Mueller Water Products Inc (MWA) 2009 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 conference call. At this time, I will turn the call over to Ms. Martie Zakas. Ma'am, you may begin.

Very good. Thank you, Laurel. Good morning, everyone. Thank you for joining us today as we discuss Mueller Water Products' results for the 2009 fourth quarter. We issued our press release reporting results of operations for the three months and year ended September 30, 2009, yesterday afternoon. A copy of it is available on our website.

Mueller Water Products had approximately 153.8 million shares outstanding at September 30, 2009, which includes the shares issued in our recent equity offering. For the quarter, the total weighted average shares outstanding were 119.4 million. For the first quarter of 2010, weighted shares outstanding will reflect the shares issued in the equity offering for the entire period.

With us on the call this morning are Greg Hyland, our Chairman, President and CEO, and Evan Hart, our CFO.

We reference certain non-GAAP financial measures in our press release and on this call, including internal measurements we use to show the differences from prior period. These non-GAAP measures derive from (technical difficulty) measures and 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 period being recorded. These non-GAAP measures have limitations, 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 net loss, adjusted EPS and adjusted EBITDA, all of which excludes the impairment and restructuring charges, the loss on early extinguishment of debt, the gain on repurchase of senior subordinated notes, and interest rate swap settlements related to debt prepayment. We will also refer to free cash flow.

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 in future tense or containing words such as and expect, believe, anticipate and project or similar words derived from those words constitute forward-looking statements. They are not guarantees, and such statements involve risks and uncertainties that could cause actual results to differ materially from these statements. Please see our Form 10-K for the fiscal year ended September 30, 2008, and our Form 10-Q for the quarter ended June 30, 2009, for a discussion of these risks.

This morning's call is being recorded and webcast live on the Internet. The archived website 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 file a copy of our prepared remarks on 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 fourth quarter of fiscal 2009.

I'll begin today with a brief overview of the quarter. Evan Hart will then provide a detailed financial report, after which I'll update you on key drivers influencing our business and our outlook for the first-quarter and full-year fiscal year 2010. We will then open up the call for your questions.

Production and shipment increases at Mueller Company and US Pipe in the fourth quarter contributed to a significant sequential improvement in the financial performance of both business units, largely due to less underabsorption of overhead, lower raw material costs and higher volume. Strong operating leverage resulted in substantial incremental margin gains at both Mueller Company and US Pipe.

We remain focused on generating free cash flow and reducing our debt. We generated $36.6 million of free cash flow in the quarter and $82.2 million for the full year. With our cash from operations and the proceeds from our recent equity offering, we reduced our debt by $221 million during the quarter. For the full year, we reduced our debt by $355.3 million or 32.4%. Evan will discuss these capital structure actions in more detail.

As our end markets recover, we expect to benefit from positive conversion margins as we did on a sequential basis in the fourth quarter at Mueller Company and US Pipe. With regard to our end markets, the water infrastructure markets began stabilizing in the third quarter and remained steady during the fourth quarter, primarily due to spending for repair activity. Housing starts increased slightly in the fourth quarter, although as we have said, we expect to lag any recovery in this end market.

The nonresidential market remains challenging, and we expect that situation to continue throughout fiscal 2010. We anticipate the typical lower seasonal demand pattern for Mueller Company and US Pipe in the first half of fiscal 2010. Initial quote activity tied to stimulus projects began in the third quarter and increased further in the fourth quarter, although it has yet to translate into a significant number of orders. We expect to benefit from the stimulus program in the second half of fiscal 2010 as more projects receive funding and construction begins. I'll discuss this in more detail later in the call.

I'll now turn the call over to Evan Hart, who will discuss our financial results for the quarter.

Good morning, everyone. I'll first review the consolidated results and then discuss segment performance.

Consolidated net sales of $374.8 million for the 2009 fourth quarter decreased $122.1 million year over year from $496.9 million for the 2008 fourth quarter. Net sales decreased due to lower shipment volumes of $105.3 million across all business segments and net lower pricing of $12.3 million due to lower pricing at US Pipe, partially offset by higher pricing at Mueller Company and Anvil. In addition, unfavorable Canadian currency exchange rates reduced net sales by $4.5 million.

Gross profit of $69.2 million in the 2009 fourth quarter decreased $53.2 million compared to $122.4 million in the 2008 fourth quarter. Gross margin of 18.5% compared to 24.6% in the prior-year period. Gross profit decreased $31.4 million due to lower shipment volumes, $26.5 million due to underabsorbed overhead from lower production and $12.3 million due to lower sales pricing.

Gross profit declines were partially offset by lower raw material costs of $10.1 million and manufacturing cost savings of $14.6 million.

Adjusted income from operations for the quarter of (technical difficulty) million decreased $33.7 million from $48.5 million in the prior-year period. Lower shipment volumes of $31.4 million, underabsorbed overhead of $26.5 million and lower sales pricing of $12.3 million negatively impacted 2009 fourth-quarter income from operations. Reduced selling, general and administrative expenses of $19.5 million, manufacturing cost savings of $14.6 million and lower raw material costs of $10.1 million positively impacted the quarter's results.

Fourth-quarter 2009 adjusted operating income and adjusted EBITDA margins of 3.9% and 9.8%, respectively, compare with the 2008 fourth-quarter adjusted operating income margin of 9.8% and adjusted EBITDA margin of 14.6%. Selling, general and administrative expenses of $54.4 million in the 2009 fourth quarter compare with $73.9 million in the 2008 fourth quarter. This decline resulted primarily from personnel-related expenses, including headcount reductions, lower commissions as a result of lower net sales, lower incentive compensation and other personnel-related costs.

Net interest expense of $27.2 million increased from $17.6 million during the three months ended September 30, 2008. The increase was due to $6.3 million of interest rate swap settlement costs associated with debt prepayments, as well as higher interest rates resulting from the June 2000 amendment to the 2007 credit agreement. Excluding the interest rate swap settlement costs, net interest expense for the quarter was $20.9 million.

Additionally, as a result of the $218 million in debt prepayments in this quarter, we expensed $3 million of related deferred financing costs as a loss on early extinguishment of debt. In the 2009 fourth quarter, our effective income tax rate for the three months ended September 30, 2009, was 37%.

Adjusted net loss per share of $0.03 in the 2009 fourth quarter compares to adjusted net income per share of $0.15 in the 2008 fourth quarter. The 2009 adjusted fourth-quarter results excluded $0.03 per share related to interest rate swap settlement costs, $0.02 related to the loss on early extinguishment of debt, and $0.01 related to restructuring charges.

I'll now move on to segment performance. Net sales for the Mueller Company segment of $158.1 million in the 2009 fourth quarter compared to $184.6 million in the prior-year quarter. Lower shipment volumes of $29.4 million were partially offset by higher pricing of $4.2 million.

Unit shipment volumes declined in the fourth quarter, although the year-over-year decline was less than it was in the third quarter.

Adjusted income from operations of $25.4 million and adjusted EBITDA of $38.1 million in the 2009 fourth quarter compare to income from operations of $35.8 million and EBITDA of $48.7 million in the 2008 fourth quarter.

