Mueller Water Products Inc (MWA) 2010 Q2 法說會逐字稿

Good morning and thank you for standing by. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question and answer session. (Operator Instructions). I would now like to turn the call over to your host, Martie Zakas. You may begin.

Good morning. Thank you. Good morning, everyone, and thank you for joining us today as we discuss Mueller Water Products' results for the 2010 second quarter. We issued our press release reporting results of operations for the quarter ended March 31, 2010 yesterday afternoon and a copy of it is available on our website.

Mueller Water Products had approximately 154.5 million shares outstanding at March 31, 2010.

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 G AAP 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 included 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, restructuring and debt extinguishment charges. We will also refer to net debt and free cash flow.

On today's call, we will make forward-looking statements in accordance with the Safe Harbor provision of the Securities Litigation Reform Act of 1995. Remarks in future tense or containing words such as expect, believe, anticipate, indicate and project, or similar words, constitute forward-looking statements. They're 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 discussion of these risks.

During this call, all references to a specific year or quarter refer to our fiscal year unless specified otherwise.

This morning's call is being recorded and webcast live on the Internet. The archived webcast along with the corresponding slides we're 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 second quarter of 2010.

I'll begin today with a brief overview of the quarter. Evan will then provide a detailed financial report and cover key drivers affecting our business. I will then follow with our outlook for the second half of the 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.

Our second-quarter results were essentially as we expected. As we discussed last quarter, we expected results to be down sequentially primarily due to higher under-absorbed overhead costs associated with the typical production drop in the first quarter. Additionally, we expect the US pipe to experience a drop off in pricing without a commensurate change in raw material costs.

But more importantly, as we review our second-quarter results, we are encouraged by the evidence of recovery we are seeing in certain of our end markets, particularly in water infrastructure. For example, bookings of both our core products at Mueller Company and tonnage at US Pipe were up significantly. We're also seeing signs of stabilization in most of Anvil's end markets and growth in its addressed energy market. Furthermore, capacity utilization increased in the second quarter in all three business segments and is expected to increase further in the third quarter, which should lead to higher margins.

While we saw a notable uptick in orders at US Pipe, we still have concerns about pipe price increases offsetting rising raw material costs. Many of the dynamics that negatively impact first and second quarter, especially capacity utilization and in particular at Mueller Company, are now behind us. We should see improved margins in our water infrastructure business in the third quarter.

Evan will now provide more details on the second-quarter financial results.

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

Consolidated net sales of $301.8 million for the 2010 second quarter decreased $20.4 million year-over-year from $322.2 million for the 2009 second quarter. Net sales decreased $27.3 million due to the divestiture of two Anvil businesses. Additionally, we experienced lower pricing of $19.4 million.

These items were partially offset by higher shipment volumes of $25.1 million and favorable Canadian currency exchange rates of $2.6 million. We were pleased that the net sales, excluding divested operations, increased in the second quarter, the first quarter in six quarters in which net sales increased year-over-year.

Gross profit of $38.2 million in the 2010 second quarter decreased $16.7 million compared to $54.9 million in the 2009 second quarter. Gross margin was 12.7% compared to 17% in the prior-year period. Gross profit decreased $19.4 million due to lower sales pricing primarily at US Pipe and $9.4 million due to higher per unit overhead costs associated with lower production.

Gross profit declines were partially offset by manufacturing and other cost savings of $12.9 million across all three of our business units, $7.4 million from higher shipment volumes, and lower raw material costs of $3.6 million.

Adjusted loss from operations for the quarter of $12.4 million increased $7.3 million from adjusted loss from operations of $5.1 million in the prior-year period. Results were negatively impacted by $19.4 million of lower sales pricing and $9.4 million of higher per unit overhead costs associated with lower production.

The quarter's results were positively impacted by $12.9 million of manufacturing and other cost savings, $9.4 million of lower selling, general and administrative of expenses, $7.4 million of higher shipment volumes, and $3.6 million of lower raw material costs.

