Mueller Water Products Inc (MWA) 2009 Q2 法說會逐字稿

Welcome and thank you for standing by. (Operator Instructions).

At this time I would like to introduce Martie Zakas. Thank you. You may begin.

Good morning everyone, and thank you for joining us today as we discuss Mueller Water Products results for the 2009 second quarter. We issued our press release reporting results of operations for the three months ended March 31, 2009 yesterday afternoon, and a copy of it is available on our website.

Mueller Water Products had 115.6 million shares outstanding at March 31, 2009.

With us on the call 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 by the financial community. We believe these measures will assist in assessing the company's underlying performance for the periods being reported. There are limitations to these non-GAAP measures, and reconciliations between non-GAAP and GAAP financial measures are included in the supplemental information within our press release.

This morning we will refer to adjusted income, loss from operations, adjusted net income loss, adjusted EPS, and adjusted EBITDA, and EBITDA loss, all of which excludes the impairment and restructuring charges in fiscal 2009 and 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 provisions 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 guarantees 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, 2008 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 website, www.MuellerWaterProducts.com, for at least 90 days after the presentation.

The slides related to this morning's call are available to help illustrate the quarter's results. In addition, we will be filing a copy of this morning's call's prepared remarks on the Form 8-K.

After the prepared remarks we will open the call to questions from our dial-in participants.

I will now turn the call over to Greg.

Thank you Martie, and good morning everyone. We appreciate you joining us this morning as we discuss our results for the second quarter, fiscal 2009. I will begin today with a brief overview of the quarter. Evan Hart will then follow up with a detailed financial report, after which I will update you on key drivers influencing our business, and our outlook. We will then open up the call for your questions.

Net sales for the 2009 second quarter were $322.2 million, down 23.6% year-over-year.

Adjusted loss from operations in the second quarter was $5.1 million, and adjusted net loss per share was $0.13.

Adjusted operating margin in the second quarter was a negative 1.6%, and adjusted EBITDA margin was 5.8% for the quarter. Excluded from these results are noncash impairment charges of $570.9 million and restructuring charges of $42.2 million, which Evan will discuss in detail.

Demand for our products continued to deteriorate in the second quarter from the first, which we had expected and which we discussed on last quarter's call. Net sales for the second quarter were down 12.4% from the first quarter.

Traditionally the second quarter is the lowest quarter for end market demand for our water infrastructure products due to seasonality. This year the situation was magnified by a continued deterioration in residential construction and little movement in the municipal markets. Additionally we believe most of our distributors completed their destocking programs in the second quarter and maintained those lower inventory levels throughout the quarter.

We also saw an acceleration of declining demand from the nonresidential construction end market, which primarily affects our Anvil business. As a result, our consolidated shipment volumes were down $36.5 million and 9.9% from the first quarter of fiscal year 2009 and $124.4 million or 29.5% year-over-year.

During the quarter we significantly cut back production in order to lower inventories. We continued to reduce costs as we implemented further headcount reductions, restructured certain manufacturing operations at U.S. Pipe's North Birmingham manufacturing facility, and implemented other actions that we will discuss later in his call.

Despite a substantial decline in volume, we were able to generate positive cash flow in the second quarter. Additionally, we have further reduced our overall cost structure, which will continue to enhance our earnings power when demand in our markets improves.

I will now turn the call over to Evan Hart, who will discuss our financial results including our debt and liquidity position. I will then come back and provide an outlook for the second half of fiscal 2009.

Good morning everyone. I will first review the consolidated results and then discuss segment performance. The results I will be discussing exclude the impact of a second quarter 2009 noncash impairment charge and restructuring charge, which I will discuss after presenting segment performance.

Consolidated net sales of $322.2 million in the 2009 second quarter decreased $99.4 million year-over-year. Net sales decreased due to lower shipment volumes of $124.4 million across all business segments and $8 million in unfavorable Canadian currency exchange rates, which were partially offset by $33 million of price increases, primarily implemented in fiscal 2008.

Gross profit was $54.9 million in the 2009 second quarter, a decrease of $43.9 million compared to $98.8 million in the 2008 second quarter. Gross margin was 17% compared to 23.4% in the prior year. Gross profit decreased primarily due to lower volume of $39.3 million, higher raw material costs of $10.5 million, and $34.4 million due to under absorbed overhead from lower production.

Gross profit was partially offset by higher sales pricing of $33 million and manufacturing cost savings of $8.8 million.

Adjusted loss from operations for the quarter of $5.1 million decreased $34.6 million from the prior-year period adjusted income from operations of $29.5 million. 2009 second quarter adjusted income from operations was negatively impacted by lower shipment volumes of $39.3 million, under absorbed overhead of $34.4 million, and higher raw material costs of $10.5 million. This was partially offset by higher sales pricing of $33 million, manufacturing cost savings of $8.8 million, and reduced selling, general and administrative expenses of $9.3 million.

