Mueller Water Products Inc (MWA) 2008 Q1 法說會逐字稿

Welcome and thank you for standing by. At this time all parties will be on a listen-only mode until the question/answer session for today's conference. (OPERATOR INSTRUCTIONS)

I would now like to turn today's conference over to Martie Zakas. Thank you, ma'am, you may begin.

Thank you, Carol. Good morning everyone, and thank you for joining us today as we discuss Mueller Water Products' results for the 2008 first quarter. We issued our press release reporting earnings for the period ended December 31, 2007 yesterday afternoon, and a copy of it is available on our Web site. Slides related to this morning's call are also available on the Web site to help illustrate the quarter's results. Mueller Water Products currently has 115.4 million diluted shares outstanding as of December 31, 2007, which is comprised of 85.8 million Series B shares and 29.6 million Series A shares. With us on the call this morning are Greg Hyland, our Chairman, President and CEO, and Mike Vollkommer, our CFO.

In our press release and on this call we reference certain non-GAAP financial measures which are derived from 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 assessing the Company's underlying performance for the periods being reported. Reconciliations between GAAP and non-GAAP financial measures are included in the supplemental information within our earnings release. This morning we will refer to adjusted income from operations, adjusted net income, adjusted EPS and adjusted EBITDA, all of which exclude the previously-announced Burlington restructuring charges in fiscal 2008. These numbers are provided in the press release.

On today's call, we will make forward-looking statements in accordance with the safe harbor provision of the Securities Litigation Reform Act of 1995. Remarks containing words such as "expect", "believe", "anticipate" and "project" constitute forward-looking statements. They are not guarantees and such statements involve risks and uncertainties that could cause actual results to differ materially from these statements. Please see our form 10-K for the fiscal year ended September 30, 2007 for a discussion of these risks.

This morning's call is being recorded and webcast live on the Internet. The archived webcast, along with the corresponding slides we are presenting this morning, will be available in the Investor Relations section of our Web site, www.muellerwaterproducts.com, for at least 90 days after the presentation. After the prepared remarks, we will open the call to questions from our dial-in participants.

I'll now turn the call over to Greg.

Thank you, Martie, and good morning, everyone. We appreciate you joining us this morning as we discuss our results for the first quarter of fiscal 2008. I'll begin today with a brief overview of the quarter. Mike Vollkommer will then follow with a detailed financial report, after which I'll update you on our strategy, key drivers influencing our business, and our outlook for the rest of the fiscal year. We will then open it up for your questions.

In general, our first quarter results were as we expected. Net sales were essentially flat. Our margins were principally impacted by both under-absorbed overhead costs associated with our inventory reduction plan, and higher raw material costs. Free cash flow increased significantly year-over-year and the closure of U.S. Pipe's manufacturing facility in Burlington, New Jersey, which we announced last quarter, remains on track. Net sales for the 2008 first quarter totaled $412.3 million, adjusted income from operations was $32.6 million and adjusted net income was $7.9 million or $0.07 per diluted share. The adjusted operating income margin was 7.9% and adjusted EBITDA margin was 13.6%.

As I mentioned, net sales for the 2008 first quarter were essentially flat compared to 2007. Volume declines were offset by pricing improvements for both Mueller Co. and Anvil, the favorable impact of Canadian currency exchange rates and our acquisition of Fast Fabricators in January 2007. We mentioned during last quarter's call that we would see the final impact of the Mueller Co. inventory reduction plan. In order to achieve the targeted reduction, production levels were taken down during the third and fourth quarters of 2007. Approximately $5 million of under-absorbed overhead costs associated with this plan flowed through our 2008 first quarter income statement. This reduced EPS by approximately $0.03, and consolidated operating income and EBITDA margins by about 120 basis points.

During last quarter's call, we also mentioned that rising raw material costs in Mueller and U.S. Pipe would negatively impact margins this quarter. Price increases covered the higher raw material costs at Mueller but did not cover higher raw material costs at U.S. Pipe. The year-over-year impact of higher raw material costs, net of price increases of $8.4 million in our water infrastructure businesses, was approximately $0.04 of EPS and about 200 basis points of consolidated operating income and EBITDA margin impact. We continue to focus on free cash flow. We generated $46.2 million during the 2008 first quarter and ended the quarter with approximately $137 million in cash on the balance sheet.

I'll now turn the call over to Mike Vollkommer, who will discuss our financial results for the first quarter in more detail.

