Mueller Water Products Inc (MWA) 2008 Q4 法說會逐字稿

Good morning and thank you all for patiently holding. I would like to remind all parties that your lines are on a listen-only mode until the question and answer segment of today's call. At this time I'll turn the call over to Ms. Martie Zakas. Ma'am, you may begin.

Very good. Thank you, Laurel, and good morning everyone. We thank you for joining us today as we discuss Mueller Water Products results for the 2008 fourth quarter and full year. We issued our press release reporting earnings for the three months ended September 30th, 2008 yesterday afternoon and a copy of it is available on our website.

Mueller Water Products had 115.5 million shares outstanding as of September 30, 2008, which is comprised of 85.8 million Series B shares and 29.6 million Series A shares which are both traded on the New York Stock Exchange. Last week we issued a press release announcing that our Board of Directors authorized a proposal to convert our Series B common stock into our Series A common stock. We will discuss this proposal in more detail during the call.

With us this morning are Greg Hyland, our Chairman, President and CEO and Evan Hart, 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 because they are used as a standard metric by the financial community. We believe these measures will assist us in assessing the Company's underlying performance for the periods being reported. There are limitations to these non-GAAP measures and reconciliations between GAAP and non-GAAP financial measures are included in the supplemental information within our earnings 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 risk 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 30th, 2007 as supplemented by our quarterly reports on Form 10-Q for a discussion of these risks. We will file our 10-K for 2008 by the end of this month.

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 website, www.muellerwaterproducts.com for at least 90 days after the presentation. The slides related to this morning's call are available on the website to help illustrate the quarter's results. In addition, we will be filing a copy of this morning's call's prepared remarks on Form 8K.

After the prepared remarks we will open the call for 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 fourth quarter and full year of fiscal 2008. I'll begin today with a brief overview of the quarter. Evan Hart will then follow up with a detailed financial report, after which I'll update you on key drivers influencing our business, our outlook for the first quarter and an overview of full year fiscal 2009, as well as how we are managing through this economic downturn. We will then open up the call for your questions.

Net sales for the 2008 fourth quarter increased 4.6% to $496.9 million and increased slightly for the year to $1.86 billion. Income from operations in the fourth quarter was $48.1 million and net income was $17.6 million or $0.15 per diluted share. The operating income margin in the fourth quarter was 9.7% and adjusted EBITDA margin was 14.6% for the quarter.

The actions we have been taking throughout the year continued to yield positives in the third quarter and again in our fourth quarter. We implemented higher sales pricing in the second and third quarters, primarily to offset increasing raw material costs. In the fourth quarter, for the first time this year, this higher pricing more than covered these higher raw material costs for the Company as a whole. We also realized additional benefits from the cost reduction and savings initiatives that we have been implementing since 2006. During the fourth quarter we achieved $12.7 million of operating cost savings and for the full year we achieved $43.2 million in operating cost savings year over year, which included savings associated with the closure of the Burlington ductile iron pipe manufacturing facility, as well as ongoing lean manufacturing efficiencies and the headcount reductions from the third quarter.

We once again had strong quarterly cash flow and generated $93.9 million of free cash flow for the year, which was 177% of adjusted net income. In today's market we have been somewhat affected by the current financial turmoil, in particular as it impacts our customers near-term buying decisions. We haven't been impacted by the credit liquidity issues facing some companies today due to our debt restructuring in May, 2007, coupled with our strong free cash flow. Furthermore, our credit agreement doesn't mature until May, 2012.

As we have demonstrated in the past, we will continue to take the actions necessary to address the near term slow down in some of our markets, while ensuring that we remain well positioned for the long term promising prospects in the water infrastructure industry.

I'll now turn the call over to Evan Hart who will discus our financial results, including our debt and liquidity positions. I will then come back to provide an outlook for the first quarter and an overview of fiscal 2009.

Good morning, everyone. I'll now provide a more in-depth review of the financials. I'll first review the consolidated results and then discuss segment performance.

Consolidated net sales of $496.9 million in the 2008 fourth quarter increased $22 million year over year due to $49.6 million of higher pricing across all business segments and volume increases at Anvil. This was partially offset by volume declines at Mueller Company and U.S. Pipe.

Gross profit was $122.4 million in the 2008 fourth quarter, an increase of $4.2 million compared to $118.2 million in the 2007 fourth quarter. Gross margin was 24.6% compared to 24.9% in the prior year period. Gross profits increased primarily due to higher sales pricing of $49.6 million, which offset $36.3 million of higher raw material costs and purchased components.

Volume decreases of $11 million, other production costs of $5.4 million and start up expenses of $4.3 million associated with our new automated ductile iron pipe operations were partially mitigated by operating cost reductions of $12.7 million.

Income from operations was $48.1 million, compared to $50.7 million in the 2007 fourth quarter. Fourth quarter 2008 operating income and adjusted EBITDA margins of 9.7% and 14.6% respectively, compare with the 2007 fourth quarter margins of 10.7% and 16.2% respectively. The margin declines were principally from higher raw material costs, reduced volumes, higher selling, general and administrative expenses and start up expenses associated with our new automated ductile iron pipe operations, partially offset by higher pricing and operating cost savings.

Selling, general and administrative expenses were $73.9 million in the 2008 fourth quarter compared with $67.5 million in the 2007 fourth quarter. The year-over-year increase is largely attributable to higher sales commissions and other personnel related costs of $3.4 million and $600,000 of administrative costs associated with the realignment of Canadian distribution operations.

Interest expense, net of interest income, declined $4.5 million to $17.6 million in the 2008 fourth quarter, compared to $22.1 million in the 2007 fourth quarter. Gross interest expense totaled $18.5 million in the 2008 quarter, compared with $22.9 million in the prior year quarter. The prior year period included $1.9 million related to state income tax matters for years prior to 2007. Gross and net interest expenses were down year over year due to lower interest rates and lower average net debt outstanding. The effective income tax rate was 42.3% in the 2008 fourth quarter and 43% for the full year 2008. This compares to 49% in the 2007 fourth quarter and 44.4% for the full year 2007. The quarterly and annual effective income tax rates were down primarily because the prior year periods were impacted by the prior year's state income tax matters.

Net income per diluted share was $0.15 in the 2008 fourth quarter, which was a 15.4% increase over $0.13 in the 2007 fourth quarter. I'll now move onto segment performance.