Second quarter 2009 adjusted operating loss and adjusted EBITDA margins of negative 1.6% and positive 5.8%, respectively, compare with the 2008 second quarter adjusted income margin of 7% and adjusted EBITDA margin of 12.4%.

Selling, general and administrative expenses were $60 million in the 2009 second quarter compared with $69.3 million in the 2008 second quarter. This decline was the result of cost saving actions and lower shipment volumes.

Interest expense net of interest income declined $1.5 million to $16.6 million in the 2009 second quarter compared to $18.1 million in the 2008 second quarter.

Gross interest expense totaled $16.9 million in the 2009 second quarter compared with $19.1 million in the prior-year quarter. Gross and net interest expenses were down year-over-year due to a lower interest rate and lower average net debt outstanding.

In the 2009 second quarter, primarily due to the very limited income tax benefit associated with the goodwill impairment, the effective tax rate was 10.7%. Excluding goodwill impairment, the effective tax rate for the second quarter would've been approximately 38% compared to the federal statutory rate of 35%. The effective tax rate for the second quarter of fiscal 2008 was approximately 42%.

Adjusted net loss per share was $0.13 in the 2009 second quarter compared to adjusted net income per share of $0.06 in the 2008 second quarter. The 2009 adjusted second-quarter results exclude $4.77 per share related to impairment and restructuring. The 2008 adjusted second-quarter results exclude $0.01 per share of restructuring charges associated with the previously announced closure of U.S. Pipe's manufacturing facility in Burlington, New Jersey.

I will now move on to segment performance.

Net sales for the Mueller Co. segment were $114.8 million in the 2009 second quarter compared to $168.9 million in the prior-year quarter. Lower shipment volumes of $62.2 million and $1.5 million of unfavorable Canadian currency exchange rates were partially offset by higher pricing of $9.6 million.

Unit shipment volumes of iron gate valves, fire hydrants, and brass service products declined about 45% in the quarter.

Adjusted income from operations of $2.6 million and adjusted EBITDA of $15.8 million in the 2009 second quarter compared to income from operations of $27.4 million and EBITDA of $39.7 million in the 2008 second quarter. Adjusted income from operations was reduced primarily by $23.2 million of lower shipment volumes, $15.4 million of under absorbed overhead due to lower production, and $4.1 million of higher raw material costs. This was partially offset by higher sales pricing of $9.6 million, manufacturing cost savings of $5.6 million, and $2.8 million of reduced selling, general and administrative expenses.

Net sales of for the U.S. Pipe segment were $93.2 million in the 2009 second quarter compared to $114.2 million in the prior-year quarter. The net sales decrease was primarily attributable to $31.9 million of lower shipment volumes partially offset by $10.9 million of higher pricing.

In the 2009 second quarter, adjusted loss from operations was $10.9 million and adjusted EBITDA loss was 4.7 million. These results compare to adjusted loss from operations of $1.3 million and adjusted EBITDA of $4.1 million in the 2008 second quarter. The 2009 second quarter results were negatively impacted by $7.9 million due to lower shipment volumes and $12.8 million of under observed overhead due to lower production. Higher sales pricing of $10.9 million more than offset higher raw material costs of $3 million.

Additional benefits in the quarter included manufacturing cost savings of $2.1 million and reduced selling, general and administrative expenses of $2.5 million.

Net sales for the Anvil segment were $114.2 million in the 2009 second quarter compared to $138.5 million in the prior-year quarter. The net sales decline was driven primarily by $30.3 million of lower shipment volumes and $6.5 million of unfavorable Canadian currency exchange rates. This decline was partially offset by higher sales pricing of $12.5 million.

Adjusted income from operations of $12.1 million and adjusted EBITDA of $16.5 million in the 2009 second quarter compare to income from operations of $12.9 million and EBITDA of $17.9 million in the 2008 second quarter. Income from operations decreased principally due to $8.2 million of lower shipment volumes, $6.2 million of under absorbed overhead due to lower production, and $3.4 million of higher raw material costs which were partially offset by higher sales pricing of $12.5 million, lower selling, general and administrative expenses of $3.4 million, and manufacturing cost savings of $1.1 million.

Free cash flow, which is cash provided by operating activities less capital expenditures, was $8.1 million in the 2009 second quarter. This compares to negative free cash flow of $15.7 million for the second quarter 2008. The increase in cash flow was primarily attributable to our working capital management (technical difficulty) principally due to lower inventories.

At March 31, 2009 net debt totaled $934.6 million, which is total debt of $1.0877 billion less cash on hand of $153.1 million. Total debt at March 31, 2009 was comprised of our $420 million senior subordinated notes at a fixed rate of 7 3/8%, $141.6 million of term A debt at LIBOR plus 175 basis points, $524.1 million of term B debt at LIBOR plus 175 basis points, and $2 million of capital leases and other.