Selling, general and administrative expenses of $50.6 million in the 2010 second quarter compare with $60 million in the 2009 second quarter. This decline resulted primarily from SG&A associated with the divestiture of MFC, including the gain, as well as personnel related cost savings.

Second-quarter 2010 adjusted operating margin of negative 4.1% and adjusted EBITDA margin of 3% compared with the 2009 second-quarter adjusted operating margin of negative 1.6% and adjusted EBITDA margin of 5.8%.

Net interest expense of $14.8 million for the 2010 second quarter decreased $1.8 million from $16.6 million for the 2009 second quarter. The 2010 second quarter included a net credit of $1.2 million related to the early settlement of interest rate swap contracts associated with debt repayments. When adjusted, 2010 second-quarter net interest expense decreased $600,000 from the 2009 second quarter primarily due to lower debt levels during the 2010 second quarter, partially offset by higher interest rates.

Our effective income tax rate for the three months ended March 31, 2010 was 38%.

Adjusted net loss per share of $0.11 in the 2010 second quarter compares to adjusted net loss per share of $0.13 in the 2009 second quarter. The adjustments include restructuring charges, premature interest rate swap settlement costs and loss on early extinguishment of debt.

As a reminder, there were 154.4 million average shares outstanding during the 2010 second quarter, compared to 115.6 million average shares outstanding in the 2009 second quarter.

I will now move onto segment performance. Net sales for the Mueller Company segment of $141.2 million in the 2010 second quarter increased $26.4 million or 23% from $114.8 million in the prior-year quarter. This quarter benefited from higher shipment volumes of $26.8 million and favorable Canadian currency exchange rates of $2.2 million, which were partially offset by $1.2 million of lower pricing. Volume increased in the second quarter primarily due to strong growth with core Mueller Company products, largely as a result of greater shipments due to what we believe is an increase in maintenance and repair activity.

For the 2010 second quarter, unit shipment volumes of iron gate valves, hydrants and brass service products increased year-over-year, on average slightly over 30%. Pricing was down $1.2 million, although we believe market shares remain relatively constant. Additionally, we're seeing a realization of our recent price increases, which we'll discuss later.

Adjusted income from operations of $9.7 million increased $7.1 million from $2.6 million in the 2009 second quarter. Adjusted EBITDA of $22.2 million in the 2010 second quarter increased $6.4 million, or 41%, from $15.8 million in the 2009 second quarter. The increase in adjusted income from operations was to due to $9.9 million of higher shipment volumes and $5.3 million of manufacturing and other cost savings. These items were partially offset by $2.8 million of higher selling, general and administrative expenses and $2 million of higher per unit overhead costs associated with lower production.

SG&A costs were higher this quarter due to our development investment in Mueller Systems and higher sales. Mueller Systems is our meter and technology business that offers utilities advanced automated metering infrastructure systems. We acquired this technology a little more than a year ago and have combine it with our traditional AMR and other meter business to take advantage of growth opportunities as utilities look for ways to increase the effectiveness of their water management programs. Year-over-year adjusted operating margin at Mueller Company improved to 6.9% from 2.3%.

We want to remind you that, as expected, operating income margin at Mueller Company declined on a sequential basis primarily due to the higher per unit overhead costs on lower production levels we typically see in the fourth quarter.

Net sales for US Pipe of $83 million in the 2010 second quarter compared to $93.2 million in the 2009 second quarter. The $10.2 million net sales decrease was attributable to $17.6 million of lower pricing, which was partially offset by $7.4 million of higher shipment volumes.

Unit shipments of ductile iron pipe for the 2010 second quarter increased 17% on a year-over-year basis and were up 7% sequentially. However, pricing for ductile iron pipe declined 24% year-over-year and 4% sequentially.

In the 2010 second quarter, adjusted loss from operations was $19.6 million, and adjusted EBITDA was a loss of $14.6 million. These results compare to adjusted loss from operations of $10.9 million and adjusted EBITDA loss of $4.7 million in the 2009 second quarter.