Net sales for the Mueller Company segment were $184.6 million in the 2008 fourth quarter, compared to $195 million in the prior year quarter. Higher pricing of $13.6 million partially offset lower shipment volumes of $24 million. Unit shipment volumes of iron gate valves, hydrants and brass service products all declined in the quarter primarily due to a pull-forward of orders in advance of third quarter price increases and the continued downturn in residential construction.

Income from operations of $35.8 million and EBITDA of $48.7 million in the 2008 fourth quarter compared to income from operations of $34.7 million and EBITDA of $47.6 million in the 2007 fourth quarter. Income from operations increased primarily due to higher sales pricing of $13.6 million, which more than offset higher costs of raw materials and purchased components of $9.3 million. Income from operations was reduced by $9.4 million due to lower shipment volumes, partially offset by operating cost reductions of $3.7 million and the positive year-over-year impact of $4.9 million due to overhead absorption and other factors.

Net sales in the U.S. Pipe segment increased 11.4% in the 2008 fourth quarter to $153.4 million from $137.7 million in the prior year quarter. The sales increase was attributable to $25.6 million of higher pricing, offset by $9.8 million of lower volumes of ductile iron pipe shipments. In the 2008 fourth quarter loss from operations was $2.2 million and adjusted EBITDA was $4.2 million. These results compare to income from operations of $10.4 million and EBITDA of $16.4 million in the 2007 fourth quarter. The 2008 fourth quarter results were negatively impacted by increased raw materials costs of $26 million, under absorbed overhead of $6.7 million, start up expenses associated with our new ductile iron pipe operations of $4.3 million and lower shipment volumes of $3.4 million. These items were partially offset by $25.6 million of higher sales pricing and operating cost reductions of $7.5 million.

Net sales in the Anvil segment increased 11.7% to $158.9 million in the 2008 fourth quarter, compared to $142.2 million in the prior year quarter. The net sales increase was driven by higher sales pricing of $10.5 million and increased volume of $5.9 million. Both income from operations of $23.4 million and EBITDA of $28.1 million in the 2008 fourth quarter increased over 2007 fourth quarter income from operations and EBITDA which were $13.4 million and $19.8 million respectively. Income from operations increased principally due to a $10.5 million of high sales pricing. Higher shipment volumes of $1.8 million and cost reductions of $1.5 million were offset by higher selling commissions, other personnel-related costs and administrative costs associated with the realignment of Canadian distribution operations.

Free cash flow, which is cash provided by operating activities less capital expenditures, was $48.8 million in the fourth quarter and $93.9 million for the full year 2008. This compares to free cash flow for fiscal year 2007 of $114.9 million, excluding the impact of debt refinancing.

Net debt decreased 9% over the past 12 months. At September 30th, 2008 net debt totaled $911.6 million which is total debt of $1.955 billion less cash on hand of $183.9 million. Total debt at September 30, 2008 was comprised of our $425 million senior subordinated notes at a fixed rate of 7.375%; $141.6 million of Term A debt currently at LIBOR plus 150 basis points; $526.7 million of Term B debt at LIBOR plus 175 basis points; and $2.2 million of capital leases and other. Currently 78% of total debt outstanding is now fixed rate and 22% is a variable rate. Our fixed rate debt is currently comprised of the $425 million senior subordinated notes and $425 million of Term debt. As we noted last quarter, in June we entered into interest rate swap agreements that effectively converted floating rate debt to fixed rate debt. As a result of these interest rate swaps, at least 70% of our total debt will bear interest at fixed rates through May, 2012. The estimated average all-in fixed rate on the swap portion of term debt is currently 6.1% and is expected to remain under 6.8% until the final swap agreements mature in fiscal 2012.

Our scheduled principal repayments are minimal over the next three fiscal years, with $8.9 million due in fiscal 2009 and $19.5 million due in each of fiscal 2010 and 2011. Our first significant debt repayments of $115.1 million are not scheduled until 2012 when our Term A debt matures.

We are well within our quarterly maintenance debt covenants. At fiscal year end our leverage ratio, which is net debt to EBITDA was 3.38 times, well below the maximum leverage ratio of 5.25 times. This maximum leverage ratio gradually scales down to 4.5 times in fiscal 2011. Our only other maintenance covenant is interest coverage, which was 3.82 times at September 30th, 2008, well above the minimum interest coverage of 2.5 times. Both of these ratios improved from the third quarter of 2008.

We will continue to manage our capital structure and we believe that we have sufficient liquidity through cash on hand, future free cash flow generation and approximately $260 million of available credit under our outstanding revolver to meet our foreseeable needs.

I'll now turn the call back over to Greg.

Thanks, Evan. As I said in my introduction, we benefited during the quarter from a number of the actions we have been implementing throughout the fiscal year. We realized higher pricing in all three of our business segments, both year over year and sequentially. In fact, the fourth quarter was the first quarter in fiscal 2008 that price increases in total more than covered higher raw material costs. We continued to benefit from our cost reduction actions. In total, operating cost savings were $12.7 million year over year and our interest expense also declined.

These factors contributed to a 20.5% increase in net income and a 15.4% increase in EPS for the quarter, despite an $11 million decline in volume.

Now turning to the first quarter of fiscal 2009, the two primary issues that will negatively impact our performance are a significant decline in bookings and the high cost of raw materials currently in our inventory that will flow through cost of goods sold. In September we saw a significant fall-off in orders at our U.S. Pipe and Mueller Company business units. September orders for these two business units were down 47% and 20% respectively year over year. For October, U.S. Pipe orders were down 46% and Mueller Company's were down 42%, declining even further from September. These downturns in orders will impact our first quarter 2009 shipments at both of these business units.

Consequently, volume will be down significantly at U.S. Pipe and Mueller in the first quarter. We are hopeful that this will be an issue for this quarter only, since we believe that recent market activity has been primarily driven by the liquidity crisis as municipalities are delaying spending and our distributors are cutting back their inventories in a response to municipalities' actions.

The second issue that will negatively impact our first quarter is the high cost of raw materials that remain in our inventory, especially at U.S. Pipe where raw materials accounted for approximately 54% of cost of goods sold in fiscal 2008.