Adjusted income from operations decreased $10.7 million due to underabsorbed overhead from lower production and $10.3 million due to lower shipment volumes. The decrease was partially offset by $5.5 million of manufacturing cost savings, $4.2 million of higher sales pricing and $3.7 million of reduced selling, general and administrative expenses. These results excluded $600,000 of restructuring charges for the 2009 fourth quarter.

Sequential adjusted operating income margin at Mueller Company improved significantly from the third quarter to the fourth quarter, from 8.8% to 16.1%. Net sales for the US Pipe segment of $105.3 million in the 2009 fourth quarter compared to $153.4 million in the prior-year quarter. The net sales decrease was primarily attributable to $30 million of lower shipment volumes and $18.1 million of lower pricing.

In the 2009 fourth quarter, adjusted loss from operations was $7.1 million and adjusted EBITDA was a loss of $2.6 million. These results compare to adjusted loss from operations of $1.8 million and adjusted EBITDA of $4.2 million in the 2008 fourth quarter.

The 2009 fourth-quarter results were negatively impacted by $18.1 million due to lower sales pricing, $7.5 million due to lower shipment volumes and $6.5 million of underabsorbed overhead from lower production. This quarter's results were positively impacted by $16.7 million of lower raw material costs, $6.3 million of manufacturing cost savings and $4.5 million of lower selling, general and administrative expenses. These results excluded $200,000 and $400,000 of restructuring charges in the 2009 and 2008 fourth quarters, respectively.

Net sales for the Anvil segment of $111.4 million in the 2009 fourth quarter compared to $158.9 million in the prior-year quarter. The net sales decline was driven primarily by $45.9 million of lower shipment volumes and $3.2 million of unfavorable Canadian currency exchange rates. This decline was partially offset by higher pricing of $1.6 million.

Adjusted income from operations of $3.2 million and adjusted EBITDA of $7.8 million in the 2009 fourth quarter compare to income from operations of $23.4 million and EBITDA of $28.1 million in the 2008 fourth quarter.

Income from operations decreased due to lower shipment volumes of $13.6 million, higher raw material costs of $9.6 million and underabsorbed overhead from lower production of $9.3 million. These items were partially offset by lower selling, general and administrative expenses of $9.3 million and manufacturing cost savings of $2.8 million. These results exclude $1.1 million of restructuring charges in the 2009 fourth quarter.

Free cash flow, which is cash provided by operating activities less capital expenditures, was $36.6 million in the 2009 fourth quarter. This compares to free cash flow of $48.8 million for the 2008 fourth quarter. The free cash flow generated was primarily attributable to working capital management, principally due to lower inventories, and included pension plan contributions of $20.6 million. Free cash flow was $82.2 million for the year.

At September 30, 2009, net debt totaled $678.7 million, which is total debt of $740.2 million less cash of $61.5 million. Total debt at September 30, 2009, was comprised of $66.5 million of Term A debt at LIBOR plus 550 basis points, $252 million of Term B debt at LIBOR plus 550 basis points, $420 million of senior subordinated notes at a fixed rate of 7 3/8%, and $1.7 million of other.

Our scheduled principal repayments are minimal, with $12 million due in each of fiscal 2010 and 2011. Our first significant scheduled debt repayments totaling $53.7 million occur in fiscal 2012, when our Term A debt matures.

As Greg mentioned, we made significant progress in improving our capital structure by deleveraging our balance sheet throughout fiscal 2009. We completed a public offering of 37,122,000 shares of Series A common stock at $4.75 per share in September and generated net proceeds of $166 million (technical difficulty). During the quarter, we used the net proceeds of the equity offering, along with other available cash, to prepay (technical difficulty) million of debt under our 2007 credit agreement. During the year, we repaid $355.3 million of debt, reducing our total debt by 32.4% since the beginning of the year. Since March 31, 2006, we have cut our debt in half by repaying $809 million.

Our fourth-quarter debt reduction efforts have enabled us to reduce our leverage ratio and our interest rate spread on the debt outstanding under our amended credit agreement by 50 basis points to LIBOR plus 500 beginning in December. Additionally, (technical difficulty) negative to stable and raised the subordinated notes rating to B-. At September 30, 2009, our trailing 12-month EBITDA as defined by our credit agreement was $122.4 million.

I will now turn the call back to Greg.

Thanks, Evan. As a general overview, sequentially we saw a nice improvement, particularly with our operating margins, although year-over-year results were down. The biggest factors negatively impacting our fourth-quarter results were the decline in shipment volume on a year-over-year basis and underabsorbed overhead associated with lower production volumes.

While we continue to be significantly impacted by overhead underabsorption on a year-over-year basis, the negative impact of year-over-year underabsorbed overhead was lower (technical difficulty) than in the previous two quarters. Additionally, our raw material costs were lower both year over year and sequentially. Our cost containment actions, both the manufacturing operations and SG&A, resulted (technical difficulty) million in lower costs in the quarter year over year and lower costs than in the third quarter. These factors contributed to the improvement in our operating income margin on a sequential basis.

Unit shipments for our Mueller-branded fire hydrants, valves and brass products in the fourth quarter declined between 8% and 26% year over year. Industrial iron pipe shipments in tons declined 22% year over year. These declines were attributable to the falloff in residential construction and municipal spending.

With respect to pricing, Mueller Company and Anvil benefited from higher pricing in the fourth quarter year over year, while US Pipe saw an $18.1 million pricing decline year over year. I'll discuss pricing for each business segment in more detail later in the call.

Sequentially, we were very pleased with the operating income margin improvement that we saw at both Mueller Company and US Pipe in the fourth quarter. As I just mentioned, we benefited from lower raw material costs, lower underabsorption of overhead, which was due to the increased production in the third quarter at these two business units.

Specifically at Mueller Company, adjusted operating income margin improved from 8.8% in the third quarter to 16.1% in the fourth quarter. We achieved a 16.1% operating income margin even though we utilized only 55% of our capacity.

With regard to Mueller Company, we saw a seasonal uptick in shipments in the fourth quarter, as we have seen in the third quarter. Shipment volumes of iron gate valves and (technical difficulty) increased 8% in the fourth quarter from the third quarter, while hydrant shipments were essentially flat. Pricing remained stable in the fourth quarter and the full year, as we have held on to our realized fiscal year 2008 price increases while maintaining our market share throughout the year.

Additionally, we benefited from the cost reductions we implemented throughout the year, as well as from increased production. The increase in production and number of hours worked continues the pattern we saw in the third quarter.

Turning to US Pipe, shipment volumes of ductile iron pipe increased 12% in the fourth quarter over the third quarter. However, pricing for ductile iron pipe continued to deteriorate in the fourth quarter, with the average price per ton decreasing about 2% from the third quarter, about 18% year over, and 22% from the first quarter of fiscal 2009.