Thanks, Greg. I'll start by reviewing the consolidated income statement and then discuss segment performance.

Consolidated net sales were $412.3 million in the 2008 first quarter compared to $411.9 million in 2007. Sales increased slightly year-over-year due to higher sales pricing in the Mueller Co. and Anvil segments, favorable impact of Canadian currency exchange rates, and the added net sales from Fast Fabricators which was acquired in January 2007. Volume declined, principally from a continued downturn in residential construction-related demand. While we believe volume related to repair and replace work in the municipal sector increased year-over-year, it did not offset the ongoing weakness in residential construction. Gross profit was $94.4 million in the 2008 first quarter, a decrease of $13.3 million compared to $107.7 million in 2007. Gross margin decreased to 22.9% from 26.1% in the prior year period. These declines were primarily due to increased raw material costs and under-absorbed overhead resulting from lower production volumes in previous quarters. These factors were partially mitigated by cost savings. Selling, general, and administrative expenses were $61.8 million in the 2008 first quarter compared with $58.7 million in 2007. The increase was primarily due to higher employee-related costs and professional fees associated with operating the Company on a stand-alone basis post spin.

First quarter 2008 results also include restructuring charges of $16.2 million related to the closing of manufacturing operations at the U.S. Pipe segment's ductile iron pipe facility in Burlington, New Jersey. These charges consist of $14.8 million of asset impairment and $1.4 million of employee-related expenses. Last November we announced this plan, which includes the elimination of approximately 180 jobs. As previously announced, we expect the total restructuring charges associated with this action to amount to approximately $19 million, consisting of $15 million of asset impairment and $4 million of employee-related and other cash expenses. The remaining restructuring charges are expected to be recorded over the balance of fiscal 2008. Once completed, we expect to realize annual savings of $15 million to $17 million as a result of this action. Excluding the restructuring charges, we expect to realize approximately $9 million of net savings in fiscal 2008. Consolidated income from operations of $16.4 million in the 2008 first quarter includes the restructuring charges. Adjusted income from operations amounted to $32.6 million which compares with $49 million in the 2007 first quarter. First quarter 2008 adjusted operating income margin and adjusted EBITDA margin of 7.9% and 13.6% compare with 2007 first quarter margins of 11.9% and 17.8% respectively. As Greg and I mentioned, the margin declines were principally from the impact of higher raw material costs and under-absorbed overhead.

Interest expense net of interest income was $19.2 million in the 2008 first quarter compared to $20.4 million in the 2007 first quarter. Lower net interest expense reflects the benefits of the May 2007 debt refinancing. Our effective rate was 41.5% in the 2008 first quarter compared with 40.5% in the 2007 first quarter. And diluted earnings per share was $0.07 on an adjusted basis excluding the restructuring charges, and was a loss of $0.01 on a GAAP basis. This compares with diluted earnings per share of $0.15 in the 2007 first quarter.

I'll now move on to the segment performance. Net sales for the Mueller Co. segment were $161.6 million in the 2008 first quarter compared to $162.1 million in the prior year quarter. Volume declines of $7.6 million were partially offset by sales price increases totaling $7.1 million. Brass service products declined sharply, as the sales of these products is directly impacted by residential construction. Unit volume shipments for iron gate valves and hydrants were essentially flat. Income from operations of $24.8 million and EBITDA of $37.4 million in the 2008 first quarter compares to income from operations of $35.7 million and EBITDA of $48.4 million in the prior year quarter. Volume declines reduced profits by approximately $3 million. Higher sales pricing of $7.1 million more than offset a $5.6 million increase in the cost of raw materials and purchased components. Under-absorbed overhead costs of approximately $9 million during the 2008 first quarter resulted from reduced production levels. Approximately $5 million of the under-absorbed overhead costs was caused by the inventory reduction plan.

Net sales in the U.S. Pipe segment of $110.7 million in the 2008 first quarter decreased from $116.4 million in the prior year quarter. Lower ductile iron pipe shipments were partially offset by the added net sales from the Fast Fabricators acquisition. Loss from operations of $15.3 million in the 2008 first quarter includes the restructuring charges of $16.2 million. Excluding these charges, adjusted income from operations was $0.9 million and adjusted EBITDA was $6.8 million. These results compare to income from operations of $7.2 million and EBITDA of $12.7 million in the 2007 first quarter. The 2008 first quarter results were negatively impacted by $9.9 million of higher raw material costs, lower shipment volumes of ductile iron pipe, and a less favorable product mix.