We did see a significant reversal in the trend in our purchase costs in the fourth quarter, especially for scrap steel. Prices dropped dramatically in mid-fourth quarter in stark contrast to the unprecedented cost increases we have been seeing throughout the year. While we should benefit from the lower costs in the longer term, the higher prices we paid through August 2008 will negatively impact our results in the first quarter. On the last conference call, I mentioned that we had announced a 10.5% price increase on ductile iron pipe to be effective in mid-August. This was needed to ensure that we would cover higher raw material costs in the first quarter of 2009. We were not successful in implementing the price increase, largely due to the unexpected drop in scrap steel costs. Therefore, we do not anticipate covering our raw material increases in the first quarter.

For example, the price we paid for scrap at U.S. Pipe peaked in July at $533 per ton. Scrap prices began to drop in mid-August and in September we purchased scrap at $340 per ton and prices continued to fall in October to $210 per ton. The price of brass ingots which we consume in the production of our hydrants and brass products dropped from a high of $3.10 per pound in July to $2.90 per pound in September and $2.50 per pound in October. We expect we will begin seeing the benefit of these lower costs in the second quarter of fiscal 2009 as the lower raw material costs in our inventory flow through cost of goods sold. As a reminder, we use the FIFO method of accounting.

Now let's look at the expected effect on first quarter results in each of our businesses. Within Mueller Company we expect higher sales pricing will more than offset the increase in raw material costs. However, the drop-off in orders just discussed is expected to lead tosignificantly reduced volume in the first quarter. This year-over-year drop in volume is expected to result in sizeable margin erosion for the quarter.

Within U.S. Pipe, our peak scrap steel costs are expected to flow through our cost of goods sold in the first quarter. We expect brass and U.S. Pipe's cost of sales to be up over 125% in the first quarter of 2009, yearover year. To put this in perspective, in the fourth quarter scrap steel in our cost of goods sold was up 68% year-over-year. While our price per ton of ductile iron pipe is expected to be up more than 30%, higher raw material costs that will flow through the first quarter, combined with reduced volumes are expected to result in an operating loss at our U.S. Pipe business segment in the first quarter.

At Anvil bookings held up pretty well in the fourth quarter and in October. We expect shipments in the quarter to be reasonably comparable to the previous year. although we could see some distributors cut back on inventories as we get close to the end of the calendar year. We do expect to see higher raw material costs in the first quarter as material variances in inventory flow through the cost of goods sold. Higher raw material costs should result in a slightly reduced operating income margin at Anvil on a year-over-year basis.

We also expect to be impacted by one time costs of approximately $2 million associated with the proposal to simplify our dual class stock structure. I will review that process in more detail later.

Given these factors we believe that the first quarter of 2009 could be our toughest quarter since we have been a publicly traded company. We do believe, however, that some of the issues just discussed affecting the first quarter are unlikely to materially impact the balance of the year.

I'll now discuss the outlook for the balance of 2009, which is less clear given the present economic turmoil and the uncertain timing of a more stable environment.

Our key market drivers remain spending on water infrastructure, driven by residential construction and municipal spending for repair and replacement and non-residential construction. Based on 2008 results, 40% of our total revenues were derived from public water infrastructure spending for municipal repair and replacement, 30% of our revenues from investment and water infrastructure driven by residential construction, and 30% of our revenues from non-residential construction.

We believe the order drop-off that we have seen in the last two months has been a reaction to the economic crisis, significantly higher interest rates, and lack of liquidity in the municipal bond market, which we have heard has caused some municipal water systems to delay a portion of their spending plans. Consequently, we believe distributors have also been cutting back their inventory orders. The American Water Works Association survey, which was published in October, projects a 17% increase in infrastructure repair and replacement spending in calendar year 2009. The responses to this survey were collected before the liquidity crisis. But nonetheless, we think it reinforces that municipalities have definite needs and plans to invest in upgrading their infrastructure network. As credit again becomes available and money returns to the bond markets, we could begin to see municipalities executing their plans to upgrade and repair their local water infrastructures.

This past month was the first time that the Blue Chip Consensus on 2009 housing start forecasts was below the 2008 forecast. Various forecasts are now calling for a drop of 30% in 2008 and a further drop of 6% to 20% in 2009. However, most forecasters are now projecting housing starts to hit bottom sometime in calendar year 2009.

As you know, spending on non-residential construction is the primary driver of demand for our Anvil products. We expect to see a drop off in non-residential construction in 2009. The most current forecast we have seen from Blue Chip economics indicators is calling for a drop of 3%, while McGraw Hill Dodge is calling for a 6% decline year over year, although these forecasts were issued prior to the current liquidity crisis. Given where demand falls in the construction cycle for Anvil products, we continue to believe that for the first half of fiscal 2009 we will see comparable year-over-year demand for our products.

As I mentioned earlier, during the last several months we saw a significant drop in raw material costs, primarily scrap steel and brass ingots. While the magnitude of this short term drop could be influenced by a supply and demand imbalance, we do expect that the cost of raw materials and purchase components will be down from the averages we saw in fiscal 2008 within U.S. Pipe and Mueller Company. As I have just discussed, we do not expect to see the benefit of these lower costs until our second quarter of fiscal 2009.

We were especially aggressive in the second and third quarter of fiscal 2008 in implementing price increases to offset higher raw material costs. In the fourth quarter our price per ton for ductile iron pipe was up almost 29% year over year. Unit prices for our hydrants and valves were up 12% to 14% and for our brass products were up 10%. It is our intention to hold onto these price increases in fiscal 2009.

As you know, we have taken aggressive actions over the past 18 months to reduce our costs as demand for our products has declined. We are implementing further actions in response to the recent fall in market conditions. Just last week we announced a reduction in force at our hydrant manufacturing facility in Albertville, Alabama. The reduction affects approximately 120 positions who were about 20% of Albertville's workforce. We are reviewing the specific situation at each of our facilities and will determine the appropriate actions that need to be taken. We will made additional announcements as specific plans develop, while remaining sensitive to our employees in the process. We will remain aggressive in responding to the market environment, managing our controllable expenses and matching production to market demand. We are also tightly managing our capital expenditures for fiscal 2009.

Other key variables for fiscal 2009 are corporate spending, estimated to be $42 million to $44 million. Our tax rate is expected to be between 39% and 41%. We estimate 2009 net interest expense to be within the range of $70 million to $73 million. And we expect capital expenditures to be substantially below 2008 expenditures and with a range of $50 million to $60 million.