The 2010 second-quarter results were negatively impacted by $17.6 million of lower sales pricing partially offset by $4.8 million of manufacturing and other cost savings. $1.9 million of higher shipment volumes, $1.4 million of lower selling, general and administrative costs, and $1.1 million of lower raw material costs.

The closure of our North Birmingham facility remains on schedule. Our projected savings of $20 million to $25 million on an annualized basis with net savings of $6 million to $8 million in the second half of 2010 remain the same.

During the second quarter, we recorded approximately $10.4 million in restructuring charges. We expect to record additional restructuring charges for the closure of North Birmingham of approximately $4 million to $5 million, most of which will be taken in the second half of 2010.

Net sales for the Anvil segment of $77.6 million in the 2010 second quarter compare to $114.2 million in the prior-year quarter. Net sales declined $27.3 million due to the divestiture of two of Anvil's businesses and $9.1 million of lower shipment volumes. The continued decline in volume is primarily due to the downturn in the nonresidential construction market, partially offset by stronger sales into the energy market. We believe we have at least maintained our market share with most of our Anvil products.

Adjusted income from operations of $6 million and adjusted EBITDA of $9.7 million for the 2010 second quarter compare to adjusted income from operations of $12.1 million and adjusted EBITDA of $16.5 million in the 2009 second quarter. Adjusted income from operations decreased $8.1 million from higher per unit overhead cost primarily due to lower production and $4.4 million of lower shipment volumes. These decreases were partially offset by $3.1 million from the gain on the sale of one of the businesses, $2.8 million of manufacturing and other cost savings, and $2.1 million of lower raw material costs.

The decline in SG&A was primarily attributable to the operations of the divested MFC business as well as the gain on this divestiture. However the operating income impact from the divestiture was minimal.

Reduce production during the second half of 2009, in response to the ongoing downturn in nonresidential construction, contributed to Anvil's higher per unit overhead cost in the second quarter compared to the prior-year period.

Free cash flow, which is cash provided by operating activities less capital expenditures, was a negative $21.7 million for the 2010 second quarter. This compares to positive free cash flow of $8.1 million for the 2009 second quarter. Year-to-date, free cash flow was $29.7 million compared to a negative $19.8 million for the first six months of 2009.

Total debt declined $42.5 million in the second quarter to $694.9 million at March 31, 2010. Total debt at March 31, 2010 was comprised of $54.6 million of term A debt and $218.7 million of term B debt, both bearing interest of LIBOR plus 500 basis points, $420 million of senior subordinated notes at a fixed rate of 7-3/8% and $1.6 million of other.

Our scheduled principal repayments remain minimal with $5 million due over the remainder of 2010 and $10 million due in 2011. Our first significant scheduled debt repayments totaling $47 million occur in 2012 when our term A debt matures. For the 12 months ended March 31, 2010, we have repaid $393 million of our debt. At March 31, 2010, our trailing 12-month EBITDA, as defined under our credit agreement, was $92.9 million.

I will now turn the call back to Greg.

Thanks Evan. Evan has provided the detail of our second-quarter financial performance and an analysis of our results. I will now discuss our outlook for the third quarter and the balance of the year, highlighting some of the positive trends we're seeing and key drivers we're experiencing.

On a consolidated basis, this is the first quarter in the last seven we experienced a year-over-year increase in dollar volume. As Evan mentioned, volume was up $25.1 million over second quarter of 2009. As a reminder, volume in the second quarter of 2009 was down $124 million from the previous year.

We've begun to experience a number of positive trends. I will begin with Mueller Company, which has seen increased volume, improved capacity utilization, and has implemented price increases. Volume has increased the last two quarters on a year-over-year basis with second-quarter volumes significantly higher than a year earlier, which was the lowest quarter of 2009.

During the quarter, we called back a number of our hourly manufacturing employees who responded to this increase in volume. However, we believe the efficiency gains from our lean initiatives have improved our productivity and reduced the required number of employees we needed to add.

On a unit basis, orders for valves, hydrants and brass service products, Mueller Company's core products increased 40% on a year-over-year basis.

