Mueller Water Products Inc (MWA) 2010 Q1 法說會逐字稿

Good morning. 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'll turn the call over to Ms. Martie Zakas. Ma'am, you may begin.

Good morning, everyone. Thank you for joining us today as we discuss Mueller Water Products' results for the 2010 first quarter.

We issued our press release reporting results of operations for the quarter ended December 31, 2009 yesterday afternoon. We also issued a press release this morning regarding the closure of US Pipe's North Birmingham plant and will be discussing this announcement in more detail later in the call. Copies of both press releases are available on our website.

Mueller Water Products had approximately 154.3 million shares outstanding at December 31, 2009.

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 periods. These non-GAAP measures derived from GAAP financial 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 periods being reported. 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, adjusted income, loss from operations, and adjusted EBITDA, all of which exclude impairment and restructuring charges. 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 expect, believe, anticipate, indicate, 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, 2009 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 at www.muellerwaterproducts.com for at least 90 days after the presentation.

The slides relating 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 for 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 first quarter of fiscal 2010.

I will begin today with a brief overview of the quarter. Evan Hart will then provide a detailed financial report after which I will update you on key drivers influencing our business, our outlook for the second quarter and second half of the fiscal year and the actions we continue to take to strengthen our position in the marketplace. We will then open up the call for your questions.

During the first quarter, we continued to see positive signs, particularly at Mueller Co., relative to repair and replacement spending in the municipal market. Volume increased on a year-over-year basis for our core Mueller Co. products, hydrants, iron gate valves and brass service products.

We also saw the benefits of positive operating leverage on a year-over-year basis, resulting in incremental margin improvement. We have not yet experienced a corresponding pickup in shipment volume at US Pipe, which is a more project-oriented business. Quote activity in our water infrastructure businesses increased in the first quarter year over year with a growing percentage of the quotes attributable to ARRA projects.

For example, the tonnage quoted at US Pipe for ARRA projects more than doubled from fourth quarter of 2009 to first quarter 2010. Based on our quotation activity for stimulus-related and other projects in the first quarter, we expect shipment volume at US Pipe to increase year over year in the second half of the year as more project-related activity begins construction.

ARRA generally required that projects receiving stimulus funding be contracted by mid-February 2010, although none of the projects are required to be completed this year. As a result, we believe that once contracts are signed for stimulus projects, attention may turn to other projects that had previously been put on hold.

Demand for Anvil Products continues to be impacted by the falloff in non-residential construction spending. While there are signs that the rate of decline is slowing, we will continue to face very challenging market conditions throughout the year. Strong free cash flow generation of $51.4 million in the first quarter and proceeds from our divestitures enabled us to repay $40 million of our term debt in January.

Since January 31, 2009, we have used cash from operations, divestitures and our September 2009 equity offering to repay $392 million of debt or 36% of our total debt. We are encouraged, as we continue to see positive signs of year-over-year improvement relative to our water infrastructure market. As previously indicated, however, we don't expect to see the impact of these developments until the construction season begins in the second half of our fiscal year.

Furthermore, while we expect to see year-over-year improvements, we believe the overall recovery will be slow.

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

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

Consolidated net sales of $313.1 million for the 2010 first quarter decreased $54.6 million year over year from $367.7 million for the 2009 first quarter. Net sales decreased primarily due to lower shipment volumes of $38.7 million. Higher shipment volumes at Mueller Co. were more than offset by shipment volume declines at US Pipe and Anvil. Lower pricing of $22.3 million primarily at US Pipe also contributed to the decline in net sales.

Favorable changes in Canadian currency exchange rates increased net sales by $6.4 million. Gross profit of $55.9 million in the 2010 first quarter decreased $19.1 million compared to $75 million in the 2009 first quarter.

Gross margin of 17.9% compared to 20.4% in the prior year period. Gross profit decreased $22.3 million due to lower sales pricing primarily at US Pipe, $22.5 million due to underabsorbed overhead from lower production and $10.9 million due to lower shipment volumes.

Gross profit declines were partially offset by lower raw material costs of $25.5 million primarily at US Pipe and manufacturing cost savings of $12.4 million across all three of our business units.

Adjusted income from operations for the quarter of $700,000 decreased $12 million from $12.7 million in the prior year period. Results were negatively impacted by $22.3 million of lower sales pricing, $22.5 million of underabsorbed overhead from lower production and $10.9 million due to lower shipment volumes. The quarter's results were positively impacted by $25.5 million of lower raw material costs, $12.4 million of manufacturing cost savings and $7.1 million of lower selling, general and administrative expenses.

Selling, general and administrative expenses of $55.2 million in the 2010 first quarter compared with $62.3 million in the 2009 first quarter. This decline resulted primarily from personnel-related expenses, including headcount reductions, lower commissions as a result of lower net sales and lower incentive compensation.

Additionally, first-quarter 2009 included professional fees of $1.2 million associated with conversion of our Series B common stock.

First-quarter 2010 adjusted income from operations and adjusted EBITDA margins of 0.2% and 6.9%, respectively, compare with the 2009 first-quarter adjusted operating income margin of 3.5% and adjusted EBITDA margins of 9.7%.

Net interest expense of $16.8 million decreased $500,000 from the 2009 first quarter. The decrease was due to lower debt levels during the 2010 first quarter partially offset by higher interest rates. Our effective income tax rate for the three months ended December 31, 2009, was 35%.

Adjusted net loss per share of $0.07 in the 2010 first quarter compares to adjusted net loss per share of $0.00 in the 2009 first quarter. I will now move on to segment performance.

Net sales for the Mueller Co. segment of $133.3 million in the 2010 first quarter increased $13.7 million or 11.5% from $119.6 million in the prior year quarter. Higher shipment volumes of $13.6 million and favorable Canadian currency exchange rates up $2.2 million were partially offset by $2.1 million of lower sales prices.

Adjusted income from operations of $16 million increased $7.5 million or 88% from $8.5 million in the 2009 first quarter and adjusted EBITDA of $28.4 million in the 2010 first quarter increased $7.6 million or 37% from $20.8 million in the 2009 first quarter.

The increase in adjusted income from operations was due to $4.9 million of higher shipment volumes, $4.9 million of lower raw material costs and $4.4 million of manufacturing cost savings. These items were partially offset by $7 million of underabsorbed overhead from lower production.

Year-over-year adjusted operating income margin at Mueller Co. improved to 12% from 7.1%. Net sales for the US Pipe segment of $79.7 million in the 2010 first quarter compared to $115.7 million in the 2009 first quarter. The net sales decrease was attributable to $20.3 million of lower pricing and $15.7 million of lower shipment volumes.