One of our primary objectives continues to be maintaining strong free cash flow. With cash on hand, debt availability and the free cash flow we expect to generate in 2009, we have options that include reinvesting in the business, paying dividends, repaying debt, repurchasing stocks and making strategic acquisitions. We evaluate each of these options on an ongoing basis and as opportunities arise. For now we believe we should reserve the flexibility our liquidity affords. Given the volatility in today's economy, which has become more acute since our last conference call, we believe this remains the most prudent course.

As most of your know, on October 30th we announced that our Board of Directors authorized the submission to our stockholders of a proposal to simplify our capital structure by converting our Series B common stock into our Series A common stock. The conversion will require the approval of a majority of the votes entitled to be cast by the holders of a Series A common stock and the Series B common stock, voting together as a single class with each class having one vote per share. Stockholders will vote on the proposal at the annual meeting of stockholders in January. The Series B common stock will be converted into the Series A common stock on a one-to-one basis upon approval by the stockholders. The proposal is being submitted to the stockholders to simplify the capital structure of the Company and enhance the liquidity of the common stock, among other things.

To recap, the actions we have been taking throughout the year continued to yield several positive results in the fourth quarter. Higher sales pricing offset higher raw material costs for the first time this year in the fourth quarter and we realized additional benefits from the operating cost reductions and savings initiatives we have been implementing since 2006. We once again had strong cash flow and this contributed $93.9 million of free cash flow generated for the year. With our debt restructuring in May 2007, coupled with our strong free cash flow, we haven't been impacted by the credit issues facing some companies today. As we have demonstrated over the past 18 months, we have the track record which shows we know how to successfully address challenging market conditions. Furthermore, we believe we have the right team and strategy in place to continue to take the actions needed to navigate through the current economic environment which will make us even stronger when our markets improve.

With that, I'll open it up for questions.

Thank you. (OPERATOR INSTRUCTIONS) One moment for the first questions to register. Our first question today comes from Kevin Maczka. Your line is open and please state your company name, sir.

Kevin Maczka, BB&T Capital Markets. Good morning, everyone. A question on the municipal customers that you're talking about. They're obviously pulling back projects, d delaying projects, responding to the environment. And obviously the longer term need there is much better than their current funding environment. And I'm just wondering what ultimately makes that change? We're talking about an increasingly challenged environment, in terms of commercial construction outlook and financing. I'm just wondering what ultimately makes that change, where their funding is more in line with their need?

You know Kevin, throughout 2008 we had continued to see an increase in municipal spending on repair and replacement. In fact, we saw -- we were realizing the spending and it was pretty consistent, we think, with the need. In fact, if you recall a year ago when we referenced the AWWA survey, that a year ago that survey was calling for a 17% increase in year-over-year spending. We said we thought we would see 10%, 11%. And actually we think probably for the year we did see that type of spending. In fact, I referenced what happened to our orders at U.S. Pipe in September where they dropped 40% year over year and another 46% in October. Interestingly, in July and August of this year our orders for U.S. Pipe were up 11%.

So we saw -- I guess in essence we hit the wall or our markets hit the wall in September. And I think that that's not -- we believe that it was related to the liquidity crisis. From what we currently hear on this in the marketplace that municipal financing became very, very scarce to non-existent. And we think that the markets, even the municipal markets now, are generally experiencing a liquidity crisis.

So I think what we saw come September was clearly a reaction to what was happening in the overall, I think, the bond market. And we believe that, as we've said, that once that starts loosening up -- we would expect that it would loosen up, but we know that the markets are in some turmoil like we've never seen. But when that starts loosening up -- and again I think it's important to point out that generally water systems, municipal water systems, have some of the strongest ratings, we think they'll see the money first. But what we've seen in the last two months we think is a reaction to the liquidity crisis. What we think will get it back to moving, to perhaps at least seeing, if not completely the growth we were seeing, at least start seeing some projects free up. We think it is just a loosening up of the credit crisis and bond money again becoming available for municipalities.

Kevin Maczka. Okay, Greg. And on the pricing side, you took a lot of different price increases in fiscal '08 on a lot of different product lines. But now with volumes down so sharply and commodity costs coming down so sharply, can you give a little more color on why you're so confident that you can maintain those price increases? Because I thought I heard you say that you had one recently that was not so successful.

Yes. If you look at up until the one for U.S. Pipe in mid-August that the price increases we announced were accepted in the marketplace. To the best of our knowledge, our competitors also increased prices. And I would say that we all fought very hard to get those price increases. We were well behind the curve, the catching up to higher raw material costs. In fact, as we said, this was the first time that we got into positive territory. That we would expect that everyone is still somewhat behind. And so it's -- when I said it's our intention to keep those prices, I'm not sure we'll get any new price increases in 2009. That certainly is I think very questionable. But we're going to fight hard to at least to get the carryover pricing from the price increases that were implemented and realized in the marketplace in 2008.

That remains -- I think that your question is valid. That remains probably a variable that we have to wait to see how it plays out. But at least our expectation is that the indus- -- that we were so far behind raw material costs that it will be important to try to maintain those. But it is a variable that, as I said, that we'll have to see how it plays out.

Okay, Greg. Thank you.

Thank you.

Our next question comes from Judy Merrick. Your line is open and please state your company name.

Thanks. This is Judy for Keith Hughes at Suntrust Robinson Humphrey. And you did a good job outlining in the Anvil section your outlook for non-residential spending. But it seems like they've had kind of two good quarters; a little better than we expected. Was there anything in the mix in the past quarter that was kind of a positive there?

You know, Judy what we've really been seeing contributing for the last two quarters to Anvil's margin improvement has been the pricing that we've been able to get into the markets. I think that on the Anvil business that we were ahead of the curve. So I think the real contribution, we did see some growth, year-over-year growth in volume. But the real contributor was the pricing that we were able to get through in the marketplace. We'll see a little bit of that margin deterioration as I referenced in the first quarter because we'll have some of the higher raw material costs now flowing through cost of goods sold. But we would still expect to at least more than cover those increases with the pricing that was implemented. But the real contributor to the margin expansion at Anvil for the last two quarters has been the pricing that we've been able to realize in the marketplace.

Okay. And was there anything you saw in the mix that helped lead to the strong volumes in the last two quarters?

Nothing that I would say that was mix-related. Again, I would say it was just more that the pricing that we were able to get in the marketplace. And it more than offset raw material costs. It made a very positive contribution in the margins. We'll see that deteriorate a little bit in the first quarter.

Okay. Great. Thank you.