Capacity utilization at Mueller has also increased on a year-over-year basis over the last two quarters. For example, in the second quarter, production hours in Mueller Company's manufacturing facilities increased over 60% year-over-year. We expect capacity utilization will continue to increase in the second half of the year, lowering overhead costs on a per-unit basis.

Additionally, a 7% price increase for valves and hydrants became effective in late January and a 4% price increase on brass service products took effect in late April. We expect to begin to realize the benefits of these price increases in the second half of the year.

The increases in shipment volumes, capacity utilization and prices should contribute to improved performance and higher-margin conversion in the second half of our year.

Now, let's look at our outlook for Mueller Company for the third quarter. Mueller Company should continue experiencing year-over-year volume increases tied to higher levels of maintenance and repair activity, including projects funded by the American Recovery and Reinvestment Act. The EPA announced that all stimulus funds were contracted by the middle of February, and the EPA estimates that 80% of those contracts have begun construction.

With regard to residential construction, it appears that the US is in the early stages of a housing recovery since year-over-year housing starts have improved for the last four months. However, we don't expect to benefit materially for at least 12 to 18 months after the housing recovery begins.

We expect the costs of raw materials to continue to rise throughout the year, but our objective is to offset these higher costs. With the increased capacity utilization, we expect to realize lower per-unit overhead costs. As a result of these positive factors, specifically the increased capacity utilization, we expect to benefit from positive operating leverage resulting in a higher adjusted income from operations and margins year-over-year in the third quarter of 2010. For the third quarter, we expect Mueller Company will have substantially improved performance on a year-over-year basis.

During the second quarter, net sales grew 23% on a year-over-year basis. We believe a stronger end market contributed to this growth as did the completion of distributor destocking in the middle of last year, as well as distributor orders that came in, in advance of this year's price increase that we shipped during the quarter.

As we look to the third quarter, we expect growth will be driven by end market demand. As a result, we expect net sales will grow year-over-year in the third quarter but at a slightly lower rate than we saw in the second quarter. We expect to see strong operating income conversion on the incremental revenue at around a 50% rate.

Turning now to US Pipe, we saw a number of positive trends during the quarter. Shipment volumes of ductile iron pipe increased 17% and tonnes booked were up nearly 60% in the second quarter over the prior-year period. We realized manufacturing cost savings of $4.8 million and, as Evan discussed, closure of our North Birmingham facility remains on track. The closure of this facility will eliminate fixed overhead costs and will enable us to increase production at our most efficient facility.

While we're currently encouraged by the growth in bookings that we realized in the second quarter, we think it is important to point out that orders were down significantly in the second quarter of 2009. Therefore, the growth is off a much smaller base. We believe that the bookings level we did achieve should contribute to a 15% to 20% growth in volume shipments in the second half of the year.

A negative factor for US Pipe continues to be pricing, where average pipe prices during the quarter declined 4% sequentially and 24% year-over-year. Clearly, the impact of average lower pipe pricing had the single largest affect on second-quarter results.

Now, looking at the third quarter, we enter the third quarter with a tonnage backlog at US Pipe that is more than double the previous year, the result of a significant increase in booking in the second quarter, which we believe is primarily due to stimulus related projects. We expect our capacity utilization in the third quarter will be about 70%. This compares to 40% capacity utilization a year ago and 45% in the first half of this year. These higher production levels will lower overhead costs per tonne and should improve margins. However, we're facing an environment of higher raw material cost, especially scrap steel. For example, the cost of our most recent purchase was more than double from a year earlier. While ductile iron pipe pricing for the second quarter of 2010 was 24% below a year ago, the average price in the second quarter was 10% below the third quarter of 2009.

The price per tonne booked has increased each of the last three months since January. In addition, we've announced a price increase that was effective May 1, and our competitors have announced similar price increases. This price increase is necessary to address rising raw material costs. In this environment of escalating raw material costs, we're taking additional steps to ensure we are not locked into prices that don't address these higher costs. Additionally, one of our competitors announced last week that they were immediately idling one of their ductile iron pipe facilities, further reducing overall capacity in the industry.