Net sales in the Anvil segment were $140 million in the 2008 first quarter compared to $133.4 million in the prior year quarter. This increase was driven primarily by favorable impact of Canadian currency exchange rates and higher sales pricing. Income from operations of $15.9 million and EBITDA of $20.9 million in the 2008 first quarter increased from $13 million and $18.9 million respectively in the 2007 first quarter. The improvement in profitability was primarily due to higher pricing and favorable Canadian exchange rates.

As Greg mentioned, we continue to focus on increasing cash flow. We entered the first quarter with $98.9 million cash. During the quarter, cash provided by operating activities amounted to $55.9 million. We invested $16.8 million in capital expenditures, applied $1.4 million to a scheduled debt repayment, and paid $2 million in dividends. We ended the quarter with a cash balance of $136.9 million. Free cash flow amounted to $46.2 million in the 2008 first quarter compared with $3.9 million in the 2007 first quarter.

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

Thanks, Mike. As we look to the next three quarters of 2008, we're planning on a continued downturn in new residential construction. We expect to see continued growth in public spending on water infrastructure, and a steady commercial construction market. And based on what we have seen in the market for raw material prices during the last quarter, we expect rising raw material costs to be an even bigger challenge for all of our segments going forward than we had originally expected. Our near-term focus remains on reducing costs, maintaining flexibility to take advantage of growth opportunities, and increasing our cash generation.

As we discussed on our last call, we estimated during our last fiscal year that our shipments to end markets have shifted roughly to 35% residential construction, 35% public water infrastructure spending, and 30% commercial construction. Residential construction is a key driver for our Mueller and U.S. Pipe segments. The downturn in the residential construction market continues, with annualized housing starts down 38% in December 2007 over December 2006. Annualized housing starts are down another 15% since September 2007, and some experts project housing starts to continue to decline as the industry works through near-record inventory level for existing and new homes.

We believe that we will continue to see an increase in public spending to improve water infrastructure. On our last call, we referenced the annual survey sponsored by the American Water Works Association, which concluded that public spending on replacing and upgrading water infrastructure will grow 17% in 2008 compared to an 11% increase in 2007. Our first quarter results reinforce our belief that we will see overall growth in spending throughout fiscal 2008. In the first quarter, U.S. Pipe quotations for public works increased 16% in tons over the previous year. In our Mueller Company segment, orders booked during the quarter for valves and hydrants in both our northeast and central regions increased year-over-year. We believe demand in these regions is more heavily influenced by public spending. On the other hand, order intakes declined significantly in the West, where the housing downturn has had the biggest impact.

Commercial construction spending is a driver for our Anvil business, and our outlook for this segment remains stable. We are anticipating modest top line growth for Anvil in 2008. Clearly, higher raw material costs impacted our margins in the first quarter. We expect raw material costs to continue to be volatile and increase in the foreseeable future. For example, during fiscal 2007 the cost of scrap iron for ductile iron pipe ranged from a low of $206 per ton, to a high of $313 per ton, and is currently back over $300 per ton. In the first quarter, raw material scrap costs for U.S. Pipe increased 26% year-over-year and, in fact, the purchase price we paid for scrap in January increased another 24% over December. While prices for brass ingots, which we use in our valve, hydrant and brass service products, dipped in the first half of fiscal 2007, they have been steadily increasing ever since. In addition, in some cases, we have seen even greater price increases for other raw materials we purchased, such as coke and alloys.

Looking ahead, we expect the price of raw materials and purchased price part -- and excuse me, purchased parts, to continue to fluctuate but to be higher than a year ago. During fiscal 2007, we were able to more than offset raw material costs in each of our segments with price increases. As we mentioned on our last call, our intention is to increase prices in 2008 to at least cover rising raw material costs. In early January, we announced a 15% price increase for our ductile iron pipe products effective January 25th. We also implemented a 5% price increase at Mueller for our valve and hydrant product lines effective February 1st. We will not see the benefit of these price increases until the second half of the year. However, we realize that in a market with reduced demand, it could be more challenging, particularly with some products, to realize the full effect of these price increases. That said, we believe that these announced increases are reasonable and supportable in the market.