In the 2010 first quarter, adjusted loss from operations was $11.9 million and adjusted EBITDA was a loss of $7.5 million. These results compare to adjusted loss from operations of $6.5 million and adjusted EBITDA loss of $400,000 in the 2009 first quarter.

The 2010 first-quarter results were negatively impacted by $20.3 million of lower sales pricing, $8.2 million of underabsorbed overhead from lower production and $4.2 million of lower shipment volumes. These decreases were partially offset by $22.7 million of lower raw material costs and $6.6 million of manufacturing cost savings.

Net sales for the Anvil segment of $100.1 million in the 2010 first quarter compared to $132.4 million in the prior year quarter. Net sales declined due to $36.6 million of lower shipment volumes partially offset by $4.2 million of favorable Canadian currency exchange rates.

Income from operations of $4.5 million and EBITDA of $8.4 million in the 2010 first quarter compared to income from operations of $21.3 million and EBITDA of $25.5 million in the 2009 first quarter. Income from operations decreased due to $11.6 million of lower shipment volumes and $7.3 million of underabsorbed overhead from lower production. These decreases were partially offset by $1.4 million of manufacturing cost savings and $1.5 million in selling, general and administrative expenses.

Free cash flow -- which is cash provided by operating activities less capital expenditures -- was $51.4 million. This compares to negative free cash flow of $27.9 million for the 2009 first quarter. Free cash flow generated during the quarter was primarily attributable to working capital management principally due to lower inventories and a refund of Federal income taxes.

Net debt, which is total debt less cash, was reduced by $323.8 million over the last year to $613.4 million at December 31, 2009. Total debt at December 31, 2009, was comprised of $64.5 million of Term A debt bearing interest of LIBOR plus 500 basis points, $251.2 million of Term B debt bearing interest of LIBOR plus 500 basis points, $420 million of Senior Subordinated Notes at a fixed rate of 7 3/8% and $1.7 million of Other.

With our January 2010 debt repayment of $40 million our scheduled principal repayments remain minimal with $10 million due in each of fiscal 2010 and 2011. Our first significant scheduled debt repayments totaling $47 million occur in fiscal 2012 when our Term A debt matures.

From January 31, 2009 through January 31, 2010, we have repaid $392 million of our debt. At December 31, 2009, our trailing 12-month EBITDA, as defined under our credit agreement, was $105.3 million. I will now turn the call back to Greg.

Thanks Evan. As a general overview, we were pleased with Mueller Co.'s year-over-year shipment volume and operating income margin improvements in the first quarter. Specifically, Mueller Co.'s net sales increased 11.5% year over year and operating income margins increased 12% from 7.1% a year earlier.

As expected, US Pipe continued to experience falling prices and volume decline, although we benefited from lower raw material costs and cost savings. Specifically, US Pipe experienced a $20.3 million year-over-year decline in sales pricing in the first quarter.

A continued decline in nonresidential construction spending negatively affected Anvil. We continue to be significantly impacted by underabsorbed overhead on a year-over-year basis. But the year-over-year negative impact of underabsorbed overhead was lower in the first quarter than the previous three quarters.

We benefited from lower raw material costs, primarily at US Pipe. We continue to adjust production to end-market demand and our cost-containment actions, both in manufacturing operations and SG&A, resulted in $19.5 million on lower costs in the quarter, year over year.

Turning now to first-quarter results for each of our segments, starting with Mueller. Mueller Co. typically has a seasonal decline in volume in the first quarter versus the fourth quarter. But the seasonal volume decline in the first quarter of fiscal 2010 was much less than it was in fiscal 2009. Volume declined about 20% in the first quarter of 2010 sequentially, half of the approximate 40% volume decline we experienced in the first quarter of 2009.

We believe this is attributable to both the increase in maintenance and repair activity, as well as the inventory reductions in the channel that were taking place last year, which were mostly completed by the end of our second quarter 2009.

Shipment volumes of iron gate valves and hydrants increased about 13% while shipment volumes of brass products increased about 25% in the first quarter year over year. Pricing of valves, hydrants and brass products has remained relatively stable and we have maintained our market share. Additionally, we benefited from the cost reductions we implemented throughout fiscal 2009.

Turning to US Pipe's first-quarter results, shipment volumes of ductile iron pipe decreased 5% the first quarter versus the prior year period. We mentioned on last quarter's call that we anticipate pricing for ductile iron pipe to continue to deteriorate.

During the first quarter the average price per ton decreased about 4% from the fourth quarter and about 26% year over year. Year over year, US Pipe benefited from lower raw material costs and cost savings. Anvil does not experience the same seasonality as our other businesses.

With regard to Anvil's first-quarter results, the continued year-over-year decline due to the downturn in the nonresidential construction market was expected. As a reminder, given where our products are used in the construction cycle, we did not begin to feel the effects of the downturn in nonresidential construction until the second quarter of fiscal 2009.

In fact, first-quarter 2009 was one of Anvil's strongest quarters. Reduced production in response to the ongoing downturn in nonresidential construction contributed to Anvil's higher underabsorbed overhead in the first quarter, compared to the prior year period. Anvil continued to benefit from cost reduction initiatives, including both SG&A and production cost savings in the first quarter.

We recently completed two strategic divestitures of non-core assets that we announced in the first quarter. First, we sold certain assets of Picoma, Anvil's electrical fitting business, in exchange for cash and certain assets of Seminole Tubular Products, a mechanical fittings business.

In January 2010, we sold Anvil's Mueller Flow Control business to the Deschenes Group. Mueller Flow Control was a wholesale distributor of pipe, valves and fittings as well as waterworks, HVAC, fire protection and piping component products in Canada.

We retained Anvil's other Canadian operations. We believe that Anvil's strength as a manufacturer and Deschenes's strength as a distributor complement one another and that this transaction allows us to focus on our core manufacturing and sourcing operations. We have also entered into a three and a half year supply agreement with Deschenes under which Deschenes will purchase at least a specified amount of products manufactured by Anvil.

Mueller Flow Control had net sales of approximately $107 million in fiscal 2009. We believe the net sales impact of these two divestitures, the acquisition of certain assets of Seminole Tubular Products and the supply agreement, based on certain purchase level assumptions, would have been about $100 million in fiscal 2009. And the impact on operating profit would have been immaterial to the Company in fiscal 2009.

With these divestitures, we were able to generate cash, reduce debt, exit non-core businesses and with the acquisition of certain assets of Seminole Tubular Products enhance our overall product offering.

Now let's turn to our second-quarter and full-year outlook. We expect Mueller Co. to continue experiencing year-over-year volume improvement in the second quarter, due to maintenance and repair activity. Also, we are no longer seeing the distributor inventory reductions that we did last year.