On a sequential basis, US Pipe benefited from lower raw material costs, lower underabsorbed overhead and lower SG&A costs, as well as higher volumes. Even though we are still significantly underutilizing our capacity at US Pipe, we cut our adjusted operating loss by $6.7 million sequentially, excluding the $3 million bad debt charge taken in the third quarter of fiscal 2009. US Pipe's market dynamics remain challenging, which I'll explain in more detail later.

Turning to Anvil, Anvil does not experience the same seasonality as our other businesses. It also continued to see year-over-year decline due to the downturn in nonresidential construction markets. Anvil experienced higher underabsorbed overhead in the fourth quarter compared to the third quarter, attributable to reduced production reflecting the ongoing downturn in nonresidential construction. We continue to benefit from cost reduction initiatives, including both SG&A and production cost savings in the fourth quarter.

Now I'll look at fiscal year 2010. Looking to fiscal year 2010, we believe that we will see several positive drivers for our wire infrastructure business as compared to fiscal 2009. But we do not foresee a meaningful improvement until fiscal 2011.

First, we do not expect to see any growth in demand coming from the residential construction market. We believe it hit bottom in the second quarter of fiscal 2009, and therefore we do not expect to see any further deterioration.

Second, we believe that through the first half of fiscal 2009, our Mueller Company distributors aggressively reduced their inventories. Thus, we saw our volumes decline greater than end-market demand. As in the third quarter, we continued to see expedited orders in the fourth quarter which supported our belief that distributor inventory may be insufficient to meet end-market demand. However, we expect distributors to continue to very tightly manage their inventories during the construction off-season, which coincides with the first two quarters of our fiscal year.

As we discussed throughout fiscal 2009, we believe municipal spending dropped in the first half of the year due not only to the liquidity crisis and the overall economy, but we also think due to the uncertainty around the stimulus package. While we have seen maintenance and repair activity pick up over the last several quarters, we have not seen a pickup in major projects.

We believe we could see an increase in year-over-year demand in the second half of fiscal 2010, primarily driven by stimulus spending. Stimulus package funds for drinking water projects are very slowly working their way into the marketplace.

As a reminder, the Congressional Budget Office estimates that water funding will be spent more slowly than funding for other infrastructure projects. The CBO has stated that only 4% of funding for water projects is estimated to be spent in the first year compared to 27% of highway projects. As you know, the stimulus bill currently mandates that the approved funds be spent by February 2011.

Our quotation activity at Mueller Company and US Pipe for stimulus-related projects picked up from the third to fourth quarter. For example, at US Pipe, stimulus-related quotes increased approximately 60% from the third to fourth quarter and represented about 20% of all quotes, while at Mueller Company, ARRA-related quotes represented about 9% of total quotes issued, compared to only 2% of total quotes in the third quarter. We expect municipal spending on water infrastructure to increase in fiscal 2010, primarily driven by ARRA funds. However, we do not expect to see this increase until we enter the construction season in the March/April timeframe.

Turning to Anvil, we believe nonresidential construction spending will be down on a year-over-year basis. The forecast that we use projects as much as a 16% decline in nonresidential construction spending for the 2010 calendar year.

We have held on to most of our realized 2008 price increases at both Mueller Company and Anvil. Prices at US Pipe deteriorated throughout the second half of fiscal 2009. Ductile iron pipe pricing remains a key question for fiscal 2010, especially in the near term. We reduced inventory at US Pipe by 35% during (technical difficulty), but we don't believe our competitors cut back production as soon as we did. This is a key factor, which we believe will contribute to ductile iron pipe pricing pressure, especially during the construction off-season.

If you recall, on our last conference call, we discussed the 11% price increase we announced effective June 1 and the 10% increase effective August 1. Neither increase held in the marketplace. We will continue to take the steps necessary to maintain our market share.

During fiscal 2010, we expect to benefit from lower raw material costs flowing through our cost of sales, primarily in the first quarter. As many of you know, we reduced inventory during fiscal 2009 as we aggressively cut back production. As a result, we significantly underutilized capacity, especially in the second and third quarters of fiscal 2009, which resulted in substantial underabsorbed overhead flowing through cost of sales in the third and fourth quarter.

Therefore, when we get into the second half of fiscal 2010, we expect to see positive year-over-year overhead absorption. In 2010, we will continue to focus on inventory reduction, but we expect to achieve these through process improvement efforts resulting in increased inventory turns rather than through dramatic cutbacks in production.

We implemented a number of cost reduction actions during fiscal 2009 in response to the continued downturn in the economy and its impact on our market. We expect approximately $20 million from these actions to carry over into fiscal 2010. As a reminder, these actions include reducing the capacity of our North Birmingham pipe facility by 50% in the second quarter, closure of two manufacturing facilities and three warehouses at Anvil in the third quarter, and structural SG&A changes primarily at US Pipe. We have a number of ongoing productivity initiatives which should yield additional manufacturing cost savings in 2010.

Now let's take a look at our first quarter in more detail. As we look at the first quarter for Mueller Company, we expect to see a seasonal revenue decline. We don't expect to see year-over-year improvement in volume until the second half of our fiscal year. The more than seasonal decline last year from fourth quarter 2008 to first quarter 2009 was a result of the credit crisis and distributor inventory reductions.

As we have noted, (technical difficulty) valves and hydrants has been stable, and we have held on to most of our realized 2008 price increases. All of these price increases occurred more than a year ago, and we did not implement any additional increases in 2009. Therefore, we expect pricing to remain flat in the first quarter year over year.

During the first quarter at Mueller Company, on a year-over-year basis, we expect to see lower raw material costs and additional cost savings. However, we expect we will continue to have underabsorbed overhead costs since we had not yet cut back our production in the fourth quarter of fiscal 2008 and first quarter of fiscal 2009. Therefore, we expect to achieve slightly higher operating income margins in the first quarter of 2010 year over year, although they will be down sequentially.

Turning now to the first-quarter outlook for US Pipe, many factors, such as municipal spending, residential construction and seasonal buying patterns, impact both US Pipe and Mueller Company's business. However, demand for US Pipe products tend to be driven more by major project spending than by routine maintenance activity. Therefore, we don't expect US Pipe to have a year-over-year volume pickup until we enter the construction season, the second half of our fiscal year, as we see more stimulus funds and actual projects and not just some project bids.

Prices at US Pipe deteriorated slightly in the fourth quarter, with the average price per ton for ductile iron pipe decreasing approximately 2% in the fourth quarter from the third quarter and down 22% from the first quarter of fiscal 2009. We anticipate continued price deterioration in the first quarter of fiscal 2010 since we believe our competitors are still sitting with much higher inventory levels, especially as we enter the construction off-season.

Year over year, we expect to benefit from lower raw material costs of pipe and the carryover of our cost reduction actions in fiscal 2009. However, we believe pricing deterioration will more than offset any of these year-over-year benefits. We believe US Pipe's operating loss will be greater year over year.

During this first quarter of fiscal 2009, net sales at Anvil had not yet experienced any downturn in its nonresidential construction markets. Therefore, we expect Anvil's revenue and margin to be down significantly year over year due to the downturn in nonresidential construction. As a reminder, we do not see seasonal patterns with Anvil's business. We expect its financial performance to be roughly comparable sequentially, although volumes may continue to decline.