Our next question comes from Michael Schneider. Your line is open and please state your company name.

Hi. It's Mike Schneider from Robert W. Baird & Company. Good morning. Maybe first we can just start with the pricing again. Have you seen any deflation in the municipal pricing on some of these project quotes that are being submitted? I realize volumes are down and bids are probably being delayed. But I'm curious if deflation has hit that sub-segment yet?

Mike, we would most readily see that in our Pipe business. And actually if you look at through the quarter, the first quarter, we're up slightly probably about 150 basis points in pricing over what we realized in Q4. Maybe not quite that much. Sorry. But we're up maybe about $10 to $15 on average per ton in our first quarter versus on what we averaged in the fourth quarter.

And these are the public bid projects, correct?

Yes. That's primarily what's going through there, the Pipe would be -- that was for shipping in municipalities.

Okay. And I understand orders collapsed during September and October. Did the amount of project quotes out there, as well, dry up or get significantly delayed?

Well the project quotes, again when you look at for total for the fourth quarter, we were down about 12% -- 6%, sorry, for the fourth quarter year overyear. But most of that happened in late August and then September. So we really did see it hit when we got into get September. Actually the tons that were quoted were down 12% for the quarter year over year. And we saw that much more heavily weighted to that decline in September.

Okay. And then I'm just curious. In pricing by segment, if we look at Mueller I believe last quarter you had signaled that the backlog in July reflected 12 to 14 points of price at Mueller Co. And in the last quarter only 4 of that had been realized. So it seems to me there was another 8 to 10 to come through, but yet this quarter only 7 came through. Is there more pricing that yet flows in the Mueller Co. backlog?

Yes. We would expect to see around that 12% to 14% flow through, and it's our intention to hold onto that, in at least the first two quarters on a carryover basis for fiscal year 2009.

Okay. And then switching to costs. Your purchase components contracts are significant and in some cases well more than just the raw materials. Can you describe, for example, just what those contracts read in terms of pricing? Resets, are they monthly? Are they annual contracts? And how quickly will you be able to realize and pressure your suppliers for price decreases?

Yes. It's best for me to look at it on business units. We don't have very many annual contracts. Probably the biggest annual contract that comes to mind is for coke. And that resets in February. And that everything we're hearing is we're still seeing higher -- coke prices increasing. Now I'm not so sure, given what's happened to the steel industry, if that may change between now and February. But on the coke, as I said, we think in those negotiations that our supplier may still have the upper hand. When you look at scrap steel at U.S. Pipe, we try to keep the minimum inventory. We buy that on probably a monthly basis. So we would expect, as I said, we would expect to start seeing those lower costs flowing through our cost of goods sold on scrap steel at -- for Pipe beginning the second quarter. We do have, as I've said, the variance that's in our inventory since we're on a FIFO accounting basis, that will flow through the first quarter.

For our Mueller business, because in addition to scrap we do buy pig iron, that I think that right now that we have orders and committed to pricing that should flow through I would say probably in February. So I would expect that come February that we will start seeing lower prices -- raw material costs flowing through Mueller. Your point is a very good one. We have asked every one of our purchasing people of our business units to go through every one of their contracts to -- and where we have the opportunity, to renegotiate those contracts. But for the most part we --our big purchase items, scrap steel, brass ingots and pig iron -- on the scrap steel, that's on a month-by-month basis. So we're pretty good there. On brass ingots, again that's on a month-to-month, four to six week turnaround. So we should start seeing those cost savings. On the pig iron, that's probably about three or four months out.

So again, we would expect to start seeing I think the real -- the positive impact on our margins in the second quarter on the reduction we're seeing in the declining raw material costs.

Okay. And then the reduction in force that occurred at Mueller, what is the projected annual savings from that? And would it kick in as soon as the March quarter?

Let me say that a lot of the reduction in force at Albertville at our hydro plant was in response to what we've seen in the last two months on orders. So it would not be a savings that we would expect to see on annual basis because it would be our expectation that when we see orders rebound that we will be bringing back certainly a portion of those positions that we laid off or terminated. But on an ongoing quarterly basis with that number of people gone, it would be about $1.4 million per savings and we would probably start seeing that in the second quarter -- $1.4 million per quarter of savings in the second quarter because we certainly would have some severance costs associated with that that we would incur in Q1.

And in fact will there be a charge, an expense run through the P&L in Q1?

Well there certainly will be severance costs relative to -- we're still looking at all of the potential actions. We don't know if it will be a restructuring charge or just a period cost associated with each business.

Yes. We're currently evaluating that and we'll make a final assessment as to the final accounting treatment.

Okay. But could you put some range around the dollar amount?

Mike, I think at this time it may be premature for us to do so.

Okay. And then on the start up of the mini mill. $4.3 million on the call last quarter you had responded to my question saying that the start-up expenses in Q4 were to be comparable to Q3 at about $1.4 million. Can you give us some sense as to why the significant increase from that forecast? And I guess what the expenses are projected to be in Q1?

Yes. On the fourth quarter we had expenses associated with weight control. We had some additional training of new employees. Efficiency in scrap loss. And what I think is the one area we've always said that it would probably take us six months until we got -- we start seeing the savings that we projected, on the back end of the ductile iron pipe manufacturing process is a process where there is cement lining put in each piece of pipe. And that has not yet been working. So we ended up shipping a far fewer tons of pipe than what we expected. So we did not have the opportunity to spread these costs over a -- greater shipments. So consequently they became a period cost, charged to start up. So I'd say the real issue was related to the reduction in volume that we actually shipped because of the failure to put the lining in the pipe properly. It's a problem with our supplier. Our supplier is on site. We're not being charged. They're eating all the expense to get this up and running. It seems to be -- it was a programming issue. But unfortunately as we have those costs there, they get spread over what we produce and what we ship. And our production was below what we expected.

And has that process been resolved?

Getting better. But I think your other question is that we would expect that we could be the $750,000 to $1 million of additional expenses in the first quarter.

On top of the $4.3 million or absolute dollar amount?

No. Absolute.

Absolute dollar amount.

Sorry.

Okay. And then a final question just on the balance sheet. So if Q1 is obviously going to be a very tough quarter and you've indicated it's going to be below probably even the toughest quarters of the first half of '08. Does it raise any either Q1 covenant challenges or as that rolls through the trailing 12 month calculations, does it pose any problems as you get into later '09 by your modeling?

