Mueller Water Products Inc (MWA) 2007 Q4 法說會逐字稿

Welcome to the fourth quarter 2007 quarterly earnings release conference call for Mueller Water Products. At this time, all participants have been placed on a listen-only mode until the question-and-answer session. (OPERATOR INSTRUCTIONS) .

I would now like to turn the call over to Ms. Martie Zakas. Thank you, ma'am, you may begin.

Hi. Good morning, everyone. Thank you, Wendy, and thank you for joining us today for our fourth quarter earnings call. Mueller Water Products currently has 114.9 million diluted shares as of September 30, 2007, which is comprised of 85.9 million Series B shares and 29 million Series A shares.

As you know, yesterday evening we issued our fourth quarter press release reporting earnings from Mueller Water Product for the period ended September 30, 2007. We also issued a news release concerning our operations in Burlington, New Jersey, earlier today, and we will be discussing those actions in more detail on this call. This morning we have with us Greg Hyland, our Chairman, President, and CEO, and Mike Vollkommer our CFO.

Within our press releases 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. We believe this will assist the investment community in properly assessing the Company's underlying performance for the period being reported. Reconciliations between GAAP and non-GAAP financial measures are included in the supplemental information within our earnings release. This morning when we use the term E-B-I-T-D-A or EBITDA, we are referring to our adjusted EBITDA which includes acquisition and plant closure cost adjustments in fiscal 2006. These numbers are provided in the press release.

Additionally, management will make forward-looking statements about our business. Please see the Safe Harbor language contained in our press release, our SEC filings and the slides presented today 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 website which is www.MuellerWaterProducts.com for a period of approximately 90 days after the presentation. After the prepared remarks, we 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. We appreciate you joining us as we discuss Mueller Water Products' fourth quarter results and provide an overview of fiscal 2008. I will begin with a brief summary of the results for the quarter. Mike Vollkommer will follow with a detailed financial report. I will then discuss market conditions and the aggressive actions we are continuing to take to strengthen our position in the marketplace. I will also provide some additional information and direction on the key drivers that could impact our business. Then we will open it up for your questions.

As summarized in yesterday's press release fourth quarter net sales totaled $474.9 million. Operating income was $50.7 million, and diluted earnings per share were $0.13. Consolidated operating income margin was 10.7%, and EBITDA margin was 16.2%. Our net sales during the fourth quarter were down 5.5% from third quarter 2007. This decline in sales from third to fourth quarter is not typical of the seasonal trends we normally see, and was primarily due to declines within our water infrastructure segment, Mueller Company and U.S. Pipe. The dramatic drop in-housing starts throughout the fourth quarter certainly impacted the sequential decline from the third to fourth quarter. As you can see from the Chart in Slide 4, housing starts fell 19% during the quarter from a seasonally adjusted annualized rate of 1.47 million units in June to 1.19 million units in September. Mike will go into more detail on how this reduced market activity impacted our sales and margins.

Given the trends in the market, we have heightened our focus on reducing inventory as we discussed on the last earnings conference call. In the third quarter 2007, we reduced inventories $27 million. We were also successful in meeting our fourth quarter target by further reducing inventory $33 million. As we have said before, we made a strategic decision to bring down inventory levels but with the trade-off of reduced earnings per share. During the fourth quarter, we incurred approximately $6 million of additional under absorbed overhead due to reduced production levels specifically related to the inventory reduction plan. This portion of under absorbed overhead reduced EPS by about $0.03 and operating income margins by about 120 basis points during the quarter. While unit costs were increased in the short-term as we reduce production we believe that this enhanced focus on improving cash flow is appropriate in today's mark environment, and during the fourth quarter we generated $74.1 million in free cash flow.

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

Thanks, Greg. I will review the consolidated and segment performance. Consolidated net sales of $474.9 million in the fourth quarter of 2007 decreased 8.3% from $518.1 million in the prior year fourth quarter. This decrease resulted from volume declines in water infrastructure products which was driven by the accelerated downturn in residential construction. Higher pricing across all segments and U.S. Pipe's acquisition of Fast Fabricator only partial offset the effect of these volume declines. Consolidated operating income of 50.7 million in the fourth quarter of 2007, declined from 71.6 million in the prior year quarter. EBITDA of 76.8 million in the fourth quarter 2007, declined from 96.1 million in the prior year fourth quarter. Fourth quarter 2007 operating income and EBITDA margins of 10.7% and 16.2% compare with prior year fourth quarter margins of 13.8% and 18.5% respectively.

Margin declines reflect the impact of lower shipments of high margin water infrastructure products, increased raw material costs in the Mueller Co and U.S. Pipe segments, and the comparative under absorption of overhead caused by reduced plant production levels. While we've been able to offset rising raw material costs with price increases and have reduced fixed costs primarily from plant closures and consolidation, we have not been able to fully offset the effect of volume declines within the Mueller Co and U.S. Pipe segments. Net sales for the Mueller Co segment were 199.5 million compared with 222.2 million in the fourth quarter last year. Volume declines of 34.5 million were partially offset by $11.8 million of price increases implemented since May 2006. Reduced volumes in Iron Gate Valve, Hydrant and Brass Service products were the result of continuing weakness in residential construction and strong shipments in the fourth quarter of 2006, driven by distributor pre buy orders that preceded the May and June 2006 price increases.

Income from operations of 34.7 million and EBITDA of 47.6 million in the fourth quarter 2007, compared to income from operations of 52.6 million and EBITDA of 65.3 million in fourth quarter of 2006. Volume declined 34.5 million from the previous year period, which resulted in a decrease in operating income of approximately $13.3 million. While raw material costs increased $10 million, this was offset by $11.8 million in higher pricing. Reduced production due to a drop in sales volume and the inventory reduction plan resulted in approximately $11 million in under absorbed overhead roughly divided equally between sales volume declines and the reduction in inventory. The under absorbed overhead relates to third quarter production but impacts fourth quarter cost of sales as the inventory turns. We also realize an additional $4.6 million in the Mueller Co segment from various cost savings initiatives.