We recently announced the planned divestiture of Anvil's noncore electrical fittings and coupling business. We will receive cash and certain assets of Seminole Tubular Company, which complements our existing mechanical pipe nickel business. We believe the completion of this divestiture, which we expect in mid-November, subject to customary closing conditions, will not only generate cash, but will enhance our overall product offering and be a net positive contributor to EBITDA.

Overall, due to the seasonality in our wire infrastructure businesses and the continued decline in the nonresidential market, we believe consolidated revenue will be down in the first quarter from the fourth quarter, and income from operations will be near-breakeven.

Other key variables for fiscal 2010, our corporate spending is estimated to be between $36 million and $39 million. Net interest expense is estimated to be within the range of $68 million to $70 million. Our effective income tax rate is expected to be between 35% and 38%. Capital expenditures are expected to be $50 million to $54 million.

In summary, we continue to manage through a challenging economic environment, and as we look to 2010, we believe we are well positioned. We believe our water infrastructure markets continue to stabilize and are showing early signs of recovery.

We expect the recovery to be slow and don't foresee a substantial improvement until 2011. However, we believe will see some benefit as more stimulus funding makes its way into the market in the second half of fiscal 2010. Demand from residential construction will likely require a longer recovery (technical difficulty). Nonresidential construction, the primary end market for our Anvil products, is forecasted to decline further in calendar 2010. We will continue (technical difficulty) capacity and manage our controllable costs in this business segment accordingly.

We remain focused on generating positive free cash flow, reducing our debt and managing controllable expenses while maintaining our quality, best-in-class product position, the reputation of our brands, and service to our customers. Even though we have implemented and continue to implement a number of cost savings initiatives, we're preserving and even strengthening two key functions which directly affect our customers and end-users.

The first is our sales and customer support structure, where we have maintain headcount. We are committed to providing superior service and quality products. Strong relationships with our end-users are key to accomplishing this objective. And our sales and customer support personnel have done an excellent job in maintaining these relationships.

The second is enhancing existing products and services, developing (technical difficulty) services and being a leader with emerging technologies to help our end-users better perform in the market. It is critical to understand where our industry is going and to ensure we help lead our customers there, as they rely on us as their trusted partner.

Making all this possible are our employees. They have done a tremendous job over the past year in helping us generate strong free cash flow through personal commitment and contributions while make being sure we continue to meet our customers' needs. I thank them all for what they have done.

As a reminder, the prepared remarks from this morning's call are being filed on Form 8-K. With that, I will open it up for (technical difficulty).

(Operator Instructions). Kevin Maczka.

BB&T capital markets. Greg, I guess my first question on US Pipe -- so on an EBIT basis, that's the segment where you lost all the money this year. And you're talking about a more intense pricing environment going forward, it seems. And margins aren't relatively high in that business even when business has been better in the past. I guess can you just remind us what the synergies are with that business and the other two segments, and why it is so important to remain committed to that business?

Sure, Kevin. First of all, I think that we are right now seeing Pipe and the results from Pipe I would say in an unprecedented market condition. And therefore, we think it would be certainly a mistake to make any long-term conclusions relative to what is happening in the market today.

To put it in perspective, the volume that we shipped and saw in this business this year was 20% to 25% below the lowest year we had ever seen in this business, and that was over 25, 26 years ago. So I think that clearly what we are seeing happening in Pipe is I think unprecedented.

And clearly, we think in the short term and right now, the issue is volume. Again, when you look at it, in the second and third quarter, volume was approximately 45% below prior year. And if you look again in the fourth quarter, we were down 22% in -- over fiscal '09. We do think that, as we've said, that Pipe is trailing Mueller Company in terms of market demand. What we think we've seen primarily at Mueller Company has been more repair and replacement activity. Demand for Pipe will be driven more by the major projects, which we're hopeful we maybe start to see with the stimulus package.

So, clearly, relative to -- I think if you look at historical Pipe margins and how we think we are positioned today, as you know, if you look at the last two (technical difficulty), we've implemented a number of restructuring actions at our Pipe business. We closed our Burlington, New Jersey, facility the second quarter of fiscal year 2008. In the fiscal second quarter of 2009, we reduced our capacity by 50% at our North Birmingham operation. In the third quarter, we implemented additional restructuring actions, reducing headcount by another 57. We focused on some structural changes in our SG&A organization, which should yield permanent reduction.

And again, as many of you know, that in the first quarter of this year we completed construction of the mini-mill, which we believe will give us significant cost savings. It has been giving us significant cost savings, in spite of the fact that we're only using 35% of that capacity.

So that's a long way of saying that we think the actions we have taken, that Pipe will be a much stronger business in the future as we've seen volume increase. You mentioned pricing. I must say that right now, I think that the pricing in the ductile iron pipe market is confusing. The best that we can tell, there's been no real movement in market share.

We think for this business, most demand is price-inelastic, so a $150 reduction per ton doesn't, we don't think, result in a municipality deciding, let's replace 10 miles of pipe. Our only hypothesis is that we think some of our competitors are trying to convert inventory into cash before we get well into the nonconstruction season. So we hope we see some pickup when we see overall demand pick up.

But to your question, I think that we are the leading provider of water infrastructure market -- products to the water infrastructure market in the US. As we've said time and time, ductile iron pipe, our valves and hydrants get installed in ductile iron pipe, go to the market through the same distribution channels, and we think that we are seeing conditions in our pipe business that certainly are unprecedented. We think we will see some improvement in 2010. And again, as we've said earlier, we think that we will see some significant improvement in 2011. And I think coupled with the actions that we've implemented the last several years of pipe that we will see a much better business there.

Okay. Thanks for all that, Greg. My only other question I wanted to ask was on the cost side. So the SG&A cost decline that we saw this time, you said that was mostly attributable to personnel-type costs, incentive comp, commission. If you were to have flattish revenues in fiscal '10, would those type of costs come back in that environment, or would this $55 million or so, or $54 million run rate, be a good run rate going forward?

I'll ask Evan to address that.

As I mentioned before, the savings are personnel-related, and commissions, bonus, incentive compensation, some workers' comp and medical. If we look at those cost savings, we think about 50% of those are structural in nature that we would have benefit going forward. The other 50% may come back, depending upon overall volume, such as commissions and such. So we've estimated that at about a 50/50 split between variable and fixed for SG&A.

Okay, so 50% would come back with higher volumes. But if you don't have higher volumes, if in fact maybe you even have lower volumes, those costs could continue to go lower?

You know, we continue to look at SG&A and take out headcount, as Greg mentioned, at US Pipe and other structural changes that we've made. I'm not sure that we could see any additional significant decline in 2010 unless there was some major decreases in volume.

Yes, Kevin, if we don't see any volume pickup in the second half of the year, we will do what's necessary. But I think that, as I said in my prepared remarks, we're looking very closely at what we need to do relative to some R&D spending. And I think that would be the variable, that would be the area that if we saw an increase in SG&A spending year over year, it might be more what we're doing in terms of new product development, because we can't lose sight that we do think these markets will grow at a much greater rate in 2011. And we want to make sure that we are prepared for that.