Pricing for our valves and hydrants has been stable as we have held onto most of our realized 2008 price increases. We recently announced a 7% price increase on Mueller Co. valves and hydrants, effective January 24. We don't expect to see much benefit from this price increase in the second quarter.

We expect Mueller Co. to benefit from lower raw material costs (technical difficulty) development investments that will enhance and broaden our product line and technology to better serve our customers over the long term. These investments will increase our SG&A costs. We will have greater underabsorbed overhead cost on a year-over-year basis due to lower production during the first quarter.

As a result of these factors, we expect to achieve higher adjusted income from operations and margins year over year in the second quarter of 2010.

On a sequential basis, we expect Mueller Co.'s adjusted income from operations and margins to be down in the second quarter due to the higher underabsorbed overhead and SG&A costs. Now, let's look at Mueller Co. for the second half of 2010.

Although maintenance and repair activity has picked up over the last several quarters, we have not seen a pickup in work associated with major projects. We believe we could see a year-over-year increase in the second half of fiscal 2010, driven by stimulus spending as well.

Stimulus package funds for drinking water projects are very slowly working their way into the marketplace. We understand that the complexity of the stimulus bill and the documentation required to obtain funds are contributing to the delay in getting funds into the market.

Municipalities are also waiting to begin projects until the construction season begins. While we look at our quote activity, we see positive signs that stimulus-funded projects can be coming. For example, Mueller Co. ARRA-related quotes represented about 25 of total quotes issued in the first quarter compared to only 9% of total quotes in the fourth quarter.

Therefore, we expect municipal spending on water infrastructure to increase on a year-over-year basis in the second half of fiscal 2010, primarily driven by stimulus spending and increasing repair and replacement activity. Distributors had essentially completed their inventory reduction programs by the end of the second quarter of 2009 and have been maintaining their inventory at the reduced level.

As we said last quarter, we do not expect to see an increase in demand from the residential construction market in fiscal 2010. We believe housing starts hit bottom in second quarter of fiscal 2009 and we have not had any meaningful shipments to the residential construction market since then.

We expect the cost of raw materials to continue to rise throughout the year. But we believe the recently announced price increase will at least offset those higher costs.

We reduced inventory during fiscal 2009 as we aggressively cut back production and also experienced reduced demand versus the prior year. Consequently, we had substantial underabsorbed overhead flowing through the 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.

We will continue to reduce inventory in 2010. But we expect these reductions to occur through process improvement to increase inventory turns rather than through dramatic cutbacks in production.

In summary, our outlook for Mueller Co.'s second half of fiscal 2009 has not changed materially since the last quarter.

Turning now to the second-quarter and full-year outlook for US Pipe. US Pipe's shipment volume during the second quarter is expected to be roughly comparable to the first quarter because we don't expect project activity, which is a primary driver of demand for ductile iron pipe to pick up until the second half of the year.

Ductile iron pipe pricing continued to deteriorate in the first quarter. The average price per ton for ductile iron pipe decreased about 4% in the first quarter from the fourth quarter, and was down about 26% from the first quarter of fiscal 2009. First quarter of 2010 average price per ton was also 20% lower than the second-quarter 2009 average price per ton.

Based on our January orders, we anticipate that overall pricing in the second quarter will not substantially improve from the levels we saw in the first quarter. On both a year-over-year and sequential basis, we expect raw material prices flowing through the cost of goods sold to be essentially flat in the second quarter.

US Pipe's results during the second quarter are typically lower than first quarter due in part to the higher underabsorbed overhead on a sequential basis. Production in the first quarter is usually reduced due to both lower seasonal demand and December plant closures.

We expect costs associated with underabsorbed overhead to be a primary factor on a sequential basis for US Pipe's second quarter 2010. We will continue to see year-over-year benefit from the carryover of cost reduction actions taken in fiscal 2009. Given these factors, we expect US Pipe's operating loss in the second quarter to be greater both sequentially and on a year-over-year basis.

Looking to US Pipe's second half of 2010, overall tonnage quote activity at US Pipe increased significantly in the first quarter on a year-over-year and sequential basis. Further, quotation activity at US Pipe for stimulus-related projects again picked up sequentially.

For example, at US Pipe, stimulus-related quotes increased approximately 140% from fourth quarter to first quarter and represented approximately 33% of all quotes in the first quarter. As discussed earlier, demand for US Pipe's products tend to be driven more by major project spending than by routine maintenance activity. Consequently we expect US Pipe to have a meaningful pickup in volume on a year-over-year basis when the construction season starts during the second half of our fiscal year.

Pipe pricing peaked in the first quarter of fiscal 2009 and steadily declined throughout the year. As a result, we expect to have easier pricing comparisons on a year-over-year basis through second half of 2010.

In January, we saw the price that we paid for scrap steel go up which will flow through cost of goods sold in the second half of our fiscal year. If scrap steel prices continue to increase, we intend to offset higher raw material costs with higher pricing. On a year-over-year basis we expect production in the second half of fiscal 2010 to be greater than the second half of fiscal 2009. Therefore, we expect to benefit from positive year-over-year overhead absorption later in our fiscal year.

We expect to see significant year-over-year improvement in our financial performance in the second half of fiscal 2010. However we believe lower underabsorbed overhead costs, associated with higher production, higher shipment volumes and the further cost reductions that we expect to benefit from in the second half of the year may not be sufficient to fully offset the costs associated with the underutilization of US Pipe's manufacturing capacity. This could result in US Pipe continuing to experience an operating loss in the second half of fiscal 2010.

The biggest issues impacting the financial performance of US Pipe today continue to be the level of market demand and our capacity utilization. We project that the run rate of industry shipments for fiscal 2010 will be down 45 to 50% from shipment volumes in 2005 and 2006.

In order to get US Pipe's capacity more in line with expected demand, this morning we issued a press release announcing that we are closing US Pipe's North Birmingham plant. Approximately 260 positions will be eliminated as a result of this closure. We expect this closure to be completed by the end of March 2010.

As you know, three years ago we made the decision to invest in state-of-the-art automated ductile iron pipe manufacturing processes. We began production, using this new manufacturing technology in September of 2008 and the productivity levels have exceeded our expectations.

As a result, we are able to take the actions that we announced this morning, confident that we will have sufficient capacity to meet any foreseeable increases in demand and can efficiently increase capacity in the future as necessary at our state-of-the-art facility.

In connection with this plant closure, the Company expects to record a restructuring charge of approximately $15 million, most of which will be taken in the second quarter of fiscal 2010. This charge is comprised of approximately $6 million of asset write-offs and $9 million of cash costs, including severance and other costs, associated with the closing.

Incremental cash operating expenses of approximately $2 million associated with the restructuring are expected to be incurred primarily in the second half of fiscal 2010.