Our scheduled principal repayments are minimal over the next three fiscal years with $6.2 million due in the remainder of fiscal 2009 and $19.5 million due in each of fiscal 2010 and 2011. Our first significant debt repayments are not scheduled until 2012 when our term A debt matures.

At the end of the second quarter our leverage ratio in accordance with our 2007 credit agreement, which is net debt to EBITDA, was 4.27 times, below the maximum leverage ratio of 5.00 times. Our only other maintenance covenant is interest coverage, which was 3.25 times at March 31, 2009, above the minimum interest coverage of 2.50 times. We were in compliance with these financial covenants at March 31, 2009.

Based on our current expectations, we believe that we will not remain in compliance with these financial covenants. We have initiated discussions with the administrative agent under our 2007 credit agreement to seek relief in connection with these financial covenants by June 30, 2009. We currently believe that we will be able to successfully amend our 2007 credit agreement in advance of that date. However, there can be no assurance that we will be able to do so.

We anticipate that our existing cash, cash equivalents, and borrowing capacity combined with our expected operating cash flows will be sufficient to meet our anticipated operating expenses, capital expenditures, pension contributions, and scheduled debt service obligations as they become due.

The company reported a noncash goodwill impairment charge of $400 million in the 2009 first quarter, subject to additional fair value analysis. At that time, any additional impairment charge was not expected to exceed $200 million. During the 2009 second quarter, however, the company's common stock began trading at prices significantly lower than prior quarters, especially in the second half of the quarter. This lower market capitalization for the company as a whole prompted additional impairment testing.

The company's additional 2009 second quarter goodwill impairment testing led to the conclusion that all of its remaining goodwill was fully impaired, and other indefinite-lived intangible assets at Mueller Co. were partially impaired. Consequently during the 2009 second quarter the company recorded additional goodwill impairment charges of $376.8 million for Mueller Co. and $92.7 million for Anvil. The impairment charges for the other indefinite-lived intangible assets at Mueller Co. was $101.4 million, and the remaining carrying value for these assets at March 31, 2009 was $263 million. The company's other intangible assets of $418.9 million were not impaired, as there was sufficient undiscounted future cash flows to support these carrying values.

These impairment charges are noncash items and therefore will not result in any cash expenditures and will not affect the company's cash position, tax payment, cash flow from operating activities, free cash flow, liquidity position, or availability under its credit facilities. Furthermore, these charges are excluded from all of the company's financial results in evaluating compliance with financial covenants under its credit agreement.

Also during the 2009 second quarter the company restructured manufacturing operations at its U.S. Pipe North Birmingham facility. These actions resulted in a noncash charge of $38.5 million, primarily for property, plant, and equipment. Additionally, the company incurred $3.5 million of severance charges related to headcount reductions throughout the organization.

I will now turn the call back over to Greg.

Thanks Evan.

As we look at the second quarter, the biggest factor impacting our results was the continued fall-off in market demand, which not only impacted our net sales but also caused us to lower our production levels even further. We also continue to take aggressive actions to reduce our manufacturing capacity and the overall costs in our businesses.

With respect to market demand, looking at our water infrastructure business, shipments for our Mueller branded fire hydrant valves and brass products dropped almost 50% year-over-year. Industrial iron pipe shipments dropped almost 40%. These drops in shipments were the result of a continued decline in residential construction, and frozen municipal spending.

However, we don't believe the year-over-year drop is entirely attributable to the drop-off in end market demand, due to two factors. First, last year distributors placed orders in advance of our February 1 price increase on valves and hydrants. We did not have a price increase this year. Second, we believe most of our distributors completed their destocking programs this quarter and then maintained those lower inventory levels.

For our Anvil business, shipment volume dropped 22% as we saw the drop-off in spending on nonresidential construction accelerate in the quarter.

We did benefit in the quarter from higher pricing year-over-year in all business units. In the second quarter of fiscal 2009 the average sales price per ton of ductile iron pipe was 27% higher year-over-year. The prices for valves and hydrants continued to be about 10% to 12% higher year-over-year. And prices for Anvil products were on average about 9% higher year-over-year. For the quarter, all business units covered raw material cost increases with higher pricing on a year-over-year basis.

During the quarter we've significantly adjusted our production schedules to help ensure that we would reduce inventories and generate positive cash flow. Our Mueller Co. valves, hydrants, and brass manufacturing facilities operated only 66% of the available days in the quarter, and average unit production dropped about 55% in the quarter year-over-year. U.S. Pipe manufacturing facilities operated only 70% of the available days in the second quarter, and tons produced dropped 43% in the quarter year-over-year.