On January 26th, we produced our last ductile iron pipe in the Burlington facility. The closure of the manufacturing operation is on schedule, and the closure has gone smoothly. And we expect savings on an annualized basis to be about $15 million to $17 million. During the second half of fiscal 2008, we expect to realize a savings of $9 million net of the $3 million incremental cash operating expenses. We will continue to evaluate our manufacturing footprint throughout our segment and maintain production levels consistent with market demand. Each business unit has identified specific initiatives that will be implemented throughout the year to improve productivity and reduce costs. Construction of U.S. Pipe's mini-mill remains on schedule, and we anticipate the facility to begin operations by the end of this calendar year.

In the second quarter, we expect to see moderately higher net sales as compared to first quarter 2008 due to the seasonal nature of our business. As a reminder, we do not expect to realize any benefits in the second quarter from our recently announced price increases. Therefore, we expect that higher raw material costs will have an even more pronounced effect in the second quarter than they did in the first quarter. As we have also mentioned, the negative impact of under-absorbed overhead due to the inventory reduction plan is essentially behind us. We believe that slightly higher volumes and improved overhead absorption will help to mitigate higher raw material costs, but we expect to realize slightly improved margins in the second quarter versus first quarter. For the second half, we believe revenues will be comparable to the second half of fiscal 2007 reflecting the ongoing downturn in the residential construction market, partially offset by increased public spending for water infrastructure and modest growth in commercial construction spending. We do believe that we will see a more magnified margin in the EPS spread across the quarters throughout the year. In the second half of fiscal 2008, we expect higher operating margins at Mueller Co. than those experienced in the second half of fiscal 2007 as we see the benefits of cost savings and as we will not have the underabsorbed overhead costs associated with the inventory reduction program in the fourth quarter.

During our last conference call, we stated our expectation that U.S. Pipe would achieve higher operating income margins in the second half of 2008 than those in the second half of 2007. Given the recent trends with higher cost per scrap iron and other key materials, our ability to achieve these higher margins is dependent on realizing price increases to offset these higher costs, even with the expected savings from the Burlington closure. And, as we just said, implementing price increases could be more challenging in this market so we could, in fact, see slightly lower margins.

For Anvil, we expect to see modest top line growth for the second half of 2008. We also expect to source more of our products off-shore in line with the market. These sourced products typically have lower growth margins, but we will see some benefits in 2008 from our synergy actions implemented in 2007 as well as other cost saving initiatives. We would expect to see a slight improvement in margins at our Anvil business in the second half of the year.

A primary objective for fiscal 2008 is increasing cash flow. As Mike explained earlier, our first quarter 2008 free cash flow was $46.2 million. We will continue to manage inventory levels and match production with market demand. We will also continue to focus on managing working capital with a significant component of our management incentive programs being based on improving working capital.

Other key variables for 2008 are corporate spending of approximately $38 million. Our tax rate is expected to be between 41% and 42%. We estimate 2008 net interest expense to be within the range of $75 million to $77 million, as we realize the full-year benefits of our debt refinancing in May 2007 and the effect of lower interest rates. And we expect capital expenditures to be about $80 million, within the range of $75 million to $85 million. With our cash on hand and the free cash flow we expect to generate in 2008, we have considered re-investing in the business, paying dividends, repaying debt, repurchasing stock, and making strategic acquisitions. We expect to re-invest approximately $80 million in the business this year, including completing our automated ductile iron pipe facility. We will continue to invest in programs that provide a meaningful return.

With regard to the repayment of debt and repurchase of stock, given the current volatility of today's economy, we think that we should, at this time, maintain the flexibility our current liquidity affords us. We were able to successfully refinance our debt in May 2007 before credit tightened and corporate interest costs increased. It's important to note that we were able to obtain financing at rates and with terms that are significantly more favorable than those available in today's market. We have also carefully examined the benefits of implementing a share repurchase plan. Because we are confident of our strategy and our ability to execute it, we believe our current stock price represents a compelling value. However, the decision to implement a stock repurchase plan is being balanced with the decision to maintain liquidity and our other alternatives for use of cash.

With regard to acquisitions, we will continue to examine possible candidates and are focused on getting the right business at the right price. We are pleased to announce that we have added Dr. Lydia Thomas to our Board as another independent director. Her extensive experience in the public sector will be invaluable as we grow our business.

This is clearly one of the most challenging business environments in recent history. Given our track record for managing costs and demonstrating flexibility to market conditions, we're confident of our ability to manage through it. In fact, actions taken today, which are helping us manage through the current situation, will make us even more competitive, especially as we expect to continue to see an increase in public spending for repair and replacement of the water infrastructure.