Turning to the U.S. Pipe segment, net sales, which now include results from the January 2007, Fast Fab acquisition, decreased 10.6% to 146.6 million compared with 163.9 million last year. Net sales from Fast Fab and higher pricing were more than offset by a 20% decline in volume. Income from operations was 10.4 million in both the fourth quarter of 2007 and 2006. The prior year quarter included $1.9 million of related party charges that were allocated to the U.S. Pipe segment for corporate services provided by the Company's former parent. Subsequent to the spin-off in December 2006, these services are now performed by Mueller Water Products Corporate. Income from operations and EBITDA were negatively impacted by lower shipment volumes of Ductile Iron Pipe and higher margin value-added product. Increased pricing offset higher raw materials costs.

Moving on to Anvil, net sales were 142.5 million in the fourth quarter 2007, an increase of 2.9% compared to 138.5 million in the fourth quarter 2006. Operating income of 13.4 million in fourth quarter of 2007 decreased from 16.1 million in the prior year quarter. The declines in operating income and related margin were primarily due to a foreign currency hedge and the timing of a number of other costs such as severance and medical expenses. Corporate expense was 7.8 million in the fourth quarter 2007 compared to 7.5 million in the prior year fourth quarter. As a reminder, $1.9 million of charges for corporate related activities from the former parent company in the fourth quarter 2006 were charged to the U.S. Pipe segment.

Now I will discuss some nonoperating line items. Interest expense net of interest income was 22.1 million in the fourth quarter 2007, compared to 17.3 million in the fourth quarter 2006. Interest expense on the Company's outstanding debt obligations was 20.8 million in the fourth quarter 2007, compared to 23 million in the fourth quarter 2006. A decline of 9.6% as a result of the successful debt refinancing we completed in the third quarter. Total interest expense net in the current quarter includes interest expense of $1.9 million related to a legacy state income tax exposure and interest income of 0.8 million on cash balances. Interest expense in the prior year quarter, is net of interest income of 1.8 million and income of 2.9 million received from the former parent company in connection with its early loan repayment to Mueller Water Products.

We have been providing a full-year tax rate or projecting a full-year tax rate of approximately 42%. Our actual tax rate for fiscal 2007 is 44.4%. This caused a 49% rate in the fourth quarter because through the first nine months we were providing tax at a rate of 42.2%. The tax rate increase primarily resulted from the legacy state income tax expense recorded in the fourth quarter and lower benefits from a domestic manufacturing credit that is based upon a percentage of Form 1040 tax-based income. That's the Section 199 domestic credit. The credit has declined because we will have lower than previously expected tax return based income resulting from being able to maximize current year tax deductions related to debt restructuring, accelerated depreciation, pension contributions, and certain other items. While the adjustment for the lower manufacturing credit does impact fourth quarter EPS by approximately $0.01, the higher deductions are lowering our cash tax payments.

As described in the earnings release the legacy tax exposure relates to the Company's acquisition of predecessor Mueller Company on October 3, 2005. We recently determined that as the acquirer of predecessor Mueller Company we may have exposure with respect to certain state income tax matters of predecessor Mueller Company. The Company believes the worst case state tax liability excluding interest and penalties related to the pre acquisition period is approximately $7.5 million. This amount, net of federal tax benefit, has been recorded as an adjustment to goodwill. Also, the Company has estimated that it may incur an additional $1.1 million of state income tax expense related to the three-month period immediately subsequent to acquisition. This $1.1 million has been recorded as tax expense in the fourth quarter 2007 net of federal tax benefit.

In addition, the fourth quarter 2007 includes $1.9 million of estimated expense related to these legacy tax obligations. However, inherent uncertainties always exist in estimates of tax contingencies and the actual amounts payable could vary form these amounts. This additional state income tax and related interest expense recorded in the fourth quarter 2007 income statement reduced earnings per share by approximately $0.02 in the fourth quarter.

As Greg mentioned, we continue to focus on increasing cash flow. We entered the fourth quarter with a $57 million cash balance. During the quarter, cash provided by operating activities amounted to $96.3 million net of a pension contribution of $20 million. We used this cash to repay $41.5 million of debt, pay a $2 million dividend and finance $22.2 million of capital expenditures. We ended the quarter with a cash balance of $87.3 million. Free cash flow amounted to 70.9 million in the 2007 fiscal year compared with 36.5 million in the 2006 fiscal year. This equates to free cash flow per diluted share of $0.62 in 2007, compared with $0.38 in 2006. Free cash flow is calculated as net cash provided by operating activities, less capital expenditures. With that I will turn the call back over to Greg.

Thanks, Mike. As we look to 2008, we are planning on a continued downturn in new residential construction. We expect to see continued growth in water infrastructure public spending and a steady commercial construction market. And we expect to be challenged by rising raw material costs across all of our segments. Our overall short-term focus is on reducing costs, maintaining flexibility to take advantage of growth opportunities, and increasing our cash generation. One of our first actions in fiscal 2008, is the further reduction of fixed costs. As Martie mentioned in the introduction, we announced this morning our intention to close manufacturing operations in our Burlington, New Jersey Ductile Iron Pipe plant. We are transferring that production to our North Birmingham and Bessemer, Alabama facilities to concentrate our manufacturing where we believe we can be globally competitive with quality and costs.