Okay, thank you.

Michael Schneider.

Robert W. Baird & Co. Maybe first we can start with just the outlook for underabsorption. I believe last quarter, it was $38 million. This quarter, it was $26 million. Can you tell me where the lines cross and where your production begins to reach equilibrium? And if you want to go by segment, that would probably be helpful, because I presume Anvil is the drag overall.

Yes, Mike, I think if you look -- when we talk about absorption, it's on a year-over-year basis. As I said, we don't think we will cross over until we get into the second half of fiscal 2010, and that is primarily, when you look at what was happening in the fourth quarter last year and in the first quarter, our production had not dropped that significantly. And as a result, that is why we built all the inventory we did. And when we got into the January, we were sitting with much higher inventories.

So on a year-over-year basis, that our production was still a lot higher in Q4 2008 and the first quarter of 2009 than what it will be at both Mueller and Pipe in the fourth quarter of 2008 and 2009. However, when we start cutting back our production pretty significantly in the second quarter of fiscal year 2009 and third quarter to bring down inventory, that is when we think that when we get into the third and fourth quarter of this year, at Mueller and Anvil, if we see -- even if we see a flat market, given that we don't have to take -- we won't be taking that much inventory out and given that we think that we'll see greater production because there will be less coming out of distributor inventories, we would think then we will be in positive overhead absorption in those two businesses.

Anvil right now is a question mark for the full year, depending on how far nonresidential construction drops.

Okay. And then sequentially, at Pipe and Mueller Co., you should see this underabsorption level fade sequentially until the lines cross in the second half? Is that right?

I think that is fair, yes.

Okay. And raw materials, they were $8.5 million higher in the quarter, and it looks like it was all concentrated in Anvil. Can you explain why Anvil was still seeing rising raw material costs?

You know, when I look at that, actually on a consolidated basis year over year -- are you talking year over year or sequentially? Our raw materials were down where we were $10 million lower raw material costs on a year-over-year basis consolidated. You're correct, they're higher -- they were higher at Anvil. And that gets to that we turn inventory slower in the Anvil business. We're on a FIFO accounting basis. So we're actually, what's flowing through cost of goods sold are prices from -- raw material prices from several quarters ago. So we should catch up a little later. I mean, we'll catch up in fiscal year 2010 with Anvil. But it really gets down to that we are turning inventory much slower in that business.

And can you then quantify just sequentially what raw materials benefited you by segment?

Yes. I think by segment, both US Pipe and Mueller saw positive raw material. Mueller was slightly -- we estimate slightly under $4 million. We look at Pipe, it was around $2 million, both positive. And Anvil was slightly negative.

And that's sequential?

Sequential.

Okay. And then your expectations now for Mueller and Pipe in Q1 and Q2, do they already turn the corner and start to see rising raw material costs?

No, I think we said in our prepared remarks that we think that for the full year, we will see positive raw material costs, so we'll see lower raw material costs, but most of that actually will be in the first quarter, and I think especially at US Pipe, because, if you'll recall, the first quarter of fiscal year 2009, that is when the very high scrap steel prices from 2008 were flowing through our cost of goods sold.

So we expect first quarter will be positive and actually then the second half of the year still remains in question, though I think right now we feel comfortable from what we've seen is that raw material prices should be stable. But we should see positive raw material costs in the first quarter.

And then on quotes, you noted that US Pipe's quotes related to ARRA are up 60% sequentially. Are quotes in tons, though, up year over year?

No. When you look at year-over-year tons quoted, they are essentially flat. But I think it is our hypothesis that the fact that -- and I said about 20% of the tons that we quoted were stimulus supported. So it gives us at least some I think -- a belief that what we are quoting is maybe a little more solid this year than it was a year ago, because we think it is more likely that those projects that are supported by stimulus funding will go through.

So it is our conclusion that right now -- and it is based, obviously, on one quarter of data -- is that the stimulus funding -- excuse me, the stimulus spending or the funding may just be going for replacement rather than real growth. But we think that there is a higher probability that those projects will actually go through since the funding is more solid.

And then how about sequentially? Were pipe quotes and tons up sequentially if they were flat year over year?

No, actually, pipe tons sequentially were down probably about 7% in tons. It is not unusual, not unusual when you start getting into the nonconstruction piece.

Okay. So I'm trying to triangulate here. So ARRA orders for pipe were up 60% sequentially, but pipe overall --

Mike, quotations, not orders.

I'm sorry, quotes were up 60%, but -- for ARRA orders, but yet total quotes were down. So are you -- so net seasonally, you're down, but the composition is changing more towards ARRA?

Yes, I think that is right.

Okay. And then the same line of questioning on Mueller. So quotes were -- ARRA quotes were 9% of all quotes versus 2% last quarter. But again, what were Mueller quotes year over year and sequentially?

Actually, on a year-over-year basis -- well, sorry, I mean sequentially, our orders at Mueller were, actually, the number of quotes as well as the dollars were up sequentially at Mueller and flat, probably flat year over year. But again, I think that continues to support that we're seeing more day-to-day replacement activity rather than the major projects. So we have continually I think the last three or four or five months seen a better market for Mueller products than what we've seen on pipe products.

So Mueller orders being up sequentially is seasonally atypical, correct?

Quotations.

Quotations, I'm sorry. Quotes being up this quarter sequentially is seasonally unusual, correct?

I don't know if I would say unusual. I would say unusual -- the actual dollars were up about 10%, so it's not enough for us to say it's out of the ordinary. It was nothing, I would say, significantly material.

Okay. And then just two modeling questions. Your pension cash contribution in 2010, what is your estimate right now?

Mike, we do an actuarial evaluation on January 1 each year to determine what our pension contribution is. But we're anticipating a similar contribution in 2010 as to 2009, so roughly in the $25 million range.

Okay. For the expense guidance, you had given $35 million to $38 million for the year. That is actually up from this year and nearing the levels of 2008. Can you explain what is increasing in that and why?

Yes. 2008 was about $39 million and we're going to be a little bit higher than 2009, but that is due to some planned incentive compensation, as well as additional headcount and other actions that we took in 2009. They will not repeat in 2010. So 401(k) reduction, delay in merit increases and other, we will not see that action repeat in 2010.

Yes, Mike, and let me just elaborate a little bit there. As Evan pointed out, if you'll recall, the executive team took a 20% salary reduction in our second quarter, essentially, second quarter this year. We suspended all 401(k) matches this year across the entire Company. We had no salary increases.

So from a budgeting standpoint, we know with our people we can only do that so long. Given what we think is, as we said, we think a pickup, hopefully, we think in market activity in the second quarter. At this point, as we look at 2010, we've put that back into our budget. So that is the primary difference on a year-over-year basis.

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

Todd Vencil.