Well in our modeling, it is -- our covenants are -- it's a rolling four quarters. If you look at our last 12 quarters, that for covenant purposes, our EBITDA was around $270 million. We need $180 million of EBITDA to still be within our covenants. So we have a lot of headroom. If -- so we would not see, given the performance for the last couple quarters, we'll have that performance with us for at least the next two and three quarters. We feel reasonably confident. We think that what's happening certainly in the first quarter is a reaction to a tsunami in the credit markets. Tough to say that if what we saw or what the economy saw in September and October, if that lasted for 12 months, we have a lot of headroom, but I guess it's safe for me to say, who knows. But if you look at where we have been, the performance for the last several quarters, how that performance stays with us, as I said, $270 million versus a need of $180 million, we have a lot of headroom.

Okay. Thank you. I'll get back in line.

Our next question comes from Christopher Glynn. Your line is open and please state your company name.

Oppenheimer. Just on the forward outlook for price, like the confidence on holding it, I just want to get into maybe some of the differences by segments. Maybe Mueller Co., where you've traditionally been in more of a leadership position versus relatively more equal playing field at At U.S. Pipe. What are some differences in the way you're thinking about the sustainability of price in the face of declining raws, maybe comparing the segments?

That's a good question. And I think you're right. I think that we probably have our greatest confidence in being able to hold on to the price increases that are under -- with our Mueller branded products, primarily our valves and hydrants. I think that in the past we've seen a little more volatility in the Pipe business. Again, the Pipe business, and I would expect that our competitors saw the same, that raw material costs ran away from us. so I'd say significantly in the first three quarters of our fiscal year that we were all in a catch-up mode. But I think where if we could see a little more variability, it could be on the Pipe side. And certainly competitive market conditions will influence what happens. But again, I would suspect that, given the performance of the Pipe business in fiscal year 2008, that we need higher pricing to catch up.

Okay. That makes a lot of sense. And then just on the competitive pricing at Anvil. I think it's a little more diverse customer base, more by product line. What allows you to get so far out ahead there? And what are the customers doing on that end, or the competitors?

Yes. You know, the competitors, we were all seeing rising raw material costs. Our competitors were also implementing price increases. That doesn't say from time to time on a particular project that there may be a competitor or that decides to go ahead and reduce prices to win a very specific project. But generally I would say that, given what happened in the marketplace, that probably several of our competitors also were out ahead of what was happening to raw material costs. But again, with the Anvil business, if you look at how we've repositioned that business over the last couple of years, that we closed some factories. We pruned some products. We moved some sourcing offshore. Some of the products that we pruned were those products that we were clearly very well down in the market in terms of market share. Some of the products that we kept that we are the market share leader, that gives us the opportunity I think to be a little more disciplined in our pricing.

So I just think again it was very good anticipation of what was happening to raw material costs and staying ahead of it. At this very same time that there was still -- we saw very solid demand in our fiscal year 2008 on the commercial construction side. So when the market demand was still pretty good, that I think that making sure that there was steady supply was very, very important. And I think that permitted us to be very proactive and aggressive in our pricing.

Okay. And then could you just review the impact of the sourcing component of COGS on your margin there? And any subsequent plans to roll further into the sourcing dynamic?

Yes. It is -- if you look and we've mentioned that we've talked about the Anvil business in the market for certainly for the last year or so. And saying that we've seen a trend where more -- where the greater percentage of the market or the products that were sourced offshore were growing at a faster rate, not only for us but the market in total, than domestically produced products. That actually has a negative impact on our margins because the products that we source offshore are sold at a lower price in the domestic market. And there are two prices. There is a domestic produced product price and there's an offshore sourced product price. That goes out at a lower price and that actually is a negative on our margins. We don't have all the data but we suspect in our fiscal year 2008, given the increase in raw material costs around the world, higher transportation costs, a weaker dollar and labor costs primarily in China increasing, that while we still expect that offshore source products did grow, but probably not at the same rate we've seen the last several years. So that was a positive for our domestic produced products. But in the future we would expect if a greater percentage of our sales come from products that we source offshore at Anvil that it will negatively impact our margins.

Okay. Thanks for the help.

Our next question comes from Joel Tiss. Your line is open and please state your company name.

Good morning. Buckingham Research. How are you guys?

Fine, Joel. How about you?

All right. I just wondered a little bit more if you can give us any sense of how much of the inventory right sizing or how much of the volume drop-off is from inventories getting better, versus maybe customers waiting for better prices or more of a reflection of end market slowdown?

We think, and Joel we've just gone through a couple months I think unlike most any of us have seen in terms of the general economy. We thought that our distributors' inventories, especially on the Mueller side, may have been a little inflated in the fourth quarter. But that's only because the pull-forward in Q3 to beat the price increases. So we said all along on the last conference call that we would expect to see a volume decline at Mueller as these worked through. I think that what we have seen is primarily a reaction to the liquidity crisis where municipalities have just put plans that they have already drawn up, they put them on hold. And distributors absolutely are managing very, very conservatively. And I would say they're de-stocking. So I don't believe that we had a real imbalance in field inventory up and through September. But I think when we saw that fall off, that the whole channel is getting very, very conservative.

Your question about projects being delayed until prices coming down, I would say that we could be seeing some of that. I don't think that -- we don't think that's the primary driver. I think the primary driver was again just what happened, it's the liquidity. That I think that the channel will fight very hard to keep those price increases, including our distributors, because we really -- we felt the pain when our raw material prices were going the other way.

Right. Okay. And then just on the share count. I think Martie said 115.3. Was that at the end of the quarter? Or was the average for the fourth quarter?

That --

That was at the end of the quarter.

That's correct.

So we should use that as a proxy for 2009?

Yes.

And Joel, it was 115.5 million.

Okay. I was pretty close. All right. Thank you.

Our next question comes from Brent Thielman. Your line is open and please state your company name.

D.A. Davidson. Good morning. Greg, I don't believe this has been asked yet. But I just wanted to get your thoughts on a potential infrastructure stimulus package and how that might impact your business and outlook?