Savings on an annualized basis are projected to be in the range of $20 million to $25 million. In fiscal 2010 we expect net savings of approximately $6 million to $8 million including the estimated $2 million incremental cash operating segment. Further, we can readily accommodate increased future demand by efficiently adding new capacity to the automated process.

Looking at expectations for Anvil, we expect Anvil's income from operations for the second quarter of 2010 to be roughly comparable to the first quarter. As a reminder, Anvil's business is not subject to seasonality and its revenue will be lower as a result of the recent divestitures.

We believe nonresidential construction spending will be down on a year-over-year basis. Industry forecasts continue to project a 16% decline in nonresidential construction spending for the 2010 calendar year.

Anvil has held on to most of its realized 2008 price increases. In the first quarter of 2010, Anvil announced a 5% price increase on its domestically produced iron, mechanical and fire protection fittings. We will not be able to quantify the benefit from this price increase until the second half of the year.

We believe Anvil will continue to be adversely affected by the downturn in nonresidential construction spending in the second half of fiscal 2010 resulting in volume declines. We expect the price increases announced during the first quarter will at least cover any increases in raw material costs. We also expect to see year-over-year benefits from the cost reduction actions previously implemented in ongoing savings.

In summary, we expect second-quarter adjusted income from operations at Mueller Co. to improve year over year, but down on a sequential basis. In US Pipe, we expected adjusted loss from operations to worsen significantly year over year due to the previously discussed drop-off in pricing without a commensurate change in raw material costs. Subsequently we expect US Pipe's adjusted loss from operations to worsen due to underabsorbed overhead associated with the typical production drop in the first quarter on a sequential basis.

Finally, we expect Anvil's income from operations to be down substantially year over year and to be comparable to first quarter 2010. Other key variables for fiscal 2010 are -- corporate spending is estimated to be between $33 million and $36 million and net interest expense is estimated to be within the range of $65 million to $68 million.

Our effective income tax rate is expected to be between 35% and 38%. Capital expenditures are expected to be $45 million to $50 million. We remain focused on generating positive [key] 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.

We expect to generate positive free cash flow for the full year, although due to the seasonality of our business, some quarters -- in particular, the second quarter -- can have negative free cash flow.

As a reminder, the prepared remarks in this morning's call are being filed on our Form 8-K. With that I will open it up for questions.

(Operator Instructions). Kevin Maczka.

BB&T. Greg, I guess my first question, can you give a little more color on this US Pipe plant closure? Maybe talk about how much capacity this takes out, what your utilization was in Q1, and what it will be after closing the facility?

Yes. If you look on our overall basis, and for total -- total Mueller -- total pipe business, we were utilizing our capacity somewhere between 30 and 40%. So, clearly underutilizing our overall capacity.

The plant that we were underutilizing our capacity most was the plant that we announced the closure -- North Birmingham. Our North Birmingham facility. And that is by far our high cost manufacturing plant on a cost per ton basis.

What we will be doing, this allows us to move most of that production into the plant where we made the investment that I referenced a little earlier. And we should see probably a drop in our cost per ton probably up to 40% in the new facility.

It will take our overall capacity utilization. If you look at where we think that the market may be heading, that we will be utilizing probably, I would say, near 85% of our capacity if not a little higher of the plant that is our low cost manufacturing operations, the minimill where we made the investment. We'll take up our capacity utilization at our larger diameter or larger diameter facility probably up to 70%. And I think in our California plant we may still be slightly below 50%.

So we expect that, as we said, that we will have on an annualized basis somewhere between $20 million and $25 million of savings. About $9 million of that comes out of fixed costs. The rest of it comes from what we would anticipate is productivity improvement, first of all, driven by utilizing our most cost-effective manufacturing facility, as well as reducing some of these efficiencies of so significantly underutilizing our capacity.

Kevin, I guess just to put a little more perspective on this, that as we said, we made the decision to invest in this technology three years ago. We manufactured our first piece of pipe on this new technology in late -- in September of 2008. I guess you can say we really didn't start real production until September -- excuse me, until probably January of 2009. Over the last 12 months, as I said, that we have been so pleased by the productivity out of that manufacturing operation that we finally had the confidence that we could make this move and have no interruptions in our customer services.

So it's -- we expect to have this completed in March. And I would say that we will probably start seeing the full benefit sometime late in our third quarter.

Okay. So it sounds like all total you are going, in terms of US Pipe capacity utilization, from the 30 to 40% range to something well north of 50% if we blend each of those facilities. Are you seeing other competitors do similar moves? Is anybody else taking capacity out of the system?

There -- a year ago that Griffin, a division of AMSTED Industries closed their plant in New Jersey, moved that production to most of it I think, or all of it to their Lynchburg, Virginia facility, but we believe they may be adding capacity at that Lynchburg facility.

I think that we've heard rumors to that point. So I guess that's -- when you look at it in total that not much capacity has come out of the industry until this announcement we made this morning.

Okay and just one more on US Pipe if I could and then I'll get back in line. But the -- so with the -- you lost, that's the segment where you lost all of the money on the EBIT line in '09, I think about $41 million. And the year now started out worse than it did in Q1 last year and you are talking about Q2 being worse still. And then, eventually in the second half, you start to see some volume improvements and the benefit of this plant closure.

So my question is just, what's your sense -- do you think you can even match the loss that you did last year or with the actions you are taking or will it be even worse, do you think?

No. We believe based on the -- what we would -- as a pickup in demand for the second half of this year, on a year-over-year basis, I said earlier we think that we will be -- we will see significant improvement and with this action that we are taking today will -- we expect to see at least $6 million to $8 million falling to the bottom line.

So with the action of taking this capacity out, utilizing, fully utilizing our low-cost manufacturing facility and what we expect to see as a pickup in demand, that we would expect to see significant improvement in the second half, year over year, which would result in this business overall performing better in full year 2010 than what we did in 2009.

Okay, great. Thank you.

Chris Glynn.

Oppenheimer. Good morning. Question about US Pipe again. It looks like the materials cost benefits actually more than offset the pricing declines in the quarter. So, just wondering how you see that spread going forward? And given the situation with the cost declines, would you call the pricing irrational or is it more just tracking the economics?

That is a -- that's a great question and let me tell you how I think one could say there is some irrationality. If you look on a year-over-year basis, we are down approximately -- the average price per ton is down approximately $300 to $350 a ton. And the best that we can determine, there is no change in market share.

I think if you take a further consideration, the demand for ductile iron pipe is generally price inelastic. I think you could probably draw some conclusions that that sounds a little irrational.