We expect to close the plant on an accelerated basis and cease production by February of 2008. This action will affect about 180 jobs. We will; however, continue to use this location as a full-service distribution center to serve our customers in the northeast. I also note that this will be the fifth plant that we have closed over the last 24 months. With this closure, headcount in our water infrastructure business will be down about 16% since we began the integration of U.S. Pipe and Mueller. We do expect to take about a $19 million restructuring charge substantially all of which will be taken in the first quarter of fiscal 2008. This charge is comprised of approximately $15 million of asset write-off and $4 million of cash cost, including severance and other costs associated with the restructuring. Incremental cash operating expenses associated with this activity of approximately $3 million are expected to be incurred throughout the final three-quarters of fiscal 2008. We expect savings on an annualized basis to be about 15 to $17 million, of which we expect to realize about $12 million in 2008 for $9 million net of the $3 million operating expenses. By taking these steps we will also avoid future capital expenditures that would have been required for this location which would have included environmental compliance as well as maintenance capital spending. This action, in conjunction with the previously announced mini mill is part of our overall strategy to enhance operational excellence, improve manufacturing efficiency, and grow overall margins in our U.S. Pipe segment.

We have also just announced that we are freezing the last remaining salaried defined benefit pension plan within Mueller Water Product and will move to a defined contribution plan. This will not only reduce costs at our pipe segment but also reduce our future pension funding requirements. We will continue to evaluate our manufacturing footprint throughout our segments and maintain production levels consistent with market demand. Additionally, as we enter our fiscal year, each business unit has identified specific initiatives that will be implemented throughout the year to improve productivity and reduce costs.

In 2007, we estimate our shipments to end markets have shifted to roughly 35% to residential driven by residential construction, 35% public water infrastructure spending, and 30% commercial construction compared with 40% residential construction, 30% public water infrastructure spending, and 30% commercial construction in 2006. We believe that our overall market share has remained stable in 2007.

As we look to 2008, the most recently published State of the Industry report by the American Water Works Association forecasts that spending on repair, upgrade, water infrastructure or public spending will grow 17%. This survey last year projected an 11% growth in 2007. While we do not expect to see this level of increased demand for our product in 2008, we do expect to see high single-digit low double-digit growth in public spending.

We have recently introduced several new Mueller branded products which address emerging water security concerns. It is generally believed that a water system is vulnerable to contamination downstream from the treatment operation through a fire hydrant. We are introducing two new products. A fire hydrant with a security feature and also a retrofit to an existing fire hydrant to make it tamper-resistant. Our new Mueller Super Centurion High Security Fire Hydrant includes a check valve as an integral part of the hydrant connection to the water main. It blocks any reverse flow of water boring contaminates from the hydrant back into the public water main. The new Mueller Nozzle Check Valve is intended to prevent contaminates into hydrant through an open nozzle and can be retro fitted on all existing hydrant. These two products add security features to fire hydrant with out affecting normal operation for maintenance. While we do not expect significant sales contribution in 2008 from these products we do believe innovative products like these continue our tradition of market leadership.

As you know, our Anvil business accounted for 30% of our total revenue and demand in this segment is primarily driven by commercial construction. As we look to 2008, forecasts are calling for growth in commercial construction spending but not at the same rate as 2007. We expect to see modest top-line growth in 2008 for Anvil. We expect to source more of our products offshore in line with trends in the market. These sourced products typically have lower gross margins, but we will see benefits in 2008 from our synergy actions implemented in 2007 as well as other cost savings initiatives. We would expect to see a slight improvement in margins at our Anvil business in 2008.

Raw material costs in each of our segments have been volatile in increasing over the last 12 months and we expect this trend to continue into 2008. For example, the cost of scrap iron for ductile iron pipe has ranged from a low of $206 per ton to a high of $313 per ton in 2007 and is currently $262 per ton. These trends are also true for brass ingot, which we use in our valves, hydrant and brass service products. While brass ingot prices dipped early in the fiscal year they have steadily increased since then. In total we expect the cost of raw materials to increase in 2008.

During 2007, we were able to more than offset raw material cost increases throughout all of our business segments with increased pricing. We were ahead of the curve for Mueller branded products in fiscal 2007 based on the price increases we implement in the third quarter of fiscal 2006 and the second quarter of fiscal 2007. In our U.S. Pipe and Anvil business segments, we instituted several price increases in fiscal year 2007 that covered raw material cost increases. It is our intent to increase prices in 2008, to at least cover rising raw material costs. For example, we announced a 3% price increase for ductile iron pipe, last week. However, we believe we are already exposed to higher raw material costs based on prices we paid during the last several months. These higher costs were capitalized in our inventory and will impact first quarter fiscal 2008 margins. A primary objective for 2008, is the continued increase in cash flow. As Mike explained earlier, our 2007 free cash flow for the year was 70.9 million. Our cash flow in the second half of 2007, benefited from our focus on reducing inventories. In fact, inventory levels declined $57 million over the last six months. Furthermore, our cash balance at the end of October was $120 million, $33 million higher than cash on our year-end balance sheet.

In 2008, a significant component of our management incentive programs will be based on improving working capital. Additionally, we have further scrutinized our capital expenditure requirements and currently estimate capital expenditures in 2008 to be below 2007 capital expenditures of $86.3 million, even with the additional mini mill expenditures. During 2008 we expect to spend about $34 million to complete the construction of the mini mill and we estimate about $40 to 50 million in other expenditures.