Davenport & Co. Let's step back a little bit and think about this from kind of 30,000 feet, if we can. You've talked, and I think it is not surprising about the expectation that nonresidential construction is going to continue to drop off. Talk to me about your expectations on magnitude there, and duration, and what you're looking to and what you're seeing from your orders.

Yes, well, from our orders, from our order perspective, we said in the second quarter that we were -- our orders from residential construction were minimal, and they continue to be minimal. And we also said we don't see it dropping much below that.

If you look at our expectation, if you look at just housing starts forecasts alone, there is a wide variety. And I think from the different economic services that forecast housing starts, I think it is either blue-chip economics or there's forecasting a 40% increase in housing starts in 2010, up over 800,000, 820,000, 830,000 housing starts.

Clearly, as we said, that it's new development that drives demand for our products. I think we're hopeful that we will start seeing some new development spending in 2011, because when you look at -- I think two factors will impact that. Certainly, if you look at (technical difficulty) developments exist, the infrastructure in place and know-how to -- I think that that's more regional in nature. I think when you get to California, you get to Nevada, you get to Arizona and Florida, it may be some time before we see any new developments being installed. But I think when we get in other parts of the country, when we get to 2011, we will start seeing I think some new development spending.

Also, I think that recently, we've heard more and more discussion about the possibility of those existing developments that are in far locations, well outside the city limits, that they could very well be written off and never be developed, and with the price of land coming down somewhat, that builders may be moving in closer to the city to open up new developments. Now, that's, I think we have no data that we can point to. It's certainly a hypothesis.

So I think that we certainly have some hopes that we will start seeing in 2011 in some regions of the United States, we will start seeing some development spending. And that will represent real growth for us, because we're not seeing really any demand from residential construction today.

Is there any reason to think as that comes back kind of regionally that you guys are better exposed to one region than another?

No, we're pretty consistent across the country.

Okay. On the nonresidential side, on the Anvil side, what are you bracing along similar lines there?

Well, as we've said, that the forecast that we're using called for about a 16% drop in nonresidential construction spending. So I think from the large -- from I'd say the overall viewpoint that on a one-to-one basis we could see a 16% drop in demand, from our market demand.

So some of our product lines, we do have a diverse customer base, so some could be OEM related and so on. But I think that overall, we are looking at our markets, demand could drop 15%, 16%. We do think that our distributors in the Anvil marketplace have probably taken out about as much as inventory as they can this year.

So, again, we think that maybe end market -- our production will be more closely aligned with end-market demand next year than it was this year. But as I said in our prepared remarks, we're prepared to do what's necessary to respond to what could be a tough market there.

I think when we look at a plan on a 15%, 16% drop in market demand, we think that the costs that we've taken out of that business, that with that kind of market demand and if pricing stays stable, that that business will still remain profitable. But I think as we look at our variables, the two variables that could certainly impact our business for 2010 are how far could nonresidential construction spending drop, and what will happen to pricing in ductile iron pipe.

Got it. Thanks for that. And on infrastructure, you talked about some of the quoting work that you're doing, and you're hoping there's some major projects coming out of the stimulus in the back half of 2010. Can you talk about the size of some of the projects you're seeing and maybe identify them, or is it too early stage to talk about that?

You know, it's pretty -- I would say it's too early right now. I think we will have a much better idea probably in the next several months.

Okay. And final question, just as you guys alluded to just kind of the differences in time to turn inventory by business, if you could kind of just walk me through real quick overall, how long do you think it takes on a FIFO basis to pull raw material costs through consolidated, and then for each business what your turns are there?

I would say if you look at our Pipe business, it may be less than a quarter. We turn our inventory five and six times at Pipe. On Mueller, it's probably every quarter. We turn inventories probably between (technical difficulty) times there. The Anvil business, because we have a different very different model because we are also in distribution in that business, that we turn our inventories about 2.5 times there. So on a consolidated basis, we are about 3.5 times. So I think it's probably safe on a consolidated basis that we're lagging a quarter, but it's a little quicker at Pipe and slower at Anvil.

That's great. Thanks so much.

Debra Coy.

Just a follow-up on the ductile iron pipe side. So if we add up for the year, although it improved at the latter part of the year, volumes are down, what, 30% or so?

Yes, volumes are down -- let's see. We could do a quick calculation for the year. We're down almost 35%.

That's big. As you said earlier, that seems to be unprecedented in history that we know of. One thing I'm wondering about is you said you believe that you haven't lost any share within the ductile iron market. What do you think is happening for ductile iron versus plastic? I'm hearing of some of the newer, large-diameter plastic pipes coming to market. Is it possible that ductile iron has lost some market share to plastic this year?

You know, Debra, I think we should never say never. But the reports, certainly the reports we get from our field continues to support that there is a very, very strong preference by the engineers throughout the -- I would say the waterworks industry that when they start getting in 12 inches and above, they still prefer the ductile iron pipe. Now, I further wouldn't say on an isolated basis that we might find a municipality saying or wire utility, let's give it try. But we have not seen, I would say, anything of significance, that kind of movement.

So you would attribute it still again primarily to the lack of project work?

Absolutely.

Because Mueller, if we added up for the year volumes for (technical difficulty) replace are down something more like 20%?

Probably a little higher than that, because when you think about our second and third quarter, it was down -- we were down in the 40%, 45% range. But I think the difference is that probably end-market demand was being satisfied out of distributors' inventory.

So I would think overall demand was down less than what we were down, because distributors were shipping that and not replacing it. But yes, I think that overall, our units were down less in Mueller than on the Pipe side.

25% maybe.

Yes.

Okay. So presumably, some rebound in 2010. And then looking beyond that, you mentioned earlier that you were taking a look at R&D spending and new product development. Can you give an idea of the kinds of things that you're looking at or where you see opportunities for new products or differentiated products?

Yes, we do. Many of you may recall that earlier this year, we made a relatively small acquisition of AMI Technology on the meter side, and we had existing AMR technology. And we're obviously very early in introducing this technology into the marketplace, because some development effort was needed, and we think additional development effort needed. But I would say, overall, we're pretty excited.

And as you know and I've said a number of times, we're a (technical difficulty) market share player on meters. So it doesn't take us to gain much market share to move that needle. So (technical difficulty) area that we're focusing and looking at what are the opportunities beyond even metering. And we do have some, I'd say, on the mechanical side with our valves and even on the pipe side. Believe it or not, there are ways to differentiate ductile iron and pipe. But I would say when we look at more of our spending or a good percentage of our spending has been to support the AMI acquisition that we made earlier in fiscal 2009.

Okay. Thanks.

Chris Glynn.

Oppenheimer & Co. Inc. Just looking for some updated commentary on receivables quality and then expectations for free cash flow next year, working capital performance.

With respect to our AR portfolio, we continue to monitor the receivables, and we had no significant charges during our fourth quarter like the charges that we had in the third quarter related to one distributor. So I would say our portfolio is in very good shape. We have adequate reserves. And if you look at our overall agings in our DSO, they have really not significantly changed and actually had slight improvement. So from an accounts receivable perspective, we feel that we're in good shape at this point.

Okay. And then just your plans and expectations around free cash flow and working capital in 2010?