Yes. Good question. Obviously very, very timely. That we think that there is a greater attention being paid to the infrastructure at the federal, state and local levels. I think certainly that there is the possibility of water infrastructure finance to be included in the second stimulus bill currently being considered by the existing Congress. I think that we've heard during the campaign the Democrats maybe even being a little stronger in this camp of increasing spending on infrastructure to help stimulate the economy. That we would certainly expect, and this is based on probably more of what we're reading rather than any specific insight, that roadways and bridges would benefit by this spending. But we would expect to see that flowing through to water infrastructure. We think there is a great deal of focus on the federal level on environmental issues related to wastewater spending and the public health issues related to clean drinking water. In addition, the U.S. Conference of Mayors, for instance, has just issued an analysis that estimates that every dollar of water and sewer investment by the government would generate an additional almost $9.00 in private output and other revenues.

So we would expect that water infrastructure might be the bene- -- could very well be the beneficiary of not only the stimulus package, but further action on the federal government in the -- and I think probably sometime through 2009. It is interesting to point out that on two ballots yesterday there were two state-wide referendums related to upgrading water infrastructure, in Pennsylvania and Maine. I think in Pennsylvania the voters were asked to approve a $400 million referendum specifically to upgrade the state's water infrastructure. I think that we saw that that was passed by 62% of the voters. I think Maine they were asked to approve something similar, though obviously a lot smaller. And I think that on the Maine referendum it included federal matching funds. And that also passed and I think it included -- for instance the matching, it was $5 in federal matching funds for every $1 spent at the state level.

So I think that everything that certainly we have heard, everything that we've read, I think the way the election turned out I think it's pretty reasonable to expect that we could see within the next 12 months spending and water infrastructure benefiting from the freeing up of federal funds.

Okay. That's very helpful. Thank you. And then I guess and not to harp on this, but how confident are you Q2 will see the benefit of lower raw material costs, just given how weak the current environment is and difficulties working through existing inventory? I guess the question being does the environment need to get a lot better before it gets worse to get you there?

I'm sorry; could you repeat that please?

Yes. In terms of getting the benefit of some of those lower raw material costs in Q2 as you work through existing inventories, I guess in order for you to get there does the environment right now need to get a lot better before it gets worse?

Relative to raw material costs or pricing?

Relative to raw material costs.

No. You know we think that certainly when I quoted -- some of the prices that I quoted that we've seen from, for instance at U.S. Pipe, going from $533 a ton in July to $210 a ton in October, I think that that could be -- we think that that could be more of a temporary imbalance. That scrap brokers got caught with scrap and they need to unload it. I think that there is a chance that now they'll manage probably their inventories a little closer. We could see prices coming up from that $210. But generally if you look at what we averaged, what our price of raw material averaged in 2008, right now we're pretty confident that we should -- that we will see lower raw material costs throughout 2009, once we get through what's in inventory in the first quarter. So I think right now that we're pretty confident, at least on scrap and brass ingots, that we will see lower costs and that will be a benefit for us through the last nine months of fiscal year 2009.

Okay. And then just on Anvil, with the strengthening of the U.S. dollar relative to some foreign currencies, are you experiencing any increased foreign competition in that business?

I think it's been too close. It's been -- we haven't had enough time to see that. I think if you look at our shipments in the fourth quarter we certainly didn't notice that. But certainly, as I said in a previous answer, that we also source our products from there. So we certainly can compete so it could impact margins. But I would say right now there hasn't been enough time for us to see that impact in the market.

Okay. Thank you very much.

Our next question comes from Ryan Connors. Your line is open and please state your company name.

Sure. It's Boenning and Scattergood Securities. Good morning. I just had a couple of questions. First of all, just back on the competitive environment for a moment. I noted that a lot of your competitors and U.S.-types competitors in particular have also been kind of taking actions to sort of right-size their businesses in this environment. We've seen layoffs just the last couple of weeks from both the SIPCO and McWane. And so I'm wondering, it does seem that the market overall is moving to cut capacity and costs. And so a couple of questions on that. Number one, given that most of those competitors are privately held unlike yourselves and therefore maybe under a little bit less pressure to take those actions in real time, do you think that your competitors are lagging U.S. Pipe in terms of right-sizing their businesses? Or do you think the market is all moving at the appropriate pace? And then like sort of following up on that, what impact do you think that has on industry-wide capacity and pricing, as we move into 2009?

Yes. A good question. I think that probably that some of our competitors may have lagged U.S. Pipe in taking out the capacity. Again, when I think of you specifically mentioned Sipco. I know Sipco is owned by a trust that was set up by the founder for its employees. So I think that at Sipco will obviously look at every opportunity to cut costs before they will start getting the layoffs. So certainly they announced layoffs in the last -- as you pointed out -- in the last several weeks. I'm not sure about some of our other competitors.

I think that we took a very aggressive action when we closed Burlington a year ago. So I think by virtue of that action we probably were ahead. But I do think it's indicative of specifically what's happened in the loss of the markets in the last two months, as I referenced earlier. So I think that the industry, everyone has realized that we have excess capacity and need to get it out of the market to get our cost positions in line. And again, I'll go back to the pricing question, is that we were all behind the curve on rising raw material costs. And as I pointed out, we still haven't caught up at Pipe and don't expect to catch up given the reduced volume that we'll be shipping in the first quarter. So I think that we probably all still have some of those pressures. And so I think that we'll wait and see. But we do think that we probably were a little ahead, given our closure of Burlington. And but I do think the rest of the industry is recognizing what's happened, especially with orders and the market activity in the last couple of months, that they needed to take out more capacity.

Okay. Great. Thanks. That's helpful to get your perspective on that. I guess just another question. This one I guess more for you, Evan. I mean, you talked a lot about the debt covenants and so forth. I wonder if you can talk just in general terms about the methodology that you used to test the goodwill for impairment on the balance sheet, and really essentially in terms of whether equity prices are an input in that analysis? And what the outcome of that analysis was in your fourth quarter annual review of those intangible assets? And whether the fall in the stock price and stock prices in general had an impact on that analysis?

Yes. We do do an annual test for impairment of goodwill and other acquisition-related intangibles. And there was no impairments in Q4. In this environment though we are going to diligently monitor that on a quarterly basis. We really look at a discounted cash flow model as well as kind of market input. It's kind of weighted 50/50. From our analysis we looked at it; used the outside advisors Duff & Phelps. And it indicated there was no impairment. But it was somewhat close, based upon our stock prices and that 50%. But there really are no long term changes into the fundamentals of our business and our forward-looking projects are solid. And we feel comfortable with those. But we do take into consideration those two factors. But at this time no impairment. We will be monitoring closely going forward.

Great. Thanks for your time.