Now let me be a little more specific about the full-year and the first quarter of 2008. At this point, we believe full-year revenues will be essential flat. We are anticipating further decline in residential construction, growth in public spending for water infrastructure, and as we discussed, modest growth in commercial construction spending. We do believe that we will see a more magnified margin in EPS spread across the quarters throughout the year. Specifically, we do not expect price increases to cover raw material cost increases in the first quarter in our Mueller Company and U.S. Pipe segment. As we have discussed several times, we were very aggressive in implementing price increases in May and June of 2006 for Mueller branded products. These price increases coupled with the February 2007 price increase on valves and hydrant more than covered rising raw material costs throughout 2007 but at a progressively decreasing rate. Early 2007 price increases at U.S. Pipe enabled us to offset rising raw material costs in 2007 but again, at a progressively decreasing rate. As we mentioned earlier, we have experienced rising raw material costs the past several months. This is expected to negatively impact cost of goods sold for both Mueller and U.S. Pipe in the first quarter. We believe that price increases once implemented from Mueller Company product should at least cover rising raw material costs there after. While we have just announced the price increase at U.S. Pipe, we do not expect to begin to realize the benefits of thin crease until the second quarter.

We will also be impacted in the first quarter by under absorbed overhead that will flow into cost of goods sold during the first quarter comparable to what we experienced in the fourth quarter. This under absorbed overhead should abate in the second quarter as the affects of our inventory reduction plan are expected to be complete.

For first quarter 2008, we expect operating income margins for both Mueller Company and U.S. Pipe to be below fourth quarter 2007 actual margins. With price increases and production more in line with shipments, margins should then increase throughout the year. In the second half of 2008, we expect higher operating income margins at both Mueller Company and U.S. Pipe than those experienced in the second half of 2007, especially, as we see the benefits from closing the Burlington, New Jersey Ductile Iron Pipe Manufacturing operation and other cost savings from actions implemented in first half of 2008.

Other key variables for 2008, are corporate spending of approximately $38 million, our tax rate is expected to be 41 and 42%, and we estimate 2008 net interest expenses to be between 77 and $79 million. As we realize the full-year benefit of our debt refinancing in May of 2007. With our cash on hand and the free cash flow we expect to generate in 2008 we will look to do the following. Repay debt to lower interest expense and strengthen the balance sheet, for example in July 2007, we paid down $40 million of debt. Continued payments of dividend, consider share repurchases. We appreciate that some investors prefer that we use cash to repurchase shares. Under our debt agreement there are various limitation on share repurchase and we are cognizant of those limitations with respect to future financial and operational flexibility. We will continue to carefully assess that impact versus advantages of share repurchase.

At this time, reducing our balance sheet leverage is a priority. And we will continue to look it at acquisition opportunities. We will examine possible acquisition candidates but we are focused on getting the right business at the right price. We want you to take away from today's conference call is that we are taking decisive actions to prepare for a continued residential construction market downturn. The actions we are taking will make us that much more cost competitive when the market rebound. We won't lose sight of the building the foundation for long-term growth. We will invest when it gives us the best foundation for that growth. We will maintain our market leadership positions. And most importantly, we have created the flexibility necessary to respond to current market conditions and to increase our production when we see an upturn in the residential construction market. With that, we'll open up the call to questions.

Thank you. (OPERATOR INSTRUCTIONS) One moment for the first question. Our first question is from Michael Schneider. You may ask your question and please state your company name.

Good morning. Robert W. Baird, how are you?

Good morning, Michael.

Wonder if we could first focus on pricing. You gaze were aggressive earlier the year, and intend to go out with more, what have you seen out of your competitors and can you gauge at all to what extent now you are above market prices and possibly sacrificing volume to improve the profitability?

Michael, good question. I think it's best to describe the market pricing as reason reasonably stable. Again, it gets down to not only Mueller Water Products but our competitors are facing the same input costs. It raw material is such a high percentage of our overall cost. I think I can say it's reasonably stable with the occasional skirmishes. I say the occasional skirmishes may be more on our ductile iron pipe business since as you know those are often quoted on individual projects rather than off a price lists going through distribution. Our market share has remained stable throughout 2007. We-- we get our trade association data that may show some variation from month to month but in total stable. We do strive to keep a slight premium, I would say a 5% price increase premium, especially in our valves in the hydrant, Mueller branded, because we think that our quality and our service deserves that, but so in total I would say stable pricing, it's a stable market shares, and we strive to keep a slight price premium.

Okay. Then on the inventory reductions, did you 27 million in the third quarter, 30 million in the fourth quarter. Can you just ballpark what it is you need to take out yet in your at least according to your budget, in Q1?

Michael, from an actual inventory take-down we think most of the take-down is behind us. However, we will see, as we discussed in the last conference call, we will see the impact of the unabsorbed overhead related to the reduced production in the fourth quarter will impact first quarter margins because it flows through cost of goods sold as the inventory turns. So relative to the specifically your question, we think inventories are pretty much in line, but we will see the impact of that production take down yet in the first quarter.

But by Q2, fiscal Q2, it would have already flowed entirely through the balance sheet?

That's our -- through the income statement?

Yes.

That's our expectation. And we're just -- hope we don't see, in the a major collapse in the residential construction market. We feel reasonably confident that we will -- the impacts of the inventory will be behind us.

Final question, just on the New Jersey closure, approximately what percent of your production today in pipe does that represent, and then what do you think that brings utilization rates up to, in the remaining facilities?

Good question. That can -- it varies, and we have been taking that plant reducing production in that plant over the last year, 18 months. But it can be as much as 20%, and -- as I said, it it can vary, but when we move that into Bessemer and Birmingham we think that it will take our north Birmingham plant -- sorry, Birmingham plant that could take us up during peak production up to 85% capacity and won't have quite the same impact on Bessemer but really is a opportunity for us to get out of a higher cost facility, and as you point out, get better utilization of our existing capacity in both Birmingham and Bessemer.