We will now open up the call to questions.

Sarah, if you could please walk through for them now the process for asking a question.

Thank you. Your line is open, please state your company name.

It's Keith Hughes, SunTrust Robinson Humphrey, thank you. Just a couple of questions. I guess number one: Fast Fabricators, how much did that add in the quarter?

You know, Keith, we have been pretty consistent not breaking out Fast Fab for competitive reasons. This will be obviously the last quarter where we won't have that comparison -- comparability question.

Let me ask you this way. In the U.S. Pipe segment, how much was volume down in the quarter? I don't know if you said that or not?

Actually, if you look at our overall volume in U.S. Pipe, we were down -- volume was down about 11%.

Down 11%. Okay. All right, fantastic, and then number two, the 15% price increase was kind of eye-popping. You gave us some kind of back-half views of what you think is coming. Do you have to get all 15% of that increase to hit your goal there's?

I'll tell you. The price increase, you are correct as we said in today's environment, getting all of that price increase could be questionable. As we said, we saw a 26% increase in the first quarter on year-over-year raw materials, just scrap, and we saw it go up in December, so obviously our competitors are sitting with the same input costs, what's happening to them. So -- but if we get all of the 15%, we'll more than offset our raw material costs.

Okay. And I guess finally, you had referred to the survey work done on public infrastructure spending, I believe you said kind of a 17% increase, especially for [L.A].

Yes.

When was that survey work done?

That was published in October.

All right, that's what I needed. Thank you very much.

Okay.

Michael Gaugler, your line is open, please state your company name.

Brean Murray, good morning, everyone.

Good morning, Michael.

Greg, I want to circle back to raw material costs for a second. Your competitors, obviously, as you indicated, are feeling some of the same pressures; are they instituting price increases, or are you leading the market once again?

We almost... It's hard to say who came out first, but our competitors did announce price increases. So on ductile iron pipe we saw that all manufacturers announced price increases.

Okay. And second, you had also mentioned that you wanted to maintain some financial flexibility, potentially paying down debt or share repurchases or acquisitions. I'm wondering what the pipeline looks for you. How it looks now in terms of new acquisitions? Are you seeing new opportunities and, if you are, how's the pricing?

Michael, I would say that we're probably still in the same position as we have been. We're looking for businesses in the water infrastructure that can add to our breadth of product or expand geographically, but I would say overall we have not seen - activity really hasn't changed.

Christopher Glynn, Oppenheimer. Thank you. Good morning,.

Good morning.

On the 15% price increases relative to the [comfedalt] and manufacturers did announce price increases so the variability, I guess remains just how disciplined they are with their announced price increases?

Yes.

Okay. And at Anvil, margins were very nice it looked like. Could you just talk about that? Was there any kind of new productivity kicking in, in the quarter?

A little bit. On a year-over-year basis, we did have some benefit from a Canadian currency translation that added about -- I think $400,000 or $500,000.

Half a million dollars.

And we did have on a year-over-year basis around $400,000 more of dumping duties than what we got in the first quarter of last year, but we did also see some benefits from the synergy program that we talked about throughout last year, and in fact at our Anvil, Columbia facility, we took out -- we reduced the number of foundry operations from two to one in April and we installed some new equipment that's improving productivity in May. So we're starting to see some of those benefits too.

And roughly 500k from Canadian currency translation, that was the off-profit benefit?

Yes.

And at Mueller Co, just to clarify some of the inputs you put to describe the margins there, so the $9 million from under-absorbed overhead costs, the $9 million includes $5 million related to the inventory reduction with the rest from low market demand, and then the $3 million from volume declines. Is the $3 million a subset of the $9 million?

No. It would not be. That would be just the absolute margin that we lost on that reduced volume.

Okay. Okay. Understood. And I knew you gave good commentary on the trajectory through the year but a little more broadly, how do see seasonality this year versus a normal year, given the kind of peculiar environment out there?

That's a good question and let me put it in context of last year. Through the first three quarters of our fiscal year last year, we saw the very typical seasonal patterns. In the fourth quarter last year, we saw a drop in our Mueller and our U.S. Pipe business that was not typical. I think as we go forward, we will expect to see -- we will expect to see the typical seasonal pattern. We'll see an increase in Q3 and Q4, but as we said, we expect revenues in the second half of the year to be comparable to what they were in the second half last year.