We expect the pricing impact in the third quarter to be less on a year-over-year basis than it was in the second quarter. However, we don't expect to cover year-over-year higher raw material cost increases with price increases.

Overall, we're pleased with the increase we've seen in tonnes shipped, the growth in our bookings, expected higher capacity utilization rates, the increased production in our most efficient facility, and the higher average monthly pipe prices and tonnes booked since January. However, with rising raw material costs and the volatility we've seen in pricing, the biggest challenge for US Pipe remains our ability to cover higher raw material costs.

In summary, we expect that net sales will increase year-over-year, driven by the increase in volume although partially offset by price declines. We expect US Pipe's operating loss to improve slightly in the third quarter, on a year-over-year basis, after excluding $3 million of bad debt expense related to a specific customer and last year's results.

Now, turning to Anvil, nonresidential construction spending, which is a primary end market for Anvil, continued to be down in the second quarter, although we did see a significant increase in the energy market, which represents a little less than 15% of Anvil's total business. Additionally, production increased 25% on a year-over-year basis in the second quarter, which should benefit under-absorbed overhead in our fourth quarter. Despite lower sales in the second quarter, we believe we have at least maintained our market share across Anvil's primary products.

As we look to the third quarter, we believe our sales and income from operations for Anvil will remain roughly comparable sequentially when adjusted for the gain on a divestiture. As a reminder, Anvil's business has limited seasonality. Although industry forecasts continue to project a decline in nonresidential construction spending for the 2010 calendar year, the year-over-year impact of the decline in spending is expected to lessen considerably.

Anvil is also seeing increasing raw material costs but has announced price increases of between 4% and 17% on a majority of its products since the beginning of the year. Some of the price increases were implemented in the first quarter, but most of them were not effective until late in the second quarter and early in the third quarter. We expect to see the benefits of these price increases beginning in the fourth quarter.

Products covered by the price increases include domestically produced as well as source products used in the mechanical and fire protection markets. We expect to at least cover rising raw material costs with price increases. We also expect to see year-over-year benefit from the cost reduction actions previously implemented.

For Mueller Wire Products as a whole, we expect third-quarter income from operations at Mueller Company to improve substantially year-over-year due to higher shipment volumes and lower per unit overhead costs. At US Pipe, we expect adjusted loss from operations to improve on a year-over-year basis. While US Pipe will be negatively impacted by higher raw material costs and lower pricing, we believe will benefit from increased volumes and lower per unit overhead costs.

Finally, we expect Anvil's income from operations to be relatively flat on a sequential basis when adjusted for the gain on the divestiture.

Other key variables for 2010 -- our corporate spending is estimated to be between $34 million and $36 million, and net interest expense is estimated to be within the range of $63 million to $66 million. Our effective income tax rate is expected to be between 35% and 38%. Capital expenditures are expected to be $44 million to $48 million, and we expect to generate positive free cash flow for the full year.

In summary, our second-quarter results were essentially as we expected, and we're encouraged by the evidence of recovery we're seeing in certain of our end markets, particularly in wire infrastructure. Bookings were up significantly with both our core products at Mueller Company and tonnage at US Pipe, and we're seeing signs of stabilization in most of Anvil's end markets and growth in its addressed energy market. The increased capacity utilization in the second quarter in all three business segments is expected to increase further in the third quarter, which should lead to higher margins.

We've taken a number of actions over the past year to manage our controllable expenses, such as the closure of North Birmingham as well as implementation of a number of lean initiatives. We should realize the benefits of positive operating leverage as our production volumes and shipments increase.

As a reminder, the prepared remarks in this morning's call are being filed on Form 8-K

With that, I will open it up for questions.

(Operator Instructions). Seth Weber, RBC Capital Markets.

Just some questions on US Pipe I guess -- is it possible to frame how much of the order increase was attributed to stimulus and then I have a couple of follow-up questions.

Yes, we think most of the order increase was related to stimulus. In fact, if you recall in our call last quarter, we referenced a significant uptick that we saw in that quarter in our quotation activity. I believe, probably if I recall, at least half of that increase was related to the ARRA projects. So we believe that, yes, most of the bookings that we saw were related to stimulus spending.