While inventories dropped $25.7 million in the second quarter from our first-quarter levels, the associated drop in production to achieve these lower inventory levels increased under absorbed overhead. The cost of this under absorbed overhead negatively impacted our second-quarter earnings and will negatively impact third-quarter earnings as well. Sequentially, under absorbed overhead costs were $26.1 million higher this quarter as compared to first quarter. And on a year-over-year basis we incurred $34.4 million higher in under absorbed overhead costs in this quarter.

During the quarter we continued to take actions to reduce our overall cost structure. We lowered headcount by nearly 600 positions. Year to date in fiscal 2009 we have reduced our workforce by about 15%.

Also during the quarter we restructured our North Birmingham ductile iron pipe manufacturing facility, essentially reducing capacity of that plant by 50%. As Evan mentioned, we incurred a $38.5 million noncash restructuring charge. We believe that this action will reduce costs by $17 million on an annualized basis. We expect to achieve about $8 million of that savings in the second half of fiscal 2009.

As a result of the restructuring actions to date this fiscal year at U.S. Pipe, we have reduced capacity by more than 20% and have lowered our breakeven production levels.

We implemented a number of other cost-saving actions in the quarter in response to the downturn in the economy and its impact on our markets. Beyond the temporary planned shutdowns and headcount reductions we have already discussed, we implemented the temporary pay reductions of 20% for members of the company's Board of Directors and most of our executive officers, as well as lesser reductions in base pay and/or reduced work weeks for other salaried employees. We also suspended the company's match on our 401(k) plans through the end of the calendar year.

Manufacturing costs and SG&A expenses for all of Mueller Water Products were $18.1 million lower this quarter as compared to the second quarter of 2008.

Now let's look at the second half of our fiscal year. We believe the second quarter represents a low point in demand in our addressed water infrastructure market. First of all, we expect to see a seasonal uptick in the second half of the fiscal year. Secondly, while housing starts may deteriorate a little further, we believe demand for our products has hit bottom. We believe our shipments to this segment in the last two quarters were minimal. As we stated earlier, we believe our Mueller Co. and U.S. Pipe distributors have completed their destocking programs. We expect that they will attempt to maintain their inventories well below last year's level.

The big question for us remains, what will happen to municipal spending? We estimate that prior to September 2008, demand from this segment was growing at about 10% annually. However, we believe that over the last several months municipal spending has been paralyzed. Initially it stalled due to the liquidity crisis including a closed municipal bond market. Then we believe most activity was suspended when the possibility of a stimulus package was first announced and remained so even after the bill was signed into law in February, primarily due to confusion over certain provisions, especially the buy-America clause.

We are seeing early signs that municipal spending may be starting to thaw. This is the first quarter in the last five quarters that our ductile iron pipe public bid quotation has not declined on a year-over-year basis. The EPA has just recently provided some clarity concerning implementation of the buy-America clause that has been causing confusion. Therefore we expect that American [Reinvestment and Recovery] Act spending for drinking water may soon begin to make its way into the market.

The direct dollars coming from this Act are very small when compared to the overall need. In the past, federal funding has accounted for less than 3% of total funding for drinking water projects. We expect that our products will be used in some of the specific projects that receive federal funding. But more importantly, we believe that once those dollars start flowing, it could open up additional projects that have been delayed due to the uncertainties.

From a timing perspective, we anticipate that it will be at least the fourth quarter of the fiscal year before we begin shipping any product to stimulus funded projects.

I want to make sure that our comments about the water infrastructure market are kept in context. Our shipments into the residential construction market have been minimal for the past two quarters. So we do not expect to fall below minimal. However, keep in mind that in fiscal 2008 we estimate that 30% of total Mueller Water Products sales were to this segment. It accounted for approximately 40% of our total water infrastructure sales. So we believe that it will be a long recovery and that we will be at the bottom for some time since we expect to lag the rebound in housing starts.

Concerning municipal spending, we do expect to see positive movement in this segment relative to the last seven months. However, demand has been very depressed, so it is positive movement from a very low base. We expect that it will take a while before we see demand equal to that which we saw in fiscal 2008. So while we believe the water infrastructure spending for our products hit a low point this quarter, we expect that it will be a slow recovery.

As I said earlier, we saw an accelerating drop in demand for nonresidential construction in the second quarter, and Anvil experienced a 22% drop in volumes. As we look at the second half of the fiscal year, we believe that on a year-over-year basis nonresidential construction spending will be down comparable. Economic forecasts from Ivy Zelman and McGraw-Hill Dodge project a 20% decline in nonresidential construction spending for the calendar year.

As I mentioned earlier, we did see higher pricing on a year-over-year basis in all three business segments. However, we are beginning to see some price deterioration, especially at U.S. Pipe. While the average price per ton was 27% higher this quarter than in the second quarter of fiscal 2008, in the first quarter of this fiscal year the average price per ton was 37.5% higher than a year ago. The average price per ton for ductile iron pipe dropped 7% in the second quarter from the first quarter, and the average price from December through March dropped 12%. We expect that prices could continue to deteriorate in the third quarter.

