore and have all the tools that they possibly can have in their toolkit when they're finding customers.

But we'll look for all the soft areas, but we're not going to do anything that could get in our way of making sure we're out there in front of the customer.

Is this a good environment to take some share?

We always, as the price leader, we talked about this earlier, we always walk that fine line saying, "Where does it make sense to take share but without disrupting our price position?" So we do that on -- almost by instinct basis.

[Dariko Yung], please state your company name.

I am from Nomura. Your capex guidance for 2007 is $80 million. Is that a good number to use, going forward?

When we look at next year, we think that's a good number. We've had several projects this year and flowing over into next year. We think that beyond 2008 our business is typically run at about the $60 million range, and we think that is more likely. The $80 million this year, we think is probably pretty -- in 2008 will be pretty comparable.

Brett Levy.

Hey, guys, all my questions have been answered except one. Is there an established amortization schedule on the bank debt, and how does the recent paydown affect that? You can just give me some sense as to what your amortization is, going forward?

The amortization schedule is -- the term being components, start to amortize -- let me step back -- the term A start to amortize in September of '09, roughly $3.8 million a quarter. The term B starts to amortize this September, roughly, $1.4 million a quarter. There is not a lot of amortization in the next -- in the short term here.

We do have the ability to prepay that without penalty.

There are no further questions at this time.

Thank you, Julie, well, since there are no further questions, that concludes our call this morning. Again, we thank you for your continued interest in Mueller Water Products, and thanks for joining us today.

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