Thank you our next question is from Michael Gaugler. You may ask your question and please state your company name.

Brean Murray Carret. Good morning, Greg. I want to focus on the Burlington closure. Maybe you can give us some color as to how transportation costs are going to affect your margins in the U.S. Pipe segment?

Michael, obviously as we -- as we did our analysis, transportation costs will increase, but as when I quoted the ongoing savings we expect to see of $15 to $17 million, that is net of $3 to $4 million of increased freight costs.

Are you planning on running your own trucks?

At this point, that's -- we haven't made that decision, but we hope to be able to stage our production where we can send it up by rail, too.

Interesting. And then just kind of as follow-up, the manufacturing capacity as it stands today at Burlington, are you planning on mothballing that, or are you going to be selling off the equipment?

We'll probably -- haven't completely come to the final conclusion, but we'll probably transfer some of that equipment to our existing plant and just -- there will be no more -- obviously melting capacity up there, so I think that we will cannibalize that equipment where we need it, then sell what we can, then the rest will be melted in our cuppellas and turned into ductile iron pipe.

Any concerns about when you look down the road towards the future, Burlington was a nice foothold in the northeast market. It had some real transportation advantages and with the replacement market spending accelerating isn't this going to put you in position two, three years down the road where you are going to need additional capacity against in the northeast to kind of service that market?

Michael, we obviously ask those questions, and those are good questions, because we didn't want to do anything short-term because we, as we've talked often, we have high confidence in the long-term growth in our markets here, but the -- we think with the capacity that is coming, will come on board with the mini mill that we are -- talked about often down in Alabama, that those improved processes will give us the efficiency where we think that we have the capacity that will hold us well for a number of years, just primarily to improved efficiency. Actually, if you look at the last several years, probably over 50% of our shipments to the northeast did come out of our Alabama plant. So we have been slowly bringing down Bessemer, I'm sorry, Burlington, and transferring that to north Birmingham and Bessemer.

As far as the mini mill when would you expect to see that come on line?

We have been pretty constant that we are looking for late fiscal year 2008, but more likely early fiscal 2009, so we're looking in the I'd say the September to November time period of calendar year 2008.

All right, Greg, thank you.

Thanks, Michael.

Thank you. Our next question is from Keith Hughes. You may ask your question. Please state your company name.

Keith Hughes, SunTrust Robinson Humphrey. Given the volumes in the quarter are you going to have to consider plant reductions or shift productions or anything more drastic than that in the Mueller division as well?

Good morning, Keith. We have been doing that throughout the third and fourth quarters. So we have been -- we have been adjusting production, we believe that, as I said, on the earlier, when we asked -- addressed Michael Schneider's question, we believe that actually we should see an increase in our production in the upcoming quarters because the inventory take-down is behind us and our shipments what we produce should be more in line with shipments. So, if need be, we'll -- we think more than likely see a slight increase in production.

Okay. And finally, in U.S. Pipe, I know you've told what's coming here in the future, but it was a very good margin on top of the revenue declines. What specifically happened in the quarter to put up that nice number?

Keith, several items. Lower SG&A expenses was probable our biggest and of course the end of the fourth quarter you might have some movement relative to medical costs and Workmen's comp costs. Our U.S. Pipe business for the last couple years has just done an outstanding job in safety and we continue to see a reduction in our Workmen's Comp costs. Some of that really came through in the fourth quarter so I would not say we saw anything related to pricing, anything related to real manufacturing or a mix shift. I think it was more on the SG&A side, and just some nice movement in the fourth quarter.

Yes, and there was about 2 to 3 million of cost savings initiatives from efforts that have been on the synergy side.

And on the synergies, are we reaching the APEX of those synergies at this point, at least the bulk of them?

Yes, Keith, certainly the implementation of those, they are behind us. We will see some incremental benefit in 2008 from those synergy programs but you're right most of it now we've seen.

Okay, thank you.

Thanks, Keith.

Thank you. Our next question is from Todd Vencill. You may ask your question. Please state your company name.

Todd Vencill at Davenport. How are you?

Good morning.

Looking at Anvil you're looking at commercial construction to rise next year. I assume that means you didn't mention it specifically in the specific guidance for '08 would that imply you're looking for both top line and margin to expand in '08 at Anvil?

We mentioned we think in the Anvil business that we will see modest top-line growth and slight expansion in margins and as I mentioned in our prepared remarks that we'll see some margin pressure because we expect that offshore sourced products will become a bigger percent, so that brings down margins because they have lower margins but on the other hand some of the cost initiatives that we've implemented the second half 2007 we'll see a full benefit of those in 2008 which we think will more than offset that so we would expect to see a slight improvement in margins also.

That's right. Did you say. That I apologize. Sort of parsing through that then, some of the economists out there are now saying they think commercial construction is going to be down next year. What is sort of the leverage on that relative to what your looking for on margins versus what you think you can do yourself with your efficiency programs if, say, commercial construction is down, low single-digits next year, I would assume top line would track. That am I thinking about that right? What would you think of the margins?

I think you're right. I think that all the forecast that we've looked at we would be more comfortable thinking in terms of low single-digits. I think that it's -- if we would even see less of a growth, I think we are still confident given what we have done on the cost side that we would see a slight margin improvement. I think if we start getting to the point where we didn't see growth I think we could hold margins but I don't think we would see an improvement.

Got it. And then, I don't know if you've -- can even go here but you mentioned you're going to be continuing to look at your manufacturing footprint. Is there -- can you talk about, how much further you think you might have to go there or kind of how you're going to make that assessment?