Pricing for our valves and hydrants has been more stable. But we have seen some recent downward pressure. In this environment we believe that we could see that downward pressure continue. We will do what is necessary to maintain our market share.

In fiscal year 2008 we were very aggressive in implementing price increases in our Anvil business in response to escalating raw material costs. We expect as raw material costs have been declining, that prices may also decline. However, we do expect that prices will remain higher on a year-over-year basis.

The cost of raw materials flowing through our cost of goods sold is declining. On a year-over-year basis these costs were $10.5 million higher in the second quarter, whereas in the first quarter they were $40 million higher. Specifically, the purchase price of scrap iron at U.S. Pipe in April was $159 per ton, a 68% decline from a year ago. Through Mueller Co., purchases of scrap iron declined sharply during the quarter with prices paid in March falling 60% below the peak price paid in July 2008. The current purchase price of brass ingots is down 39% from a year ago and 45% from its peak.

There is a timing difference between when we purchase raw materials and when we sell the related finished goods to our customers, because we use the first-in-first-out method of determining cost of sales. It will be several quarters before we realize the full benefit of this decline in raw material costs, due to the significant drop in volume and reduced production.

Specifically for the third quarter, the biggest impact on our financial results will be volume decline and the impact of under absorbed overhead associated with both the decline in volume and our aggressive cutback in production in the last two quarters. We anticipate the increased year-over-year cost of under absorbed overhead to be comparable to the second quarter increase of about $35 million. We expect consolidated operating income to be close to breakeven, and we expect U.S. Pipe to be in an operating loss position in the third quarter.

In addition, we are tightly managing capital expenditures, which we now project to be in the range of $40 million to $45 million. We expect to generate positive free cash flow for the full year.

Other key variables for fiscal 2009 are corporate spending, estimated to be between $40 million and $42 million. Our effective income tax rate, excluding goodwill impairment, is estimated to be between 38% and 40%. We estimate 2009 net interest expense to be within the range of $68 million $71 million under the terms of our existing credit facility.

As Evan mentioned, we have initiated discussions with our lead banks under our 2007 credit agreement to seek relief in connection with the financial covenants. We currently believe that we will be able to successfully amend our 2007 credit agreement, but as you know, we can provide no assurance that we will be able to do so.

In summary, we believe demand in our water infrastructure markets hit their low point this quarter, although we will continue to have a tough year-over-year comparison and expect a slow recovery. Demand from residential construction will likely require a long recovery period, but we do expect to see positive movement in the municipal market.

Nonresidential construction, the primary market for our Anvil products, is forecasted to decline further. We continue to reduce capacity and other costs in this business segment.

We are currently at that stage of the cycle where we are being severely impacted by decremental margins. We are taking actions such as the restructuring of U.S. Pipe's manufacturing operations in North Birmingham to reduce capacity and lower our breakeven point. We will realize the benefits of positive operating leverage when our production volumes and shipments increase.

Our primary focus remains on generating positive free cash flow and managing our controllable expenses while maintaining our quality, market leading position, the reputation of our brands, and service to our customers.

Again, as a reminder, the prepared remarks on this morning's call are being filed as an 8-K.

With that, I will open it up for questions.

(Operator Instructions). Mike Schneider.

It's Mike Schneider from Robert Baird. I guess starting off with the obvious question about the debt covenants. Do you anticipate just getting a waiver for the third quarter? Or is it the case where you want to amend the entire covenant structure in the agreement?

Yes, we are in discussions with our lead banks at this time, and it's our expectation that we will seek relief in the form of an amendment. So that will be a process that we're going through and plan to have achieved by the end of June of this year.

And can you give us a sense of just the timing of this? Why would you wait until the fiscal third quarter to commence the process? Is there something that occurred during the second quarter that was materially worse than you expected? Because Greg, as you said, we talked about these market conditions last quarter on the call. I'm just curious what if anything changed, or if this has been going on even since last quarter.

Yes, Mike. I think that when we look at it, there have been four primary variables that we think have changed the last three months relative to the outlook that we had, the prior outlook. First of all I think that we've seen nonresidential construction -- market has worsened, and the potential recovery has moved out, so certainly as everyone knows that this is a big driver for Anvil demand. So we think that the market for Anvil has deteriorated from where we thought it was three months ago.