Is it possible to frame the lead times on those projects? Is it possible that those projects are going to take longer to get done versus your typical leadtime on a typical pipe project (inaudible)?

Right now, we believe it may be a little bit longer from order placement to shipment than are typical. But, we think most of what we -- the orders we received in the second quarter will ship by the end of the fiscal year.

Okay. Then I guess I'm just a little confused. When you talk about capacity utilization being up in all three businesses, so if [Cap U] was up in US Pipe but margins were still down, I guess I'm just not understanding that disconnect for the second quarter. Is it just the --?

Yes, that's a good question. I'll go back a little bit. As you know, we're on a FIFO accounting basis. So, actually, we don't see either the positive or negative impact of increasing or decreasing production until the following quarter. I think that is what we really, that is what we really saw in Mueller this quarter.

If you look -- and I know you're referencing better operating leverage with higher capacity utilization because obviously overhead unit costs come down on a per unit basis.

Again, I think the example at Mueller will I think hopefully help answer this question. We generally will see, for instance in the second quarter at Mueller, lower conversion margins primarily due to reduced production in our first quarter. In our first quarter, we had a drop off due to seasonality, and we also have a shut down over Christmas. So, we generally will see higher conversion margins in the third and fourth quarter. If you look over a 12-month period, it evens out. For instance -- and this gets back to your question about past utilization. We referenced in the script that our hours -- production hours in our Mueller facility in the second quarter were up 60% on a year-over-year basis. We will see that benefit in the third quarter. That's why I said in our script that we expect to see conversion margins on the incremental revenue of at least 50% at Mueller in the third quarter.

So, it's really -- we'll see either the up -- either the benefit or the hit one quarter after we actually experience it at our manufacturing facility. So what we saw in terms of operating leverage or overhead absorption in Q2, that was related to the drop off in production in Q1. With the increase in production and capacity utilization in Q2, we'll see those benefits in the third quarter.

That's helpful, thanks. Then just a quick follow-up -- is there a breakeven revenue number that we should think about for the Pipe business? You know just assuming, steady-state, pricing kind of stays where it is and input costs stay where they are, is there a breakeven revenue number that you can point to? Do you think the Pipe business is profitable by the end of the year on an operating basis?

I would say, Seth, if you look at the conversion rate that we saw in the second quarter, that we experienced in the second quarter -- and I call it a conversion rate and the difference in pricing and raw material costs. If we would continue with that rate, no. The volume we would see in the second half of the year would not be sufficient. In fact, I think, at that conversion volume -- at that conversion, we would have to see a significant increase in volume that we don't think we'll see for at least the next couple of quarters.

We are encouraged. I think, though, if you look at the volume we expect in the second half of the year and if we would see conversion rates I would say consistent with what we saw in 2008 and 2007, I think that volume would put us pretty really close to breakeven. So I think the biggest driver for us is going to be what happens in pricing with pricing relative to raw material costs and (inaudible) that we referenced in the script that, for the last three months since January on our orders booked, average price per tonne has increased, as well as the price increase that we announced that was effective essentially at the beginning of this week, and our competitors announced similar price increases. Now, the key will be obviously how those price increases hold.

But, to your question, if we saw -- at the conversion revenue we saw in the second quarter? No, we would not be there and we would need a significant increase in volume, and that could still be questionable. At historical conversion rates, the difference between price and raw material and the volumes that we would expect to see in the second half of the year, yes, that would get us close to breakeven or be at breakeven.

Okay, thank you. Did you tell us what the price increase was at the Pipe business?

Yes, the price increase was about a 10% price increase, but that is -- that measures the market list price before and after the price increase. We could see much higher increase in that based on how it is applied, but generally about a 10% price increase.

Thank you very much. I'll get back in queue.

Christopher Glynn, Oppenheimer.

A question on Anvil -- the core it looks like only down 10% year-over-year. It looks a little better than what you were talking about tracking the market trends you forecasted. Just to comment on that and also on your comment that you're at least maintaining share maybe sounds like you fee; you took a little share.