Yes, it would be, for us to take out in the short-term any other significant manufacturing capacity, it would take a lot of planning, and as one that we couldn't implement I would say as quick as we're implementing the Burlington closure. And what allows us to implement the Burlington closure is the fact that we will have the mini mill coming on stream later this calendar year and we think, given the outlook, it's worth the risk that -- to take it down sooner rather than when the mini mill was operational. We feel confident in that decision. Relative to any other manufacturing facilities, it would take a lot more planning and would be a major decision, so it's one that I would just say, off the top of may head, was one that we probably could not implement for the next 12 to 18 months.

Got it. Thanks for. That that's very helpful. And then couple other questions. On the -- you mentioned the pipe price increase. For other price increases you sort of indicated that you anticipate you're going to have them but can you give us some colo on magnitude and when you think you might be rolling those out?

Yes. We've obviously given that a lot of thought, a lot of and on our Mueller branded products, as we have discussed several times in our conference call, that we have -- we have traditionally increased prices effective February 1, and have done that for a number of consecutive years and clearly we believe with what we see on raw material costs, that the price increases are justified, so that we would expect that right now as we're looking at it, of course, it could always change, but right now we would expect early fiscal -- early second quarter of our fiscal year 2008, and I think that relative to the absolute increase, we're still looking at that very closely, but certainly as I indicated, that we are feeling raw material pricing pressure and would expect that our competitors would be feeling that same kind of pressure.

On the pipe increase that you have announced, when is that effective? Is it it effective immediately?

No, we announced it the last week, October 29, and it will be effective December 1.

Okay. And final question. On the goodwill write-off, the $1.1 million is that broken -- I would assume that's in the segment operating income for Anvil and Mueller. Is that right?

The $1.1 million is the state tax that we needed to provide for the first quarter subsequent to --

I'm sorry.

So that's in our fourth quarter tax provision which is part of that plus Section 199 credit is what put the upward pressure on the effective rate for the year.

Right.

The higher number, the 7.5 million, roughly, that was the pre acquisition period, that's in goodwill, net of the federal benefit.

Right. Does that flow through the income statement?

No, that's pre acquisition contingency. We increased our tax liability, we increase goodwill.

Thanks a lot.

Our next question is from Scott Gaffner.

Scott Gaffner from Lehman Brothers. I'm just curious, one more follow-up on the inventory question. The inventories now are kind of pretty much flat versus the end of last year.

Yes.

But own a turns basis, we're definitely at a little bit higher level. What's sort of maybe the rationale not to take those inventories down a little further?

Well, we'll certainly always invest in -- we'll adjust inventories in line with market demand but when you look on a year-over-year basis if you look at our ending on our balance sheet inventories at the end of 2007 on a year-over-year basis compared to ending inventory in 2006, there's about $25 million of raw material increases, probably about another $10 million of overhead under absorption that gets capitalized. Then, of course, we did make an acquisition of Fast Fab in January, so on a year-over-year comparative basis there's another $10 million of inventory on the Fast Fab. So on a apples to apples basis in 2006 costs, inventories are down about $45 million year-over-year. So we have made a significant impact in bringing down those inventories but as I said in the prepared comments, that our -- there are significant components of management incentives throughout our operation based on improving working capital and certainly one of the key components, if not the key component on improving working capital is to continue to find ways to improve inventory turns. I certainly didn't want to imply that we are losing focus on better managing our inventory but wanted to really point out that our specific program that we discussed that we implemented at the end of the second quarter we think name impact on production which was a pretty major impact on earnings per share, we think that's behind us.

Okay. And then as far as Dale's decision to stay on for an extra year can you walk us through that and maybe the rationale behind that, why he wanted to stay on for an extra year, et cetera?

Absolutely. He's having too much fun. When you get down to it, it was -- when we all had this stalemate decision when we announced it first was right after the acquisition. As the business unfolds, as I think he's excited about our future and so on and so forth, he and I continued to have discussions, and as you know, that when we announced his retirement in December, be effective in December of 2007 that at that time he also committed to consulting with us for four weeks every quarter for two years. So what we have done is he's going to continue working then full-time for nine months. We're going to take some of the consulting arrangement off the back end, and I think that it just works out to be a very, very smooth transition. Aus read the announcement that we have made Doyce Gaskin President of Mueller Company. He has 30 years experience, extensive experience in manufacturing. We often talk about our loss foam process and what kind of competitive position it puts us in. Doyce was one of the key architects of that system. During the last several years he's had more and more involvement on the commercial side so I think we all agreed just a perfect transition and handing over the reins of that business to Doyce, sought will be a very smooth transition.

Okay. And then just lastly as far as your prediction for housing starts next year, what are you guys modeling in for housing starts next year and where do you think that will bottom out, you know, the bottom out in the middle of the year? Do you think closer near the end of the year?

Let me tell you what -- we're -- we read forecasts like everyone else reads forecasts, and we know in that the last quarter that those forecasts for 2008 change pretty dramatically and I think that we've saw that in the chart that we saw earlier when we saw such a dramatic decline from Q3 -- I mean, from end of June to the end of September. So relative -- we said we're expecting toe see a continued deterioration. It's tough for me to share because we're not correlated one to one with housing starts but I can say, and this is consistent with what we've been saying for quite sometime is that we will expect the lag the turn around in housing starts, because as a real driver of demand for our products is when a builder gos in and puts in the development. So he puts water pipe, the valves, the hydrant, the streets, so on, and it's our hypothesis, so it's difficult to find specific data to support it, but it's our hypothesis there are a number of developments out there sitting with the water infrastructure and the roadways in place with very few houses already constructed so we expect that they will start building out those developments before they invest in new developments, so we think that we won't see any positive turnaround relative -- positive impact of residential construction at least until 2009 for us.

Okay. Great. That helps a lot.

Thank you. Our next question is from Robert Maloney. Please state your company name.