Yes, we currently expect to again be generating positive free cash flow. And I think we also expect that inventory reduction will be a major contributor to that. I know this year, we said in our prepared remarks that if you look on a year-over-year basis, we took I think roughly $111 million, $112 million of inventory. If you look from our peak in January, we brought inventories down to about $130 million.

We certainly did that, I referred to it, by brute force, by just shutting down plants. But we also, I think, if you look at 2009, in spite of the cost reductions we were able to implement, we continue to invest in our lean initiatives. And a lot of those lean initiatives are really focused on reducing cycle times. And when we reduce cycle times, that will take inventory out of the process. So we look to improve inventory turns in 2010 and expect that reduction in inventory will still be a positive contributor to generating positive free cash flow for the year.

Great. And then I think it was Evan gave some interesting color around the stimulus in his prepared remarks, maybe mentioned that the projects are supposed to be done by 2011. Do you view that as law or more a guideline for the agencies?

Well, you know, that's the way I think the stimulus bill is currently written. We would not be surprised if, especially since only -- as we said, only 4% is expected to be spent in the first year, so that run from February '09 to February 2010. It may be I think very difficult for the marketplace or the utilities and municipalities to spend the remaining 96% in a year. This is just certainly our hypothesis, but we would not be surprised if the government extended that time period. But right now, they haven't.

Okay, understood. Thanks a lot.

Keith Hughes

It's Keith Hughes from SunTrust. Back to the stimulus just very quickly, for those types of projects that you see the quotations -- I know there's not a lot of them that's been coming in -- are they the type where you need or if the quotations come for a month, two-month lead time, three, six months? Just give me any kind of feel if you look at the type of projects coming in how quickly you will see the quotation before work is actually done.

Keith, it's our expectation that we will see very little benefit in the first quarter. And from what we're seeing and what we're hearing out of the marketplace, I don't think we will really start seeing this turn into shipments until we get into the March/April next year in the construction piece. So we are --

Are the types of projects they're doing really short lead time type projects (multiple speakers)? What do you think?

They're across the board right now. But I would say that the earlier -- the first ones that we're seeing are tending to be smaller rather than larger. So you would expect that they would be quicker, shorter lead times when they turn into an order.

Jonathan Ellis.

This is actually [Jay Chadbur] filling in for Jon Ellis. Banc of America-Merrill Lynch. To what extent do you expect the accounts payable buildup during 4Q to reverse, and Q1?

The accounts payable, yes, obviously that's just the timing of our purchases. And we'll see some movement in the fourth quarter, but I wouldn't say a total reversal.

Okay. And was there a pension contribution made during the quarter, and what portion of that was mandatory versus voluntary?

The pension contribution in the fourth quarter of fiscal 2009 was $20.6 million, and that was required under the Pension Protection Act.

Okay, thanks for your time.

Seth Weber.

RBC. I'm just trying to understand your 1Q outlook for Mueller Co. So I think you said in your remarks that the December quarter a year ago was pretty depressed, give the macroenvironment. So how should we think about that? But you're saying you're not going to see an uptick until the back half of the year. Wouldn't (technical difficulty) kind of artificially easy in the December quarter?

I think where the real difference will be, Seth, is that, again, if you look at our fourth quarter of fiscal year 2008 and our first quarter of fiscal 2009, we were operating our factories at a much higher capacity utilization rate than we are today. The difference was, that production ended up going into inventory rather than into the marketplace.

So we will certainly in our Mueller business suffer on a year-over-year basis on overhead absorption. And from a volume, we think that volume could be slightly better and we will certainly have lower costs. But what will be a big hit on a year-over-year basis will be the overhead absorption.

That's why, when we talk about what we think will happen in the first quarter there, we may see a very slight increase in overall revenues. We do expect that we will have higher margins than what we did a year ago, primarily due to the lower raw material costs and the cost savings that was implemented, but with the follow-on from Q4 that the margins will be below what we saw in the fourth quarter. But we do think that they will be slightly better than what we saw in the first quarter last year.

Right. Okay. Thanks for that clarification. On the Pipe business, not to beat this to death, but do you think that if pricing were to stay where it is and volumes come through where you think they -- where the run rate suggests, is that business profitable in 2010?

I think if pricing stays at this level and volumes where they are, no, we don't think that that business will be profitable at that rate, certainly at this price level.

Okay, something like a low-single-digit negative margin?

Yes, it would be -- we will certainly be better year over year because of all the cost reductions that we've taken out. We also had a $3 million bad debt write-off that we don't expect would recur. But I think you're in the range. I think it would be a low-single-digit loss if we don't see pricing rebound.

Okay.

On a percentage basis. I'm sorry. When I say low-single-digit, I'm talking about low-single-digit margin.

Right, understood. And did you say the capacity is at 35% in Pipe, or is that just one facility?

The mini-mill.

That's the mini-mill, right.

(multiple speakers) mini-mill, where I think that we have a real cost advantage. But right now we're only using 35 -- the Pipe in total is under 50% right now.

Okay. And just two other quick ones. What is your policy on buying material forward, or do you just -- are you buying in the spot market at this point?

Well, most of our scrap we buy on spot market, though we are still working through, in some of our Mueller locations, we're working through some previous buys because volume dropped, production dropped so much there.

Actually, if you look at historically, we were generally unable to buy more than a month or two ahead, though this year we did buy brass ingot -- we were able to buy brass ingot ahead. And we're still working off purchases that we made early in the calendar year. But generally, we buy probably at most a quarter's requirement at a time.

Okay. And then just lastly, I was surprised to see the CapEx guidance 50 to -- low $50 million range, which would be up pretty meaningfully, given kind of the puts and takes over the last couple years. Is there anything that you have -- I mean, is that a hard number?

At this point, it is not a hard number. We wanted to give some guidance. If you look at -- we've said that our sustainable capital expenditure levels are probably around $40 million. I think this past year, we spent $39.7 million. So we were just doing sustaining.

We have, at this point, have included in our plan some capital spending that will be more geared towards helping us reduce cycle times and therefore take inventory out of the business. And I answered a previous question about -- we do think we have a lot of -- we still have opportunities to improve, to take inventory out, by improving our turns. And I mentioned a lot of our lean initiatives this year were focused on that.

Well, we may get into the point where we have to move some equipment to be able to facilitate, I would say, a better flow through the factory, or we may find a piece of equipment that allows us to do and operation much quicker than we're doing it now that again will help us reduce inventory. But I will say that that right now, that we have -- it's not capital that we have to spend. It's capital that we would like to spend if we think that we have the flexibility to do it. And I think our debt covenants limit us to $54 million.

That's correct, $54 million for next year.

Okay, but we should -- if the number starts banging up into that territory, we should interpret that as a sign that you're feeling better about the business in general?

I think that's a good assumption.

Okay, thanks very much, guys.

Matt Vittorioso.

Barclays Capital. I appreciate all the color on the margins thus far. Just maybe a little more color on the overall EBITDA margin improvement at Mueller Company. It seems like the sequential revenue increase was relatively modest, but EBITDA margin's up nearly 700 basis points. Could you give us the sequential sort of reconciliation between -- for the EBITDA margin?