Secondly, that three months ago I think we were more optimistic about the timing of the uptick in municipal spending, primarily driven by the stimulus package, and now we think with the confusion that that is -- still remains log jammed. We know that there has been significant discussions within the EPA of trying to get better clarity on the buy-America clause. But I think that that money has not started flowing yet, so as we referenced a little earlier, now we think the earliest we will see any benefit from the stimulus package will be in our fourth quarter of our fiscal year. And then we think it runs the risk of getting into the season where construction becomes very difficult. So we think the last three or four months delay in getting stimulus money flowing not only is going to impact the timing in fiscal 2009 for us, but we think it runs the risk of being even -- delayed, pushed to the later half of 2010 just because we are going to get into that construction season where very little can be done.

The third thing that hit us is that we -- when we saw this -- how this was playing out, we became very, very aggressive in cutting back our production, as again -- and I think we've always been consistent -- that we think an environment like this, a primary focus is just to make sure that we are generating positive free cash flow. And so we became even more aggressive than what we expect -- what we thought we would even have to in cutting back production. So that under absorbed overhead, we had a bigger hit for under absorbed overhead this quarter. That's going to flow into Q3 for sure, and it will be a wait and see on how much more production we may have to take out.

And I think the fourth impact has been a deterioration in our -- in the pipe business and primarily due to pricing. As we pointed out on -- our price per ton for ductile iron pipe was up 27% year-over-year. So I think that we try to do everything to hold on that. But as I also -- hold that pricing. But as I also referenced, we saw that deteriorating throughout the quarter.

Quite frankly, we think that perhaps that some of our competitors were not as disciplined as we were in controlling inventories. We think that -- our intelligence tells us that they may have -- they may be sitting on some pretty significant inventories, and we expect that they will find and need to try to convert that into [cash] (technical difficulty). So we have a -- I think a little more pessimistic look on what will happen in the pricing on our pipe business.

So when we put these four variables together the way they played out the last three months, it's put us in the position that Evan referenced and requires that we enter this process with our banks.

Kevin Maczka.

Kevin Maczka, BB&T Capital Markets. Greg, I just want to make sure I understood your comment about the seasonal uptick. Are you -- so you are expecting a seasonal uptick in Mueller and U.S. Pipe, offset by further weakness in Anvil as commercial continues to slow? Is that right? For a net positive? Am I thinking about that right?

Yes. Certainly Kevin, we are at that time where we will -- we do expect to see a seasonal uptick on Mueller and U.S. Pipe. Even sequentially I think that we would probably still expect to see Anvil's revenues up slightly. But I think that the -- to a obviously a much lesser extent than we would see at Mueller and U.S. Pipe. So it's from a revenue standpoint that we would expect revenue in all three business units to be up in Q3 but probably down -- this is Q3 versus Q2. But probably down somewhere around the same amount in total in this third -- year-over-year in the third quarter as we were year-over-year in the second quarter.

Got it. And then, Greg, on your comments on price pressure increasing, you were ahead of the commodity cost increases with price in all three segments this quarter. Now it sounds like pricing and of course the commodity costs are both coming down, so with them both trending up before, both trending down now, do you expect to stay ahead of that in the back half of the year, or will price sort of more than offset the decline in commodity costs?

Yes, yes. Certainly Kevin, our visibility in Q4 -- because given where we are at this point in the market, we don't have the -- quite the same visibility as we might in Q3, but we still expect in Q3 on a year-over-year basis that our higher pricing will be more than the negative impact of raw material costs.

Great. And then just finally, Greg, on the stimulus, Q4 it sounds like is when you are expecting to see benefit. And I know there's uncertainty. A lot of things are still unclear. But is there anything you can quantify there at all in terms of what the bid activity looks like, the pipeline, what sort of the topline impact might be, maybe even just qualitatively if you could?

Yes. Qualitatively, we did mention a little earlier that this is the first time in the last five quarters that we haven't had a decline in our public bid quotation. So we think that some of that is being driven by the stimulus package.

Relative to -- and we have started to see inquiries, questions about our US content in our products. So I think that that is the precursor to actually start seeing inquiries. So we're getting -- I would say the last two, three, four weeks we have been getting a number of inquiries to certify the US content in each of our products, so that I would say, again -- and I'm repeating myself -- is the precursor we think to the different water municipalities or water companies getting ready to issue the inquiries.

But I can say right now, we haven't seen too much of the -- too many of the actual inquiries. But we've seen activity that would lead us to believe they are getting ready to issue those.

So again I think that we will see it in Q4, at the earliest in Q4, and I will put it qualitatively -- we think it probably will be small rather than a big impact. I think we will see a much bigger impact a little later.

Christopher Glynn.

Chris Glynn, Oppenheimer. Just fleshing out a little bit on the first time in five quarters not declining -- public inquiries. I guess that's not actual quotations?

Yes. So sorry. Those were actual bids, and that's from our U.S. Pipe business unit, that we will quote many more of those direct, and so we have a better handle. So to (technical difficulty) perspective, we did see a slight increase in the second quarter of this year over the first quarter of this year in the amount of tons we bid and probably equal to about the number of tons that we bid on the second quarter of -- in 2008. But again, the last four quarters we have been sequentially bidding on fewer tons.