Yes, the core -- we did say slightly less than about 15% of Anvil. I don't know if you would include that or not, but the 15% of Anvil goes to the energy market, and we saw a nice uptick in the last quarter in energy markets, and we expect that will continue. Certainly I think everything was very positive on the -- for investment in the US market, the oil and gas production side.

On the other, we did have some nice conversions last year in terms of distribution. I think that, in some products, we probably have gained some share because, in some regions, we were able to strengthen our distribution network.

So, I think our management team at Anvil has done a great job of managing through this downturn and have found some opportunity where there is. Again, I think we've taken the lead on implementing price increases also at Anvil. And so, I think those combined to perhaps mitigate what maybe should have been a bigger decline based on what is happening in the end market.

Is Anvil an area where you can look at bolt-on acquisitions over time to get some scale there?

Yes, we've always said that the Anvil market is one where we think, over the intermediate term, is right for consolidation. So that certainly is an option.

Okay. I just missed your comments on what the price increase was for Anvil, if you could --.

Yes, Anvil, between the first quarter and early now in the third quarter, they have ranged between 4% and 17%, varied by -- obviously varied by product line, but both on our domestic produce and that which we source offshore.

One last one-- the 50% plus conversion margins at Mueller Co., was that a sequential or year-over-year comment?

That would be year-over-year.

Okay, thank you.

Jerry Revich, Goldman Sachs.

Greg, you provided some very helpful color on order trends. I am wondering if you could step us through where orders were relative to sales in the quarter in Mueller Company and US pipe, you know, the book-to-bill number, if you will??

Yes, Jerry, we built backlog at both businesses, much more backlog. We grew much more backlog at Pipe and that gets back to Set's earlier question about little longer delivery lead times associated with the ARRA. But we probably shipped anywhere between probably 80% to 90% of what we booked at Mueller because most of those bookings came in January before -- or a good portion of those bookings came in January before the effective day of the price increase. Most of those shipped by the end of the quarter.

Got it. I guess that explains the reason for why pricing was in a tail wind for Mueller Co. this quarter. It sounds like, once you've got that lower price product out of the way, pricing should pickup in coming quarters?

That's our expectation. In fact, we were probably a little surprised with the orders we did receive in January. I think what that reinforced was our distributors certainly expect the price increase to stick, and that is why they brought the orders forward into January. So, yes, I think we're certainly seeing signs on the orders that we booked in February, late February and March, that the price increase is holding in the marketplace.

In terms of the magnitude of the price increase for the remainder of the year in the Mueller Company. business, it sounds like you should be able to offset the raw material inflation pretty well in this business?

We expect. We expect it should offset it from at least what the outlook is today on what we expect to happen on raw material costs. As we've said in the past, for a variety of reasons, that we generally plan on getting maybe about 60% of the price increase because, in some cases, we do have contracts, in other cases on a project-by-project bid. It may influence what we decide on on our pricing action. But generally, as we look at the second half of the year now, we do expect to be able to offset raw materials with higher pricing.

In the US Pipe business, the 10% price increase is certainly a nice start, but considering what we've seen scrap steel prices move over the past call it three to four months, at which point do you think the industry gets more aggressive with offsetting those higher raw material costs, because is it by the end of 3Q once you get the utilization rates up for the industry as you alluded to?

Yes, we won't see much of an impact in the third quarter, primarily because I think a lot of what we're going to ship in the third quarter we have in backlog. So, I think that if we're going to see it, will see it in the fourth quarter. I said we're encouraged by the announcement last week. One of our competitors announced idling one of their ductile iron pipe manufacturing facilities. So if you look over the last a little over two years in the industry, four plants have either been closed or idled, and two in the last several months, with our North Birmingham closure and then the idling of the other plant. So, we're hopeful that will all converge to see higher pricing as we go into the fourth quarter and maybe pricing at a level that addresses the raw material issues.

Thank you very much.

Brent Thielman, DA Davidson.

Yes, I guess, Evan, one for you, just a housekeeping question. Did you say there would be an additional restructuring charge in the second half?