However I think back to your point, and I think it is certainly demonstrated in our first-quarter results, our pricing was down a little over $20 million. Raw material costs were down over $22 million and I think that that is exactly what we are saying. Price is following what is happening to raw material costs.

If you look at it, pricing peaked in the first quarter last year and then steadily dropped. If you go back to 2008, we saw a significant increase in raw material costs at a rate where pricing couldn't keep up. We increased prices, competitors increased prices to try to catch up with those raw material costs late in 2008. And we saw those benefits were actually flowing through and probably this time period last year and even in our second quarter last year as it worked its way through the system, even though raw material costs had dropped significantly.

So I think back to your point that we believe that prices are just following raw material costs, but when we look at it, we think that maybe prices are falling a little more than what we would, I think, expect if you look historically at pricing as a multiple of raw material costs.

So again I think that certainly on a year-over-year basis, pricing is contributing to what is happening to pipe. But I think it is not surprising that the prices are dropping because it does follow raw material costs. And it gets back to the biggest issue in this industry is the undercapacity utilization and significant underutilization. Obviously that is why we took the actions this morning and, as we said in our prepared remarks, we think the run rate for demand is 45 to 50% below what we saw just several years ago.

Thanks, that's really helpful. You sound really confident on the pricing at Mueller Co. being realized. Correct me if I'm wrong. Is there any visibility with the US Pipe situation? Would you just I guess [track ros] again would be the biggest driver?

Yes. We -- certainly you're right. We are confident about the price increase at Mueller. I think there's -- certainly our competitors announced price increases to be effective around the same time ours was affected. And we have seen some pull forward of orders to beat the price increase from our distributors.

Now we believe most of those were to protect probably outstanding quotations that they had, rather than -- and building up their inventory. But I still -- I think that further -- further I think gives us confidence that the marketplace believes that price increase will stick.

Again we have seen pricing at pipe being a lot more volatile. I think that that probably is the result of the significant -- what we would believe is significant undercapacity utilization in the industry. I think that situation tends to lead to volatile pricing.

However we would expect that pricing should improve as we see demand picking up only because we think that that's fallen further than what -- again what history would tell us if you look at pricing as a multiple of raw material costs.

Great, thanks again. Just one cleanup. The -- was there any -- I guess the net divestitures impact or portfolio management about $100 million on a full-year basis last year. Was there anything in the first quarter run rate impacted?

Very little. We -- in fact it would not be material. We did not complete the divestiture until -- the actual transaction until mid-November. So there was only a six-week impact. Not much of a -- you know, not much of an impact at all. And in the MSC, that's the distribution arm of Anvil in Canada that we divested. We actually had full-year -- we had the full quarter results for that business so that transaction was not completed until early January.

Okay. Thank you very much.

Keith Hughes.

it's Keith Hughes. SunTrust Robinson Humphrey. I will stick with the US Pipe real quick. On the stimulus projects that are coming in, are you seeing any evidence that municipalities are just shifting dollars from their traditional fundraising sources to stimulus projects, thus giving the industry not a net gain? That's been a problem in some other sectors. Are you seeing that in the water business now?

You know, Keith, we are actually not far enough along to say definitively. I would say we expect that that is probably happening. And that -- and but on the other hand, if we look at it on a year-over-year basis and especially for pipe, we had seen such a fall-off because we just essentially saw I would say all project activity come to a halt. Any kind of movement I think will be very positive for us.

we also believe, and we still have -- this is more of a hypothesis -- that now once municipalities know exactly what projects will be funded by stimulus money and what projects won't, that we could see some freeing up of what we think is pent up demand in some of these other projects. But our -- we suspect that initially what we are going to see is just projects that would have occurred without stimulus money -- using stimulus money.

Okay. And the -- do you have any sort of feel on projects or quotes, how much the Build America Bond program, how much that is contributing to the demand?

You know, Keith, at this time we really don't.

Okay. And just final question on pricing at US Pipe. So are you basically believing that a pick up in volume from stimulus projects will shore up pricing enough and that, coupled with the fact that with scrap up, that's just going to push the prices up just like it would in any of those kind of commodity-marketed, is that kind of how you are thinking about it right now?

Yes. We would think that way. As I said as we look at it, the drop-off on price on a year-over-year basis is actually rational because it is following the drop in raw material costs.

I think that we believe it's dropped more than what history would tell us. Again, if you look at pricing as a multiple of raw material cost, we think that that is probably tied into a little more of some of our competitors trying to turn inventory into cash.

Essentially when we are in the nonconstruction season, we would believe that when we get into the second half of the year and we can see demand pick up, that we should also see raw -- overall pricing increase. And I think back to your point, I think slightly increasing raw material costs is actually a positive for pricing in the pipe business.

Keith Hughes Okay. That's all for me. Thank you.

Jerry Revich.

Good morning. It's Goldman Sachs. Congratulations on a strong free cash flow this quarter. I'm wondering if we could talk about on the steel cost side, we have seen those rising for a couple of months now. Can you discuss why the timing of the price increase in Mueller you know mid-to-late January instead of January 1, as you typically see in that business?

And also I'm wondering if you've seen your competitors follow suit with similar announcements?

Yes, actually, Jerry in an -- Mueller has -- prior to last year, we have had a price increase for 16 straight years generally effective February 1. So this is just a -- and you're right. I don't know why it was February 1 when you look back that long, rather than January 1, but that's been the tradition. But this year we moved it up by a week and more because we start seeing the scrap steel prices going up. That certainly was a major contributor.

Yes, and we have seen our competitors announce similar price increases effective around the same time frame. And as I mentioned a little earlier that we have seen some of our distributors hold what we think are pulling orders forward to beat the price increase which, I think, further gives us confidence that this price increase will stick in the marketplace.

Thanks. And just to clarify, in the past the price increase would be effective February 1. Sounds like that's later this time. Is that right?

No, it's earlier. It was effective January 24 for us. So just a week, not very material, but usually what we have done in the past is we would announce a price increase in late December, effective January -- effective February 1. The reason for that 30 -- generally that 30-day window is that we know our distributors have outstanding quotations, that we wanted to give them a period to be able to protect that price because we certainly have a discipline that once that price increase goes into effect, that that is the new price increase.

So it's just more of a -- we found that is a much more efficient way to allow our distributors to be able to protect a quotation that they have outstanding and allowing them to place -- giving them some time to place an order before the price increase officially goes into effect.

That's helpful. And you've made a couple of divestitures this quarter. Is the business portfolio roughly where you want it to be or are you still looking for select opportunities to perhaps sell some assets or buy some bolt-ons that make sense in the context of your portfolio?

You know, Jerry, good question. And we will certainly consider additional investors, but only when we think about nonstrategic assets. I would say that with the divestiture of our Mueller Flow Control in Canada, that would probably be the biggest single asset that we would consider non-strategic.