Rob Maloney from Morgan Stanley. Quick question for you on inventories. Not to beat a dead horse here, but maybe you can walk us through how inventories look in the distribution channel right now.

Rob, we believe that inventories are pretty much in line with demand. And primarily we can only do this on a almost a store by store basis with our field sales force, and the general roars we get is we don't think there's excess inventory in the field that there has been -- I think a real effort in the last six months. We probably saw more of it in the January through June time frame of distributors bringing down inventories. So relative to what we see that we think that there's not too far out of equilibrium, we think on the commercial construction side with Anvil I think that the distributor inventories are also being pretty well managed.

Okay, thanks, Greg. With financing becoming more expensive over the last several months, even for municipal borrowers, I'm curious whether you guys have seen any increased caution in the public water infrastructure side of your business.

We haven't. And again, we reference the -- we reference the American Water Works survey that's calling for a 17% increase. In that survey it's rather interesting that they say the primary source of funding is for rate increases, and I think throughout the year we have continued to see some pretty hefty rate increases in a number of different -- in a number of different municipalities and utilities. So right now we continue to see the need outweigh I think perhaps any of -- any pressures that the utilities may be seeing.

That's great. This is maybe more of a question from Mike. In the past we've talked about taxing and opportunity for you guys. Maybe you can bring is up to speed on where you stand on reducing your tax rate and where you see the tax rate coming in, in 2008.

Right now we're looking at 41 to 42% for next year. If you just take a look at the statutory rate of taxes with the federal rate and the state rate net of the federal benefit we're just under 40%, 39.3 and change. What brings us up above 40 is some non deductible section 162-M expenses. We have been spending a lot of time in the last couple of months with the legacy tax situation. And a by product of that and going into next year is I want to take a hard look at the state and make sure that we're not paying -- we're paying an appropriate rate and putting good strategies in place to reduce that. But right now, based upon, the Federal State release and the state that we conduct business and the non -- certain non deductible expenses, we're up above 40%. Today we're forecasting that at 41 to 42 for this year but obviously we're continuing to work on that.

That's great. The final question for you guys, just a technical one. I saw pretty meaningful uptick in eliminations this quarter. Can you walk me through what drove that?

With the Fast Fabricator acquisition, there's a lot of, additional pipe sales between inter company, and we show the revenues gross within pipe and we have an elimination for that inter company sales activity.

Thanks a lot, guys.

Thanks, Rob.

Thank you. Our next question is from Seth Webber. You may does your question and please state your company name.

Hi, thanks, good morning, it's Bank of America. First, I guess, thanks for the additional disclosure this quarter. That's very helpful. Just following up on Rob's question, the 17% increase in municipal spending, is there something structurally that is driving that, is there some sort of legislation that's out there, why wouldn't that number translate to 17% business plus or minus for you guys? Last quarter you gave aus bookings number for large diameter pipe and small diameter, at least directionally. Can you provide that?

Yes, Seth, good morning. First of all, I'll tell you where the 17%, why we think won't see that, and it's -- I would see that to be more anecdotal. Again, we look for as much information as we can get from the field. We get the sense that there is some pent-up demand needed investment required, I would say in the sewage, sewer lines and so on. We don't see anything there. So we think that that could be contributing to it but again I would say it's more our looking at the survey results in trying to take our own assessment of those results and I would say primarily we thick there's some pent-up demand as I said for spending required that side of the business. Relative to ductile iron -- I mean, the large diameter, our bookings -- let me first of all get back. I think that we provided two -- actually two metrics. One, what was happening to our quotations, then two, what we were seeing on actual tons. When we look at the full year that we believe that we are up about our quotes support about a 10% growth in public spending that we have seen on the pipe side, and primarily the large diameter, when we look at our fourth quarter, relative to tons that we believe it's up about 6 to 7%. So, Seth, we continue to see that trend that supports our belief, and you think other thanks we're reading that we are seeing -- utilities, municipalities continue to increase their spending to upgrade and repair the existing infrastructure.

Okay. Thank you. And just a quick clarification. Did the Anvil segment income include any of the dumping duties this quarter?

It did not, no.

Okay. Thanks very much, guys.

You bet, thanks.

Thank you. Our next question is from Alan Zwickler. You may ask your question and please state your company name.

Good morning. I'm from first Manhattan company. How are you?

Fine, Allen. And you?

Okay. I was late to the call, and feel very free to tell me that I'm not entitled to answer -- to an answer to this question but I'll ask it anyway. Now that weave gotten a pretty difficult year out of the way and we look at 2008 and certainly a lot of uncertainties, when you look at the difference businesses that you're in, just on a macro basis, what is your plan, i.e., if things were sort of to continue the way they are, what is the priority? Is to the generate cash? Is it to grow? Is it to stay the same? I know that's kind of a lead question but just philosophically could you maybe give us a little flavor for, you know, what -- you know, how you view 2008 given, you know, if things just kind of stay the same way?

Yes. And as we've said in our prepared remarks, probably from a top line we expect things to stay pretty comparable. As we said, we expect revenues to be flat, so I would say our priorities are certainly continue to focus on generating cash. We -- for the last six months, our focus on the inventory reduction program that we've talked about I think quite a bit yielded results that met our expectations. Mike went into detail on the amount of cash that we generate. I don't know if I mentioned earlier that we have further plans in place in terms of improving our processes to improve working capital and management incentivize. We will also continue to invest in making sure that we can protect our market leadership position. So we will invest, if we find that there's an opportunity for us to manufacture our product more cost effectively, or if there are no product opportunities we'll continue to invest to solidify our market share position because we do think we're going through a correction period on one of our larger end use market segments but the long-term is very, very strong. And we will just always continue our priorities. Improving our debt to EBITDA leverage ratio. I don't know if that answers your question, but I think pretty much that what we are planning for is probably a year not unlike what we saw, continued downturn in residential construction, up-turn, continued growth in repair and replacement, but we do think that we have the big impact of -- our reduced production on bringing down our inventories we think once that flows through the first quarter of fiscal year '08 that will be behind us.