Okay. And then finally, on the inventory levels, I think down about 5% year-over-year but a tough demand environment. Could you just give a little extra clarification on why that's enough?

Well, that's a good question and I know we discussed this in the last few calls, when we talk about our inventory reduction program for the second half of 2007, we did it by pure brute force, just shutting down production, shipping out of inventory, we got to the levels where we expected to get. I think in the future - and we did see an overall improvement of our inventory turns. But we will see, I think, a continued improvement in our inventory turns, but it will come from improving our processes, not so much from just pure bringing down just taking out production. And this quarter actually look at our balance sheet, you probably would have seen that we did have a slight increase in inventory. That was all at our U.S. Pipe business in preparation of our closure of the Burlington facility. We mentioned on our last call we would be building inventory to make this a smooth transition. In fact, inventory continued to decline at our other business segment.

Great, thanks a lot.

Thank you.

Rob Maloney your line is open, please state your company name.

Hey, guys it's Rob Maloney with Morgan Stanley. With financing becoming much more challenging, even from municipal borrowers, I'm curious whether you've seen an increased caution in the public water infrastructure part of the business.

That's a good question and we're certainly on the lookout for that. We have not seen - as we mentioned earlier, we saw nice growth year-over-year in our Mueller products out of our northeast and central segments, where that's more aligned to repair and replacement spending; and our quotation activity, in U.S. Pipe on public works in terms of tons were up 16%. What we see is we think the spending for water infrastructure is typically handled at the local level, and accounts for over 90% of their total and at the local level probably account for 90% of the total spending. We do think, though, in some markets property taxes probably also supplement user fees within sun systems to support water projects. But on the other hand, for example yesterday we were at the polls here, like many around the country, but more specifically we voted in Atlanta to extend a 1% sales tax to support a water improvement program and that was -- the last word we had, 70% of the voters supported that. So - and again if you look at last year, the median rate increase was about 5% across the country. That's up from, probably for the previous ten years it averaged about 4%.

So I think as we continue to look at this market. and obviously, we know demand for water is an inelastic, that what we have seen from our internal data, we continue to support that we're seeing the spending, but I think we have an eye open just to see could it be impacted somewhat, but right now I think our overall view is that we don't think that spending on upgrading, public spending on water infrastructure is as vulnerable as perhaps some other spending -- local government spending could be.

Got it. Thanks. Similar question on the commercial construction side of the house. Again, tough financing has certainly created a lot of concerns around the commercial construction environment, what are you seeing in terms of quotation activity on the Anvil side of the business?

I think you're right, I think right now we think where we are -- where the stage of commercial construction spending is, and that's a little awkward, that we'll see continued stable demand for our products in 2008, but I think we will see a cutback on new construction and it could impact us in '09 and beyond, but I think at least there's enough projects that are at a point where they're putting in their fire protection systems and HVAC that we should see stable demand for Anvil, we think, in our fiscal year 2008.

Okay. Just one more quick question on distribution. Have you guys seen any changes in your relationship with HD supply?

I would think the biggest -- the biggest thing that we have seen is now that they are -- I think this is our first full quarter of HD supply being part-owned by private equity. I think we've seen a heightened focus on their part, as you would expect, managing cash. So I could say if anything else that they are even managing inventories a little closer. That means down the road that - that we are probably going to have to offer quicker delivery from our factories to satisfy end-use demand because we may not have, at least in territories where HD supply, they're our distributor, they may not have enough inventory to cover demand. So, to answer your question, I think the only thing that we've seen is I think they're managing their cash even tighter and cutting back inventories.

No changes in the exclusivity status within the old Hughes and National Waterworks businesses?

We continue to have those discussions. I think as we have said in the past, as they go through this period of still consolidating locations, that we have agreed to allow them to carry our product and a competitor's product until they make that decision, with the caveat that we may always pull the line and give it to another distributor. So I think that we're still working through their consolidation of locations and so, from that standpoint that we do -- they are carrying some of our competitors' products where we've agreed to it, but in the long-term, certainly it's our desire and we expect to manage our business on an exclusive basis as we do with our other distributors.

Okay. Thank you very much, gentlemen.

Fred Dillman, your line is open. Please state your company name.

Good morning, D.A. Davidson. Greg or Mike, I'm just curious, you mentioned a less favorable sort of product mix in the U.S. Pipe segment, and I was just curious, what exactly does that comprise of, and do you have any sense whaf the impact to margins was from that?