So Chris, I'd say that the best way to think of it is directional, with seeing the increase directionally, but I think that when you -- when one looks at it still in absolute tons, what we were bidding in 2008, our quotations tend to -- we were bidding on higher, more tons in 2008 than what we've been bidding on so far in 2009.

That's helpful. What kind of amendments might you address? Maybe this is sensitive, but could you maybe get a pass on some of the under absorbed or something like that?

Well, it is sensitive right now because we are in discussions and limited as to what we can say, but I will let -- see if -- what color Evan can provide.

No. I would agree. We've entered into our discussions and really can't comment as we are in this process starting our negotiations. But we will be taking a look at every aspect as we look at our ratios under our 2007 credit agreement and determine what the terms will be going forward. So we will be looking at all aspects.

Okay. And I guess would higher interest rates be a likely outcome there?

You know, we can't comment as we are in the process. So you can look to other amendments that have been out in the marketplace, but at this time because we are in the midst of those discussions, we cannot comment.

Understood. And then just if you said it, I missed it. But relative to the financial statement EBITDA, the adjustment to that used for calculating the compliance? (multiple speakers)

The difference traditionally on a -- we look at covenant compliance on a trailing 12 month EBITDA basis, and bank EBITDA is higher than our adjusted EBITDA that we published, by about $15 million on a (technical difficulty) month basis. And that's primarily related to stock compensation and a few other add-backs that we have in the calculation.

Okay, great. And just lastly, some interesting variability in the pricing comments. I think of the Mueller Co. segment as a little bit of a stronger franchise competitively maybe than the Anvil, but you talked about defending share there, and you sounded a little bit more blase about the pricing situation with Anvil. So I thought that was kind of curious.

Yes. It was the -- I think on the Anvil side -- I think on the Mueller side that clearly that as a specified product, you are right. We have a stronger position and end users at times will just demand to continue to use the product that they have in place.

But I think that, Chris, what we were I think trying to convey is that in this environment that I think that it is reasonable for us to expect that we could see some more pricing pressure, more pricing pressure than we would typically expect to see. And while we are up year-over-year -- and we would expect to have higher pricing throughout the year on a year-over-year basis for the Mueller business -- that we are seeing I think a little more pressure.

And we are also seeing some pressure on Anvil too, but I think that the key there is that we would still expect on a year-over-year basis to have higher pricing in those businesses than we did last year.

Okay. And I'm sorry. I do have one more. Just on the free cash flow outlook, some of the pieces moving around there. Deferred taxes was a big number in the quarter. Is that something that can come back favorable and kind of goose the free cash flow in the second half?

Yes. I will ask Evan (technical difficulty)

Yes, right. That's deferred (technical difficulty) related to our right off of other intangible (technical difficulty) and so that's specifically related to that one item.

Okay. So there's nothing that kind of comes back there?

Correct. Nothing comes back.

Michael Gaugler,

Brean Murray, Carret. I would like to follow up a little bit on Mike's earlier line of questioning regarding the debt levels. When Mueller came public, debt levels were aligned with a certain level of sales and profits. Given the current sales and profitability and the difficulty that you are seeing in your end markets, and that's obviously going to continue for at least a few more quarters, have you considered reducing debt via an equity offering to more closely align your current sales profit and debt as it exists today?

Mike, a good question. I can say that the management team with the Board, that we look at all options. We talked to our advisors. I think that it's always safe to assume that we would not rule out all possibilities. But I think as we are looking at it today, that we think the most -- the right approach is to amend our -- the 2007 credit agreement. But again, I want to emphasize that it's a dynamic process and we are always looking at all the different possibilities.

And just so you know, I asked the question because, again, you came public with a lot of debt obviously, and your sales and your profits were much higher than they are today. And with the share price having run up recently to these levels, it's pretty much neutral. I just thought that perhaps that might set you up better in terms of bottom-line growth if you could get a little bit of that debt off the balance sheet.

Mike I think, again, I think very good insight, good comments, and I think that we would -- we look at all options, and certainly that that would always be a possibility.

Brent Thielman,

Brent Thielman with D. A. Davidson. Really just one question left for me, and I think really more particularly on the Anvil side. But have you guys seen any change in terms of import activity on some of the products that you guys produce there, just given sort of the I guess decline in end market demand, just any sense there in imports?

Yes, I think that -- I think in the last couple of months we have seen the pricing of imported products dropping pretty -- in the 10% to 20% range. So both products that we compete with in the market as well as products that we source. So it's -- I think it's reasonable to expect that we might see in this environment imported products gaining a little share. But again, there are a number of projects, especially in cities where the various construction unions have a very strong foothold, that they'll -- that only domestic products will be installed. But yes, I think that the last -- I would say the last three or four months we have seen imported products pricing decline, where a year ago they were actually increasing.