Our next question comes from Seth Weber. Your line is open and please state your company name.

Seth Weber. Thanks. It's Banc of America. Good morning, everybody. Most of my questions have been addressed. But maybe Greg, can you talk a little bit about the Pipe business, structurally. At what point -- how much pricing power do you really think exists in this space relative to PVC? I mean is some of the problem that customers are just going to use lower priced alternatives? Have you seen any of that?

Yes. Seth, when you -- I don't think we've seen a lot of that in the very short term. Again, it gets down to for a lot of the smaller diameter pipe, when you go 4 inch, 6 inch, 8 inch, as I'd say over the last 15 years already moved to plastic pipe, PVC, and now in some instances HDPE. When we start getting into larger sizes, 14 and above, that generally, because of the greater volume of water that goes through that size pipe, the higher pressures, there's a preference to ductile iron pipe. So I think there is more of an engineering reason to stick with a ductile iron pipe. We have seen, I would say in the last couple of months, some municipalities on these larger size pipe permit the PVC pipe to quote on the project, though there's none that come to mind to where they've actually selected the PVC. But we've seen it at least now approved to quote.

But I think that our position still is that we think, given the physical property of ductile iron pipe in the larger diameter, that that will stay ductile iron. And we've seen a lot of erosion already on the smaller diameter. So I'm not so sure there is that much more to lose.

Okay. Thanks. That's helpful. And then just a follow-up question on the cost savings. Is there a dollar number we should think about for cost savings in '09 from actions that you've already taken? You quoted a number for the fourth quarter. Is there a number that we can plug in for 2009?

Yes. On a consolidated basis, we've said all along that we would have a decreasing -- that the real benefits of the actions that we saw -- that we have taken we would see in '07 and '08. If you look on the $12.7 million we did in this quarter, that probably when you look at our actions, those peaked, so we would expect to see something much less than that next year. We will see an additional $6 million to $8 million savings from the Burlington closure that we didn't see this year. But we would expect, again, to be -- the actions we're taking that we've already have put in place, that we'll see benefits but we'll be below what we did this year. And I think probably on an annual basis we were around $40 million of savings this year.

Okay. Thanks very much.

Our next question comes from Michael Schneider. Your line is open and please state your company name.

Hi. It's Mike Schneider from Baird again. Greg, maybe we can go just through the Mueller Co. volumes by product line? That is just the brass products, valves and hydrants. If you can give us a sense of what went on in the quarter?

Yes. It was almost pretty even that through the last two -- well, are you talking for the quarter or the last two months? Sorry, Mike.

The quarter and then I'd also like to know, that was my next question, what went on since?

Yes. If you look on the quarter, actually the fall-off in dollars on a year-over-year basis ranged between 10% and 30%. And the biggest drop-off were in valves, which is not surprising because valves are a product that we would have expected to see the real pull-forward into Q3. So when we saw the drop-off in Q4, it was not unexpected because of the pull-forward. For instance, the brass products fell off the least amount. And again, that was because we would not have expected to see as much pull-forward because that's a lower priced item. So we saw, as I said, valves 30%. Hydrants less than that, about somewhere in the mid 20%. And brass in the high teens to about 20%.

So but again that's not what concerned us. We expected to see the fall-off. What we -- what was the real concerning is when we got into September and October, as I said, where orders were down pretty much across all three product lines on a year-over-year basis of -- and continued at that 30%. And in October it was down over 40%, about 45%. And that was for valves and hydrants primarily, with brass products off a little bit. So when we see volume at that rate, we would expect that that would probably carry through into shipments, volume shipments in the first quarter. So on a year-over-year basis we would expect that that 30% will probably carry through on a year-over-year basis, that 30% decline this first quarter over the first quarter of 2008. And just to put it in perspective, of course the first quarter of 2008 was our lowest shipment quarter for Mueller.

So with that kind of drop in volume, that we would see operating margins erode to probably high single digits and when you look at this quarter that our operating margins at Mueller were over 19%. So it's -- the drop-off in the Mueller orders early in the quarter, in July and August they weren't that much of a concern because we knew that was related to the pull-forward. It was the drop off that we saw in September and then it continuing at an even greater rate in October is the big concern.

Okay. And to that point about volumes, when you're quoting these down 40 some percent levels at Mueller and U.S. Pipe, you are talking year-over-year correct? Not sequentially?

Yes. Yes. We're talking year-over-year.

Okay. And then within those declines, the most recent numbers that you quoted for Mueller, you mentioned that brass products wasn't off as much. Is that more an indication that brass products are used more in the residential area versus municipals? So it is indeed just concentrated in the municipal area?

That's a good question. Good observation, Mike. Certainly that's true. The brass products are used strictly for residential. And we would have seen -- I think that's right. We would have seen a bigger drop off in valves and hydrants because of the absolute slowdown in municipal spending, also on a year-over-year basis. So I would think that that's the biggest contributor. Also a little bit, as I referenced, that we probably didn't see as much pull forward on brass products either because that's a much lower ticket item. I think the distributors will try to lock in lower pricing on valves and hydrants than -- it's a little less important on the brass products. But I think it's a combination of both. And I do think that what's happening in municipal markets, certainly we saw a much bigger year-over-year drop off in that market than what we expect we would have seen in residential construction.

Okay. And in the explanation as to why Mueller margins go to the high single digits in Q1, if we go back a year ago that was almost your toughest quarter. You were dramatically paring inventory at that point, yet revenue was only -- well it was basically flat for the division. But now we've got just the double impact of substantially lower volumes here earlier in the quarter. And presumably you've got to take inventory levels down another level?

Yes. It'll be related to just the absolute production related to the drop in volume. We'll see probably some decline in inventories, but we've done a pretty good job I think of bringing down inventories all along. And so it's that we don't have the big hits related to bringing down inventories that we would have had five quarters ago. It's just the absolute fall-off in production related to volume.

So by at least your guidance by segment, clearly operating income is going to be positive in Q1. But when you look at an earnings per share basis, do you actually expect to remain positive?

Mike, we don't give guidance. But certainly I think that there is the possibility that we do expect to have positive cash flow. We do expect operating income of the operations to be positive. With our one-time expense related to collapsing the shares, as well as some potential severance costs and just ongoing tax and interest expenses that it could be in negative territory.

Okay. Thank you again.

That does conclude today's question and answer segment.

Well again, thank you for your interest and look forward to speaking to you next quarter.