Yeah, we have some pretty highly-engineered connecting system and I'll just do a brief -- when you put two pieces of ductile iron pipe together, they have to lock together and we have, because of I think our technology, those are higher margin products for us, and that tends to be more in line with pipe that will be driven by pipe going into neighborhoods as compared to pipe going into transmission lines. So -- and so as residential construction would fall, we would expect to see that becoming -- those products becoming less a percent of our total revenue. A rough estimate and I don't have the specific impact on margin, but roughly, I would say it probably impacted margins in the pipe segment about 100 basis points.

Okay. Appreciate that. And then I guess as it relates to Anvil, I know there's been some talk related to suspected tariffs on steel pipe in China, and I think the Commerce department is working towards making final determination there. Can you talk about any potential impact to Anvil that would have?

I think that certainly we do import as do our competitors import pipe. I think the -- what we would be doing, Brent, is that it would require that we put -- we're on top of our game in terms of passing along pricing to the marketplace.

Okay. Thanks a lot guys.

Thank you. Andrea Wirth, your line is open, please state your company name.

Robert Baird good morning, guys.

Good morning, Andrea,.

Just a quick question on the housing side. Obviously, we're talking about forecasts generally being down for '08. Just curious if you could tell us roughly what level you have baked into your operating plan as far as housing starts. Is it roughly a million units? Just want to get a sense of what kind of a plan you have as far as the housing market goes specifically.

As we went into the year we mentioned on our last call that we expected to see a downturn in housing starts. This certainly impacts our business. We don't have a one-to-one correlation other than our brass products; as you know the real driver demand for our products is when a builder puts in the development, not the actual housing starts. So, that if I think if we see a drop that goes below a million, that I think that we'll see -- we'll continue to see a decline relative to our expectations, but that's just really a rough, rough ballpark because we don't have that one-to-one correlation and, as I have said, what impacts us more is what happens with housing developments, and that dropped quite a bit in 2007.

I guess we're trying to get a little bit more comfort with your believing that inventory levels have generally been leveled off to where you need them to be. And just trying to get some comfort that - going out a couple more quarters we continue to see 30% declines in the housing market. You know, when do you think you need to go back in and start reduction inventory levels again?

I think again that what we did in 2007 was take out the 60, 70 -- I think $60 to $65 million of inventory just by absolutely cutting back production. So, having taking shifts out. Having our employees stay home for a week and so on, and that's why we had the big overhead -- under-absorbed overhead expenses that flows through the income statement in Q4 and this quarter. I think that with our inventory in line right now, that we would bring that -- we could bring that down in a more orderly fashion and not have, I would think as much impact as the way we took it out in the last couple of quarters.

Okay. Okay. And then just on pricing, you know, it looks like U.S. Pipe didn't get much pricing benefit this quarter, so my guess is, just given how this last price increase will go so you probably won't see much in Q2 either, but it does look like the Mueller segment got -- call it four points of price -- do they see an additional four pipes in 2Q or how do we look at past price increases, aside from the one in January that you should see?

I think you're absolutely right. We did not see any pricing in U.S. Pipe, and we will not see any as we've said. We will not expect to see any until the second half of the year. I would think that we would continue to see maybe the same level of price benefit at Mueller business at our Mueller business in the next quarter.

Okay and just as far as when you'll get an idea of how prices are sticking, it sounds like these will probably be more effective as of January 25th. Have the price increases you've put in through thus far been coming through at the levels you put them in, or just equivalent us an idea of what the initial reaction has been?

We really don't have enough data. It's only been a week, Since January 25th for U.S. Pipe and obviously February 1st for the Mueller business. So it's really too soon for us to tell.

Okay. And just last question and Mike, obviously you guys have a lot of cash on the balance sheet now, but just want to get an idea - and you obviously did the refinance too, but what are your tightest debt covenants, what we should be monitoring and I guess, you know should be monitoring and how much cushion do you have right now?

There's quite a bit of cushion right now. We have a leverage ratio requirement of 5.25 times last month EBITDA and interest coverage has to be greater than 2.5 times. So there's quite a bit of head room there.