But I think that there's a few that we would have. Certainly as we have said in the past, our number one focus is to reduce debt. But as we sit here today and look to the next 18 to 24 months, I think that we are confident that we are looking, that our markets have hit bottom.

And while one of the biggest driver of demands for our business is residential construction. And as we have said, we expect to see no pickup in 2010 from residential construction. But as we look to 2011, 2012, I think we can start seeing some demand coming from that market segment.

So if we found that we had an opportunity to better position ourselves to participate in a growing market, we certainly would look at an acquisition that would make sense. But, again, that our focus is reducing debt which, as we commented several times in our prepared remarks, been able to take a significant amount of debt out in 2009.

But a long-winded way to get to it, yes, that we would still consider to divest some of our non-core assets, but they would be -- any of those in the future would be significantly smaller than a divestiture of Mueller Flow Control.

That's helpful. And lastly, what kind of year-over-year volume increase in US Pipe do you expect in the back half of this year just based on the order activity that you are seeing in the market place?

That one's a tough one for us to answer right now. Because, one, that most of those quotations -- or those quotations haven't turned to orders yet and that is another interesting phenomenon that we are seeing related to the stimulus package. Typically at our US Pipe business, we would expect to see, once we made a quotation to a contractor, probably within 45 days that would turn into an order.

This is taking now stimulus-related funds or projects are taking over 90 days for a contractor to place an order just because of, I would say, the paperwork that that contractor has to fill out and the bureaucracy associated.

So I am hesitant to be able to give a specific number at this point because we are still not sure when they may ship to those projects and we will have, I think, a much better idea as we go through this quarter when we start seeing the actual delivery requirement of those quotations.

But we are still pretty -- we are confident this time to expect volume will be up on a year-over-year basis. We just need a little more visibility to, I think, have a better idea how much it will be up.

Thank you very much.

Seth Weber.

Good morning. It is RBC. Just following up on a couple of those last questions. I mean -- so it sounds like you are basically drawing a line, saying that the pipe business is strategic to Mueller Water.

Can you give us any help here? I mean, when you are out quoting new projects, are you getting -- is there any -- are you seeing benefit, are you quoting pipe business and Mueller business together or can you help us maybe understand why you think that the pipe business -- why you need to be there? Why it is strategic for you at this point?

Yes. That's a good -- the answer to your question, generally no. Generally the valves and the hydrants are quoted differently than the pipe business, but -- the pipe quotations. You know when you stop and think about it, valves and hydrants many times are purchased off a specification where ductile iron pipe is not.

You know as we look at the pipe business and say, "Why do we want to be in pipe?", certainly we are the largest water infrastructure company in the US and believe that pipe is a necessary backbone to the water infrastructure market. When you look at where our valve and hydrants do get installed in ductile iron pipe, they go to the market through the same distribution channels. So certainly there is a connection there.

And our two valve and hydrants competitors also manufacture and supply ductile iron pipe to the market. That alone would not necessarily say be enough of a -- enough reasons to say, "Hey let's just stay in this business."

I think certainly as we look at it, we are in the midst of an unprecedented decline in demand for ductile iron pipe. I've mentioned several times, including in our prepared remarks, that we believe the run rate for ductile iron pipe demand is between 40 and 50% from where it was just four or five years ago.

And we believe it would be a mistake to make any long term decisions based on what is happening in the market today. When we look, I think, at future demand, we are confident that there is a need for a significant investment over the long term to, one, rebuild the water infrastructure systems throughout the United States, but we also believe that we will see a rebound in housing starts within the next two to four years.

And it's probably important to remind everybody that housing starts have been the largest driver of demand for ductile iron pipe in the past. And so I think that when we couple what we expect to see a significant improvement over the level of demand we are seeing today and, then, couple that with we have been streamlining this business the last three years, taking out costs.

We have made a significant investment as we've referenced several times this morning in the -- in state-of-the-art machine and transport systems so we capitalize on continuous flow of computer-aided processes. We have only been utilizing the operation for about 16 months and we have not realized the full benefit from that investment because we have been so dramatically underutilizing that capacity.

So we think with the benefits that we will get from that investment, the benefit from taking out the additional capacity and fixed costs that we announced this morning, once we start seeing an improvement in demand -- because our margins have been significantly squeezed by lower utilization -- that as that demand improves and, given our expected cost position after the plant consolidation, we believe that US Pipe will generate satisfactory returns and be a good business in our portfolio.

So it really gets down to, yes, we do see connections with our valve and hydrants. Not necessarily as direct as you may see between other products, but we also think that it would -- this is not the time to get out of the business. Because it is again at an unprecedented low, I think, market demand.

Okay, understood. And so over the next couple of years, do you think that the margins in that business can surpass the 5 or 6% that you hit back in FY '06 and '07?

We do. We do. Yes. Yes. And again, if you look at the capacity with the fixed cost that is taken out of the business, plus the benefits that we will get from fully utilizing the capacity that utilizes the manufacture, the advanced manufacturing technology that we have invested in that we think that that is a very reasonable expectation for us to surpass the margins that we saw several years ago.

Okay. Thanks very much.

Todd Vencil.

Good morning. Let's pull the focus back a little bit and think about cash flow in general and the working capital opportunity. I mean, you guys obviously did a lot of work in calendar '09 in the last few quarters, and you mentioned that you are going to get further traction there. But based off of process improvements. How much of a working capital opportunity do you think you might have in this fiscal year?

Evan, why don't you take that?

Yes. We -- as we indicated, we reduced inventory significantly during fiscal 2009 and that was through dramatic cutbacks in production. And as we look forward in 2010, through lean and other manufacturing efficiencies and process improvements and realignments, we will continue to improve inventory turns on an overall basis.

I think that we said over the next 24 months or so, we expect inventory turns to be in the range of 4 to 7. Specifically US Pipe is our fastest turn business with Anvil being the slowest turn. So when you look at overall inventory reduction, certainly as we see volumes return, there will be some working capital need there. But we will offset some by these process improvements that I mentioned.

Additionally, our accounts receivable, we continue to look at DSO and monitor that to try to bring that down. Generally, it's in the -- I'd say mid 50s for DSOs and we'll continue to look at that.

So on an overall basis we had strong free cash flow generation in Q1. Q2 is typically our lowest point from a cash generation standpoint. So we will have a use of cash in Q2. But as we go throughout the balance of the year, we expect to have some working capital improvements that will contribute to cash flow.

Yes and just to further a point Evan made, if you look a year ago we were sitting at, on a consolidated basis, inventory turns about 2.6 times. At the end of the first quarter of 2010 our inventory turns are 3.2. So we are seeing some -- certainly some improvement.