Yes, related to the North Birmingham facility. The second half would be $4 million to $5 million, the majority of which would be in Q3, but there would be some in the fourth quarter as well.

Okay, perfect. Thank you. Then I guess with respect to the ductile iron pipe market, are you seeing any change in terms of market share either in the quarter or in the last six months?

You know, we haven't. Brent. Let me put it this way. We have not seen any change in our share. We get industry data from our trade association on a monthly basis. I'm not sure if there's been a shifting of share among the other three, but generally, for the last six months, our share has been pretty flat.

I guess, Greg, with your new lower cost pipe facility, is the pipe you're selling out of that plant comparable to market prices?

I'm not sure, Brent, I understand your question but yes, we don't discount that pipe relative to market prices, because we have lower costs. As you can see from the results, we need higher margins.

I understand, just wanted to check. Lastly I guess, you know, there's been some allegations against JM Eagle, obviously a big player in the PVC market, plastic market. I don't know if you get any read from utilities or anyone else whether there is any sort of censorship in terms of interest or demand from ductile iron pipe as a result of the -- if you could just comment on what is going on there?

You know, Brent, you're right. That certainly hit the market several months ago. I've got be, quite frankly, I think it might just be too soon to tell. We haven't seen any trends that we can point to from our customers' viewpoint. We know that Eagle certainly has launched a very aggressive advertising campaign to respond to it, but no, we continue to sell to the market on the benefits in the long-term of ductile iron pipe versus we think PVC pipe. But I don't think there's anything we could point to to say there is any kind of movement in place.

Okay, thanks. Good luck in the quarter.

(Operator Instructions) Seth Yeager, Jefferies & Company.

Can you give us utilization, if possible, at Mueller Co. and Anvil and how that moved year-over-year?

Yes. When we look at Mueller, it obviously varies by factory and by, actually, by production. But, if you look -- and we will talk about Mueller on a year-over-year base. I referenced this a little earlier, that our production actually was up, the hours were up 60% on a year-to-year basis. So, we have -- where in the second quarter last year, just about all of our factories and all of our different operations were operating well below 50%. We have some of our operations in some of our plants approaching 80%, though I would say that is certainly on the high side. But, we're getting up to probably, across the board, around at least 60% capacity utilization at Mueller.

Our capacity utilization has picked up at Anvil. What's more driving that is, a year ago, we were really driving down inventory. We're still improving our inventory turns at Anvil but that has evened off somewhat. So, when I look at Anvil capacity utilization, I'm going to say a year ago again, we were under the 50% range. Today, it varies by plan, but I'm going to say we're in the 55% to 60%, 65% range.

Clearly, we are at a higher capacity utilization at Mueller than what we were year-over-year. As we referenced at our US Pipe business that, with the closure of North Birmingham and the uptick in bookings, that we expect we will be at about a 70% capacity utilization at Pipe in the third quarter.

Thanks for that detail. It sounds as if you guys are pretty confident that, at least in most of your segments, pricing will help offset some of the increased raw materials. But, can you just remind us the scrap component of COGS and just sort of generically how that fits across the board?

Sure, I will let Evan address that.

Yes, if you look at scrap as a percentage of total cost of goods sold for our US Pipe business, that is roughly around 45%. At Mueller Company, it is a smaller percentage as we have higher purchase components -- but, overall, around maybe 20%, in that general range.

Thanks. Just one quick follow-up -- it sounds as is the water related ARRA funds are finally beginning to flow into your backlogs. Have you guys been able to quantify the aggregate amount in these projects in which you could participate?

That has been a very elusive and difficult number for us, and we continue to try to get our arms around that, but it still -- those funds go to such a wide, broad variety of different components in addition to labor costs that obviously we get a small percent of that, but it's difficult for us to quantify.

All right, thanks a lot guys.

At this time, there no further questions.

Well, seeing that there are no further questions, we will conclude our call. Again, as a reminder, the prepared remarks of this morning's call are being filed with the Form 8-K. Thank you for your continued interest in Mueller Water Products.

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