Mike, let me just expand upon that a little bit too. Especially I know we mentioned in our prepared script and talked about the refinancing in May of 2007 and how our timing turned out to be very, very good because it clearly lowered our interest expense and provided more operational flexibility. I think one of the other key outcomes that refinancing was that it also extended our principal repayment schedule. So, as Mike mentioned at the end of the first quarter, our debt to EBITDA was about 3.1 versus a maximum of 5.25 in our covenants. So clearly you see that we have a lot of headroom there. Our EBITDA to interest expense was 3.9 times versus a minimum of 2.5 and we currently have $113 million payment due in 2012 and the largest principal payment of approximately $500 million is not due until 2014. Put that in perspective, before the refinancing $958 million was due in 2012. So just to further amplify what Mike was saying that we have a lot of flexibility and a lot of room.

The scheduled debt repayments of just over $50 million through 2011, but specific to your question, on the covenant side we've got a lot of room and we would expect to continue to have a lot of room going forward.

Great. Thanks, guys.

Seth Weber, your line is open. Please state your company name.

Hi, Banc of America, thanks. Good morning, everybody.

Good morning, Seth.

Just following up on the previous question. It sounds like there are some other levers that you could pull in necessary, if you see the signs that maybe things are progressing a little more slowly. Could you talk a little more about that, whether it's facility rationalization, work force flexibility, or kind of what you think would be the easiest thing for you guys to do at this point?

Yeah, apparently, Seth, the second half of the year will benefit from the Burlington closure, so that is a chunk of fixed costs we're getting on out of the business and as we said we expect to see about $9 million of benefit. Relative to -- we have very flexible work rules in all of our facilities, and we were able to demonstrate that in Q3, Q4 of 2007. That we will flex our work force relative to demand and so we obviously can reduce those variable costs. We do have ongoing at the beginning of the year. We're going through our planning process. Each of our businesses identified cost reduction initiatives that we monitor on a month-to-month basis. We utilize the Six Sigma process at our U.S. Pipe, lean manufacturing at our Mueller and Anvil business that are cost reductions actually year-over-year for the quarter we just completed e really also contributed -- had a nice contribution to our margin. So when you look at it, that we think that being able to -- we're pretty well positioned to be able to respond, especially since we were able to close the Burlington facility so quickly and smoothly. In the long-term, if we continue to see a significant drop and the housing, residential construction doesn't rebound for several years, we will have to look a lot harder at reducing our manufacturing footprint. As we've said on previous calls that any plants that we would close going forward would be a pretty difficult decision and it would be a long time to implement. So, I guess to summarize, we will see the benefit of the Burlington closure. We have flexibility in our work force and have demonstrated our flexibility of taking that cost out and matching it to demand.

Okay. Thanks for that. And just have you disclosed what do you think the mini mill will contribute or how that's going to effect your P&L going forward?

Yes, when you look at our U.S. Pipe margins for the last couple of years, I think we're in 5% to 6% range and I think that we've always been pretty consistent that we would expect when we start seeing the full benefits of the mini mill and the closure of our Burlington facility that we can get that up to the 9%, 10% range.

Great, thanks very much.

Thanks. And our last question comes from Brett Levy. Please state your company name, please?

One is have you guys gone to -- because obviously I feel like iron ore is going to be impacting your costs a little bit later in the year in addition to what just happened with scrap. Have you talked to your customers about the possibility of going to a surcharge mechanism that essentially moves up and down kind of with some of your raw material costs? And then the second question was, given that your bonds are now in the mid-80s, have you guys thought at all about repurchasing some of your bonds with your free cash flow?

Brett, let me take the surcharge -- the surcharge is certainly an avenue to -- for us, and we talk about it from time to time. It has been the industry's practice in the past to put these types of, I guess spikes in costs, just in the overall pricing, and change. This time we changed the discount schedule relative to our list price. So we think that both systems always get us -- will eventually get us to the same place. Our preference would be to try to get it into the pricing because we think in the long-term we have a better chance to able to keep that when we see a reduction in -- a reduction in raw material costs. But it's a good question, and I think that you can look at it almost 50/50 but we would still rather default to try to get the higher pricing to improve, increase our chances to be able to keep that pricing if we see a drop in raw material costs.

And Greg mentioned the thinking that we've had and what we've studied on the use of cash and balancing liquidity, maintaining liquidity at this time, with share repurchases and re payment of debt and in connection of that we looked at repayment of term debt and the notes as well and have concluded at this time to maintain liquidity, as Greg mentioned.

Got it. All right, thanks much, guys. Thanks, Greg.

Well, again, thank you all very much for your continued interest in Mueller, and look forward to speaking with a number of you in person during the next quarter. Thank you.

That does conclude our conference for today. All parties may disconnect at this time. Thank you.