And I think as Evan said that we -- we believe in the next 24 months that it will vary by business unit, but we will we think we have the consolidated basis that we can be at inventory turns about 5 times and probably Anvil being our lowest business at about 4 times and we would expect US Pipe to be bumping up around 7 times.

So we certainly have more work to do in terms of what we're doing with our lean processes. We are pleased with, I think, what we have seen over the last year. But over the next 24 months we think that, if you look at it from a big picture, it can vary obviously from quarter to quarter, that we still have cash flow opportunities from bringing down inventory.

Got it. Thanks for that. I mean, specifically, on the plant that you are closing in Alabama, I mean is there -- does that result in a sort of one-time working capital benefit from that that we should think about?

Probably not too much. That we may be bumping up a little bit some of our inventories at our California plant and that probably will be inventory that's being transported. So on the working capital side, I don't think that we'll see a benefit there.

However we will see, if you look at overall free cash flow, we will see a benefit because we would expect to see a reduction in our capital expenditure requirements. Because North Birmingham was certainly one of our older facilities and was a facility that probably had more than its fair share of capital spending needs.

So all in all, I think we will see it will be a positive impact on free cash flow. But we probably don't see a significant change in inventory levels.

Got it. Just a couple of cleanup things. I mean, on Anvil you mentioned signs that the rate of decline in the end market demand is slowing?

Yes.

Can you talk about that, just what you guys are seeing?

Yes. We saw probably from our second quarter last year to third and our third quarter to fourth we saw a much steeper decline. We are still declining obviously, it is still going down, but not quite at the same rate.

In fact, when you look at, probably, I think on a sequential basis in our first quarter, our second quarter last year, we saw it down probably near 14%. That lessened a little bit in our third quarter, still a little more in the fourth quarter.

And so I think that the -- I think probably that we can't conclude if that is as much of a commentary on end market demand as it is that we believe that, during this period, that our distributors were aggressively taking down their inventories and I think that they have them down probably to the level that they want them to be.

So I think probably more than anything that that has contributed to what, at least what we're seeing, is a slower rate of drop-off in demand from quarter to quarter for Anvil.

Got it. Makes sense. And then finally, I just missed the number on the professional fee in the quarter. How much was that?

on a year-over-over basis -- do you have that, Evan, handy again?

On a year-over-year basis we had $1.2 million associated with the conversion of our Series B common stock and then there were some additional professional fees down about $1 million.

Got it. Thanks very much.

Brent Thielman. Your line is open.

Yes D.A. Davidson. Good morning. Just a question on Anvil. Are you seeing any sort of irrational pricing behavior out of some of your competitors there?

I would say nothing of significance, but we have seen the price of imported products drop. But I would say on domestic produced products we have seen maybe a little volatility there, but nothing that we would say is that significant.

Okay. And then I guess with respect to the stimulus quotations and some of the orders you are seeing at US Pipe specifically the stimulus -- is there any sort of shift in the diameters of the sizes from what your typical mix would be in that business?

If we are saying anything, maybe towards a slightly larger diameter which is not surprising. Because if we are going to do -- the smaller diameters are certainly driven more by residential construction. I think when you start doing some of the heavier work you'll get into the larger diameter.

But at this point other than maybe a slight shift, nothing that I would say that we've noted -- of a significant trend.

I think that's all I had. Thanks, guys.

Jonathan Ellis.

Good morning. It is Bank of America Merrill Lynch. Just a couple of quick questions for me.

First off, just in terms of -- and I appreciate all of the commentary you provided on expectations for the first half versus the second half of the year. Question I have is when you look at your trends historically it seems like about 45% of your revenue in EBITDA is coming the first half, 55% in the second half.

Can you give us some sense, I don't know if you have thought about it in this context, but how much the weighting could be shifted more towards the second half of the year relative to history?

Yes. We believe that we may see a greater weighting in the second half versus the first half this year than we have traditionally. I think first of all what will influence that is the stimulus-related project that we will see in the -- what we expect to see in the second half of the year.

And we think that probably 2010, this may be unusual because of what we will say is such a drop-off in project spending that we saw in 2009 that we may see some pent-up demand. And pent-up demand, I think, was waiting for the stimulus funding. That certainly I think will impact it to cause the shipments to be -- or revenues -- be more heavily weighted to the second half of the year.

Another contributing factor is that if you looked in the past that when we had our price increase at Mueller in -- effective February 1, that generally we saw our distributors pulling we think a lot of stock. A lot of orders that they were going to bring into inventory, they would move those in ahead of the price increase. We would tend to ship those later in the quarter probably in the March timeframe. That would then bump up March shipments.

And I don't think we are going to see that phenomenon to the same extent this year that we have in the past. So I think with those two -- those two factors I think would give us confidence that we may see a slightly higher, greater weighting -- higher weighting in the second-half versus the first half than what we have seen traditionally. And of course in the Anvil business it's not -- there's not a seasonal, really much of a seasonal impact on that business.

Great. The quotes that you highlighted that seem to be stimulus-related. I know you just mentioned that those quotes tend to be geared more towards larger diameter works and maybe the mix is helping.

But I guess my question is, what are you seeing in terms of margins, implied margins on some of those quotations? Are you --? Does it seem to be fairly competitive right now or is pricing as rational as you are seeing -- or irrational, depending on which business line that you are seeing in other parts of your markets?

I would say, yes, it is very competitive pricing. But I think the competitive pricing -- right now, the pricing is so competitive given, I think, capacity utilization that we are probably not seeing much of a difference than what we are seeing in general.

But it is very, very competitive. But then again I think that as we -- the point that we made, what's impacting our margin is more of the -- our utilization of our capacity is the biggest impact. So if we take out capacity and see our utilization go up that we obviously should see a positive contribution.

I see. Okay. But to be clear, if your utilization rates go up just because of underlying demand, then perhaps the stimulus-related projects could -- in terms of mix could actually bring down margins slightly because it's based on the pricing?

It won't bring down margins, we think, on a sequential basis. Because certainly, I think -- we don't think we will see pricing too much different than what we are already seeing. And I think on a year-over-year basis it's the underutilization of capacity that will have a bigger -- I think a bigger impact.

That's helpful. Thank you. Just in terms of cost savings. You talked about the $6 million to $8 million of savings anticipated from the new plant closing in the new year. My question, I think in the past you had talked about roughly $20 million of carryover savings from last fiscal year, that that was going to be a benefit in 2010.

Can you just give us an update? Should we just assume now that on a full-year basis, savings would be $26 million to $28 million if we add in the plant closure? Or has the overall number changed somewhat?

Yes. Evan, why don't you take that?