Seth Weber.

It's Banc of America, Merrill Lynch. Sorry if I missed this. There were a lot of numbers flying around. But in general would you expect your cost saving initiatives and your pricing or recovery on raw materials to offset the under absorption in the second half of the year? I don't know if I've asked that clearly or not, but (multiple speakers)

Yes, I think you did. You did. That wasn't asked. That's a good question. We don't believe that will be the case in the third quarter. We -- the under absorbed overhead as I referenced a little earlier, we've really cut -- we cut back production quite significantly in the second quarter. That will flow through in the third quarter. So again, on a year-over-year basis, that we will -- we expect to see positive pricing. We will still be a little negative on raw materials, but we expect overhead absorption to be on a year-over-year basis about the same in Q3 that we saw in Q2, which is around $35 million, and so pricing will not offset that absorption hit.

Pricing plus your costs? But you have these cost savings initiatives that (multiple speakers)

Other -- yes, other cost savings. We will see other cost savings of -- combined that on a year-over-year basis that our pricings and other cost savings will come very close to offsetting overhead absorption, but I still think that we will have slightly higher overhead absorption.

That's helpful. Thank you. And then just the -- should we expect additional charges in the third quarter? Greg, you kind of intimated there might be additional actions coming if -- I don't know if maybe it's just as necessary or -- but is there something that's planned currently?

Seth, only potentially. Nothing that we have planned. But we could have potentially additional severance expenses, but relative to, as Evan pointed out, nothing else in the terms of impairment.

Ryan Connors.

This is Michael Roomberg. I'm actually sitting in for Ryan today from Boenning & Scattergood. I had one more question on the Anvil side. You guys have mentioned in your prepared remarks that the decline in municipal and residential spending seems to be leveling off. Is that also the case -- and perhaps you may have touched on it previously -- with respect to nonresidential spending, construction spending?

No. In fact we referenced that we probably -- we expect that we had -- we saw about a 22% drop in Anvil shipments in the second quarter. The forecasts we are looking at are calling for about a 20% drop on a calendar year basis for nonres, so we think that we will see probably drop-offs on a year-over-year basis in demand pretty comparable to that 20%. And again, I think the other forecasts we are looking at are still calling for nonresidential construction to drop -- spending on nonresidential construction to drop in 2010. I think today that varies from anywhere from another 5% to a 15% drop in 2010, based on the forecasts we've looked at.

Okay. All my other questions were answered. Thanks a lot.

Matt Vittorioso.

Barclays Capital. You've given some pretty good color on the earnings puts and takes. Could you just maybe comment directionally on that 5.8% adjusted EBITDA margin in Q2? Where would we see that going in Q3? Was it kind of flat versus Q2?

Yes, we -- Matt, we don't give guidance, but we did say in our prepared remarks we expected operating income in the Q3 to be near breakeven. So that would -- that certainly would say that EBITDA margins will go up slightly in Q3.

Great. And just given what we've seen with other companies that have come to -- or gone to their banks to get amendments, obviously typically a higher interest rate would be included in that. And what -- just curious if you've factored that into your free cash flow positive guidance? Is that anything that would significantly move the needle there, or do you expect to generate plenty of cash flow to cover that?

Obviously, we can't comment on our discussions there. But I think given our focus on reducing -- still continuing to reduce inventories and the other actions that we're taking, that we are confident that we would in either case -- in any case have positive free cash flow for the year.

Great. That's helpful. Thanks.

Bret Levy.

Jefferies & [Co.] Most of my questions have been answered as well. Can you guys talk a little bit about CapEx for the year and kind of what portion of it is going to be growth, or if there is any of that, kind of what's maintenance, and is there any kind of continuation projects in the CapEx number?

Yes, certainly. We gave the guidance where we think CapEx will be somewhere between $40 million and $45 million, and I would say for the most part, that is at our maintenance level with perhaps a little bit of that spending was -- is still for growth. But I would generally say that we've always said on the previous calls, and it's our expectation that the $40 million to $45 million level is pretty much maintenance.

And then, should things start to turn, do you guys have the ability now to buy back bonds on the open market? And would you contemplate as part of your discussions giving yourself the ability to do that going forward?

Again, we have the ability, and I will turn to Evan here. We have the ability to buy back bonds but it's capped.

Yes, currently we do have the ability to buy up to $75 million, and we always selectively look at that as we go forward as one potential strategy. But right now we are in the middle of the negotiation process. So we'll have to factor that in as we go forward.

Sounds good. Thanks very much guys.

Well, we see that we have no further questions. Again, we would like to thank everyone for joining us today, and again, remind you that we will be filing this script as an 8-K. Thanks very much.

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