What I'm trying to get at is you mentioned that there's an incentive. You've given your managers an incentive to reduce working capital which is great. And to the extent they can do that, that's fine. But I presume there's also some incentives to make money for the corporation. So I'm just trying to understand what the balance is between, bringing down working capital versus earning money for the corporation so that the shareholders can participate in that respect on a longer-term basis in terms of, up, showing some earnings and growing the business. So I'm just trying to understand the balance, if I could be a little clearer.

Very good question. Our -- the biggest component of our -- of the manage incentive is year-over-year growth in operating income or what we call economic operating income. So it does take into account a -- what our cost of capital is. But I mean, when we look at 2008, our growth will come more from the -- or any growth we achieve will come from our ability to be more efficient. We're not counting on it coming from overall top-line growth.

Okay. So if the top line doesn't grow, let's just -- I'm I can't using your assumption, will you be able to generate a growth in operating profits generically? Again, the world stays the same and you have cost cuts that you've identified, are you going to be able to grow your operating profits?

Over the long --

Over the course of the year. I don't care about quarter, but I'm just trying to understand.

As we said, we have not at the point of giving that specific guidance.

Okay. So meaning that it the's possible that, I mean, I'm just trying to understand whether this company would be in a position to earn last year to the year that just ended, through all the different adjustments, what -- if I could be so bold, what would you say your operating profit was on a continuing basis in the fiscal year '07 just so that we have a bass, if you could -- could you at least tell us that so we could make our own guesstimate?

Allen, I think if you refer to our releases, once you get there.

There's a lot parts. I just would like to be able to understand what my starting point. I don't think that that's something that you should have a problem giving out.

No, not at all. If I understand your question, I think, and excuse me if I have it incorrect, we have $210 million of operating income in 2007, and overall margin of 11.4%.

Okay.

I think that Greg has given some color as to the expectations for 2008, and talked about pressures in the first quarter.

Right. I understand.

Overhead, raw materials. Then you also referred to what he believed would be expansion of margins in the second half of the year. So I think to answer your question we may have two years within the year coming up. One that's going to confront pressures in the first quarter, particular from the matter that Greg spoke to, and coming beyond that along the lines of better margins.

Right. So it's a tale of two cities, perhaps, but the 210 is the clean, for lack of a better word, operating number that one would build a model from is that a fairway to look at it?

That's coming out of the gates, that's the starting point from a fiscal '07.

And that's the EBIT number, is that correct?

Correct.

Excuse me?

Yes.

Okay. Thank you. Operating income. Thank you very much.

Thank you.

Okay, I'm sorry to be long-winded on that.

No problem. Yes, one more call, please.

Thank you. Our next question is from Lionel (inaudible).

Just want to go back to your free cash flow and cash position. You talked earlier what you were going to do with the cash. I know on the balance sheet at the end fiscal '07, aim just wondering if you're planning on using a portion of this cash pretty rapidly first, and then since mentioned acquisitions, are you seeing -- are you starting to see some more attractive multiples out there as market conditions get a little worse?

Let me answer the question on acquisition. I'll ask Mike to address your cash flow question. I would say that right now we're really not seeing any more movement or properties available than what we've saw a year ago as we've been consistent that we define the business obviously where we operate in is water infrastructure. We've said on an acquisition front if we could add to our breadth of product or expand geographically that would be a priority for us but we would do it at the right price and right -- so I think it's safe to say that we haven't seen a lot of changes over the last several months and so I would say that we do not have a very full pipeline in terms of acquisitions that we're looking at.

Your question with respect to cash flow, we ended the year with 87 million in cash and when would we expect to repay debt? Was that your question?

Pretty much.

We -- we will be in a position, if we decide to repay some indebtedness in the first quarter, what we do is we lock in the forward LIBOR rate on tranches event that of bad debt and there's a breakage fee of we pay tha before the maturity of that. We do have that staged out, 30, sit, 90 days out so we will have the ability if we decide to take down some debt in the first quarter as a couple of those tranches mature.

Last, can you just talk about your different geographic markets? Are you seeing some weakness across the board at this point or I would guess probably -- you're probably seeing worst or more challenging market conditions in the Sun Belt. What are you seeing across the country in terms of market conditions?

Yes, good question. And let me just give you a little bit of data that from our U.S. Pipe business. That on a year-over-year basis in our second quarter of fiscal '07 versus fiscal, our pain shipments on net sales we were up 1.5% in the second quarter of 2007. In the third quarter, we were down about 1%. So essentially through the second and third quarter we were flat. In the fourth quarter we dropped to 22%. We dropped 34% in the west, 32% in the south. So we dropped in the other regions, too, just very slightly in the east. As Michael Gaughler mentioned mention market where you'll see a stronger repair and replacement market. Midwest dropped somewhat. Significant drop off in the west or the pacific and the south and I think that clearly follows the drop-off in residential construction. I think that we're -- there's probably greater exposure on the subprime mortgage market. So while we're seeing a drop-off across it really is at least as we've said we talked about our pipe business much more concentrated in the west and the south.

Okay. That's perfect. Thank you very much.

Well, thank you, everyone. I know our call now has been about an hour 20 minutes. We thank you for your interest, and we will be in our offices here for any other questions that anyone may think of. So thanks again.

Thank you. This concludes today's conference. Thank you for participating. You may disconnect at this