Yes. As we mentioned coming into 2010, we do have a carryover. In the first quarter in particular we had $12.4 million in manufacturing cost savings, lean actions from our North Birmingham closure last year, as well as other reductions. But, effectively, we [won't] have additional efforts going through 2010 that result in new cost savings. But a lot of the cost savings we'll see in 2010 are the result of the actions that we took last year.

Okay, great. Just a couple more quick questions. In the Mueller division, I know last few quarters you talked about starting to rehire some employees and actually paying overtime. Just given your commentary on the outlook, are you still in a rehiring phase or have you held off subject to how volumeorders come back over the next few quarters?

Yes. We've -- some -- I would say some slight rehiring in different departments in the plant, nothing that I would say is of significance. I think that we will -- at this point we think it's still prudent to handle any spikes in production with overtime and we are going to hold off what I would say any real significant hiring.

Thank you. Just on the US Pipe business and you talked about pricing following changes in raw materials costs. Is -- to the extent that raw materials cost starts to increase over the course of the year, what do you anticipate would be the lag between those cost increases and actually being able to institute pricing to cover that?

I'm sorry. Would you repeat that again?

Sure. To the extent that there are any raw material cost increases in the US Pipe business this year, my question is what is a typical lag in terms of being able to institute a price increase to offset that cost inflation?

Generally on pipe, we can get those price increases in the market relatively quickly. Because they are based on a lot of quotations. So a quotation can change, you know, a specific quotation can change from month to month. So as I said, generally we can get those into the marketplace reasonably quickly. Now it all depends on the rate of increase in raw material costs.

In 2008, we did not because raw material costs escalated at such a significant pace. But generally I would say that we might have a six-week to two-month lag.

Thank you. Just my final question on the price increases you mentioned, 7% in Mueller and then 5% in the domestically produced Anvil business. Can you just help us understand, those price increases apply to what percent of Mueller revenues and what percent of Anvil revenues?

Yes. At Anvil, it's probably about 25% of our revenues. And if we look at Mueller, it's probably up around 40% of our revenues.

Thanks, guys.

[Brian Meyer].

Hello. It's Brian from Baird. Just have one quick question. You guys had mentioned on the Anvil outlook that you would expect a similar operating income number sequentially (multiple speakers). I'm just curious, this quarter's results included that -- I think it was a $1.6 million gain on sales.

So I guess, is it relative to that 4. -- I think it was 4.5 that included the gain or backing out that gain? You know (multiple speakers).

The 4.5 included the gain and, yes, you are right. That is just a one timer. So if I would think about relative to what is happening to the ongoing operations, then I would subtract that gain.

Okay. That was actually all I had. Thanks a lot, guys.

Brett Levy.

Jefferies & Company. Only one remaining question. In terms of your bank debt agreements, any covenant concerns as you look into the next several quarters? And then, also the spread is pretty wide for a company that continues to improve their credit outlook. Any plans to kind of go early to get your rate down a little bit there?

Evan, I will let you take that.

Yes. We look at current debt levels at December 31. You know we needed bank EBITDA of about $80 million in the first quarter for our [tightest] covenant which is EBITDA to cash interest in our -- and actually our bank covenant EBITDA for that time period or the trailing four quarters was $105.3 million.

And if you look at our total debt to EBITDA ratio, it was 7 versus the maximum of 9.5 and our senior debt to EBITDA was 3 versus a maximum of 5.25. And as we look out over the next 12 months, we see no issues with respect to our maintenance covenants under our amended credit facility.

And we will always evaluate the capital markets and determine as we look out to the future and when our Term A and Term B debt mature, we will take a look and see what is happening in the marketplace to determine the appropriate time to make any changes.

Thank you much.

Matt Vittorioso.

Barclays Capital. Given that we're here at the end of the call, I was wondering if -- again, I appreciate all of the guidance on the earnings expectations for each of the segments. I was wondering if you would take a crack at just synthesizing that and saying do you expect your EBITDA in 2000 -- fiscal 2010 to be higher or lower than it was here in fiscal '09?

Matt, we certainly have talked about the positive trends for the second half of the year. I think that there are certainly a few variables that we have to see need to play out. The biggest is that the timing of the actual shipment, where we saw quotation activity picking up and we believe they will turn into projects.

Exactly when those projects ship, it's our third quarter or fourth quarter. We are in the first quarter of our fifth year 2011, it still remains to be seen. We certainly have -- what will play out with pricing I would say on pricing on the second half of the year relative, but I think that, given our -- the closing of the North Birmingham, utilizing our low-cost facility, we would certainly think for the second half of the year that we should see higher EBITDA than we saw in the second half of the year 2009.

That is helpful. And then, just one point of clarification. Over the last quarter of last year and this first quarter -- or including, I guess, the second quarter -- January -- where you sold the -- part of that Anvil business. It looks like you're getting about $50 million or $60 million of proceeds from disposing of assets.

Are we to -- you are basically guiding that you are not losing any EBITDA from those asset sales. So it is basically $60 million, $50 million of cash with no EBOTDA loss associated with that. Is that correct?

Yes. On a year-over-year basis if you look at it, yes. But that -- both of those businesses, I think, were a real hit last year and so we will be flat and not lose any EBIT.

Thanks very much.

Brent Thielman.

D.A. Davidson. I apologize. I know this call is going on long. Just have one more question. Sort of a bigger picture question.

You know, we are seeing announcements of obviously some rate hikes across the board, across the country. But at the same time you are also seeing announcements of consumption rates declining.

And so I guess my question is as some of the stimulus work starts to draw down, how do you think about utilities' budgets today and their ability to fund the types of projects where your products are used?

Good question. The -- I think that, again, that when we look at where the sources of funds come from -- come to the municipalities, certainly rate increases are one of the highest or one of the greatest sources. Municipal bonds, and in fact if you know that from August, August municipal bonds, municipal bonds have continued to increase month over month and in fact I think in January they were up on a year-over-year basis, So loans and other grants.

So we still believe that on the water municipalities, that they will have access to the funding they need. The big question remains that will cities tap into the funds that the water municipalities generate to try to balance other parts of their budgets. Certainly some cities are not allowed to do that. Others we have seen instances where they do do that.

So it is a -- it still remains to be a question mark and to see how it plays out. But certainly if you look at where municipalities are traditional sources of funds, we are seeing positive rate increases. We are seeing increases in bond activity, but still remains I think a question mark as we look to the future.

Again, appreciate all the color. Thanks, guys.

That was our final question. I will turn the call back over to Mr. Hyland.

Okay. Well, again, thanks for your interest and this morning. We obviously took a very significant action with our announcement this morning, the closing of our North Birmingham manufacturing facility. And as I said that we issued a press release this morning that will probably provide more detail. 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.