Yes. When you look sequentially, and again, I think that this probably highlights the operational leverage that we have in this business, most of the variance came from positive overhead absorption flowing through the income statement this quarter versus the third quarter.

And (technical difficulty) in the second quarter, we were really cutting back production at Mueller as we were bringing inventories down, and the market certainly was down. In the third quarter, we picked up -- our production actually picked up because we had taken out a lot of inventories. We were seeing an increase in our volume. So we experienced very positive overhead absorption on a quarter-over-quarter basis.

You're right, from a volume standpoint, our actual volume was up maybe only $3 million and that converts at -- converted at about 50%. So when you look at the real improvement, is the overhead absorption, and again I think supports our belief that when our markets do rebound that we have a lot of runway here on our operating leverage, especially at the Mueller business.

Okay. And second for me, on the back of the question around working capital in 2010, I think we had discussed before and you'd talked about distributors not wanting to carry as much inventory at this point. Are you concerned at all that the business model in general may be changing, where you have to carry more inventory yourself, and if that is the case, what implication might that have on your pricing level going forward?

Excellent, excellent question. And I would say that we certainly, as we look at all the possible scenarios, that that is possibly one scenario that we could be faced with. That would certainly change our discount structure, I could say, with our distributors so that we would be giving out less of a discount. So that certainly I think would help our margins.

But that, I think, goes to the comment, several comments I made on the call, where we're focusing on our lean initiatives to improve reduced cycle times. It goes back to Seth's question on relative to capital spending, that any increase in capital spending more than likely would be geared toward workflow, flow in our factories to reduce our cycle times.

So it would be our expectation that we probably would see an increase in raw materials. But hopefully, we would be able to control our work in process and finished goods inventories by the improvements that we're making. So we could see a bump up in inventory, but we don't think that dramatic, given our focus on reducing cycle times and reducing work in process.

Great, thanks very much.

Mike Schneider.

It's Mike Schneider, Robert W. Baird. Greg, maybe first you can just comment on October. What have you seen since the quarter end, and have seasonal trends, I guess, been typical so far, and any other commentary on ARRA quotes?

Mike, we actually saw in Pipe our tons quoted to ARRA even jumped up a little bit. They were about 208 of the tons that we quoted versus the 18% that we saw in the fourth quarter. So that trend continued.

I would say right now that we expect to see a more typical -- what we are seeing is a more typical seasonal pattern. Now, what that means is that when you look at our Pipe business and our Mueller business, generally we see revenues drop between 20% and 25% in the first quarter from the fourth quarter. And I think that that is what we are seeing. Last year, they dropped a much greater percent. But I think that was because of what was happening in the overall economy.

So when we made our comments about typical seasonal patterns, I think for our Mueller business and Anvil business, I think that that's generally somewhere between a 20% and 25% drop in revenues in Q1 from Q4.

Okay. (technical difficulty) earlier question, then, about Pipe margins. When you said you expect them to stay in the low-single-digit percentages loss, was that at US Pipe with $105 million in revenue at the Q4 level, or are you talking about Q1?

Well, that was more in line to if we don't see any real improvement in pricing. So it really gets down to the pricing. We right now would certainly expect, we would certainly expect that the tons that we would ship from US Pipe in fiscal year 2010 will be above those in 2009.

But I also said that if you look in the fourth quarter, our price per ton in our fourth quarter was down 22% from the price per ton we saw in the first quarter. And as we enter the first quarter of 2010, we think there could even be (technical difficulty). So when you look on a year-over-year basis, we're looking at at least a 22% and even possibly a greater 22% dropoff in a price per ton. So that number, that margin, is really going to be dependent on what happens in pricing in this marketplace.

So with that in mind, so you lost $38 million this year in Pipe alone on the EBIT line. If volumes are flat to up, but yet pricing you're starting 22% in the hole, does US Pipe lose money again this year?

Depends on pricing. Mike, it really depends on pricing. I think on a year-over-year basis at US Pipe, we're going to see lower raw material costs. We're going to see better overhead absorption because we do think our production will increase, because we won't take out the same amount of inventory.

We think on -- certainly we talked about carryover cost savings from the 50% capacity reduction that we took in North Birmingham in the second quarter. That will be a positive for us.

So we see all those variables being positive. The question is, what's going to happen to pricing? So that right now is a big variable. And I said that that is cloudy in our crystal ball, because I'm confused by what is happening in pricing today, because I think with the lower pricing, we're not seeing prices -- I think demand's inelastic, and the best that we can see, shares are being stable. So that's confusing pricing, so we right now don't know what will happen in 2010.

But again, if pricing stays as it is today, so sequentially flat, you would expect your operating margin to be negative low single digits this year.

I think that's right. If pricing stays where it is today, that would happen in 2010.

Okay. And then on Anvil, the revenue was flat sequentially. I'm just curious what you read into that, because it would seem to me the market is certainly deteriorating sequentially, yet you've been hanging around actually for three straight quarters at about $110 million to $115 million.

Yes, that's a good question. I think that we're going to see that drop more in a step function. I think what we're seeing right now is probably the closing out or -- where we fall in the construction cycle is about two-thirds to three-quarters of the way through the construction cycle. So I think that we're still seeing demand for our product, for projects that were started 18 months ago. So I think when we're thinking about a 16% decline in spending, I think we will start seeing that probably in a step function when we get somewhere in early calendar year 2010.

Okay. And then same question on Anvil about margin. Sequentially, with that revenue being flat, your margins were cut in half this quarter. And in dollars, that was about $3 million. What explains that? Is it just underabsorption and lower production during the quarter, or something else?

The absorption did probably account for half (technical difficulty). We also had a mix, a slight shift in our mix, and as well as we bumped up our rebate accrual for distributors in the fourth quarter. And that was one a little more that we do -- we look at that every quarter. We look at it even more closely at the end of the year. And I think we bumped up our rebate accrual a little bit. And Evan, you may have more --

That's correct. That is just kind of a year-to-date catch-up adjustment. So as Greg mentioned, about half of it is overhead absorption and the other half is the mix, as well as an adjustment to our rebate accrual in the fourth quarter that we typically do on an annual basis, kind of a final true-up.

So, Mike, that is more of a year-end phenomenon.

And just one comment I guess I would make. The slides are very helpful, but it might make the conference call a lot more efficient if we could get the slides the night before (technical difficulty) early in the morning, because the Internet slides run behind the commentary. So I think a lot of us spend time scribbling when we needn't do so, and just might make the Q&A session go a lot faster.

Mike, thanks. And we're always looking for ways to improve the efficiency of the conference calls. So we'll look at everything.

That was our last question.

Well, again, thanks. I know this was a long conference call. Thanks for your attention. I know that our prepared remarks were a little longer than usual. But of course, we were looking at fourth quarter, first quarter and the full year. And thanks for your continued interest in Mueller Water Products.

That does conclude today's conference. Thank you all for participating. You may disconnect at this time.