Mueller Water Products Inc (MWA) 2010 Q3 法說會逐字稿

Welcome and thank you all for holding. I would like to remind all parties that your lines are on a listen-only mode until the question-and-answer segment of today's conference. I will now turn the call over to Ms. Martie Edmunds Zakas. Ma'am you may begin.

Very good. Good morning. Thank you [Lorelle]. Thank you for joining us today as we discuss Mueller Water Products results for the 2010 third quarter. Yesterday afternoon we issued our press release reporting results of operations for the quarter ended June 30th, 2010. A copy of it is available on our website. Mueller Water Products had approximately 154.6 million shares outstanding at June 30, 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 finance measures in our press release and on this call including internal measurements we use to show the differences for prior periods. These non-GAAP measures derive from GAAP financial measures and are provided because they are used by the financial communities. We believe these measures will assist in assessing the Company's underlying performance for the period 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 or adjusted net loss per share, adjusted income to loss from operations, and adjusted EBITDA; all of which exclude impairment restructuring debt extinguishment related charges and tax on the repatriation of Canadian earnings. 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 Provisions of the Securities Litigation Reform Act of 1995. Remarks in future tense or containing words such as; suspect, believe, anticipate, indicate and project, or similar words constitute forward-looking statements. They are not guaranteed. And such statements involve risks and uncertainties that could cause all result 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.

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 corresponding slides we are presenting this morning will be available for at least 90 days after the presentation in the Industrial Relations section of our website muellerwaterproducts.com. 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 later this morning. 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 today as we discuss our results for the third quarter of 2010. I'll begin 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 fourth quarter, the actions we continue to take to strengthen our position in the marketplace. We will then open up the call for your questions.

Our third quarter results were about as we expected. Net sales, excluding divested operation, increased 13.1% from the prior year period primarily driven by volume increases at Mueller Company and US Pipe.

During the third quarter we began to see the benefit of the January price increases on valves and hydrants at Mueller Company. As we continue to see raw material costs escalate we announced another 7% price increase on valves and hydrants effective July 1st. At US Pipe, although average prices on shipments were down on a year-over-year basis, they were up sequentially. We also achieved a higher price per ton on ductile iron pipe order sequentially.

We saw significant year-over-year improvement in operating margins as we benefited from greater operating leverage which was driven by higher volume manufacturing and other cost savings, and increased capacity utilization primarily at Mueller Company and US Pipe. We continue to see signs of stabilization in most of (Anvils and markets). I would discuss this further detail later in the call.

As we look ahead, we believe that are distributors and our end customers are approaching the fourth quarter with caution given the uncertain economic climate. In addition, we believe our distributors are continuing to manage their inventories very conservatively and maintaining lower inventory levels. Again, during the quarter we saw significantly improved margins in our water infrastructure businesses as we benefited from increased volume and lower year-over-year manufacturing costs. I'll now turn the call over to Evan who will provide more details on the third quarter financial results.

Good morning, everyone. I'll first review the consolidated results and then discuss segment performance. Consolidated net sales of $375.9 million for the 2010 third quarter increased $12.7 million year-over-year for $363.2 million for the 2009 third quarter. Net sales increased due to $43.1 million of higher shipment volumes and $4.3 million of favorable Canadian currency exchange rates. These items were partially offset by the divestitures earlier this year of two Anvil businesses which had net sales of $30.8 million in the 2009 third quarter, and $3.9 million of lower pricing primarily at US Pipe.

Excluding the two divestitures, net sales increased $43.5 million in the third quarter versus the prior year. On a sequential basis, net sales increased $74.1 million in the third quarter compared to $41 million on a sequential basis in the third quarter of 2009.

Gross profit of $70.6 million in the 2010 third quarter increased $12.8 million from $57.8 million in the 2009 third quarter. Gross profit as a percent of net sales was 18.8% compared to 15.9% in the prior year period. Gross profit increase due to $12.1 million manufacturing and other cost savings, $9 million of higher shipment volumes, and $8.3 million of lower per unit overhead cost on products sold.

These items were partially offset by $6.6million of higher raw material costs and $3.9 million of lower sales prices. Adjusted income from operations for the 2010 third quarter of $13.4 million increased $18 million from an adjusted loss from operations $4.6 million for the 2009 third quarter. Results were positively impacted by $12.1 million of manufacturing and other cost savings, $9 million of higher shipment volumes, and $8.3 million of lower per unit overhead cost of products sold.

Order results were negatively impacted by $6.6 million of higher raw materials and $3.9 million of lower sell pricing. Selling, general, and administrative expenses of $57.2 million in the 2010 third quarter compare with $62.4 million in the 2009 third quarter. This decline resulted primarily from SG&A associated with the divesture of one of Anvil's businesses as well as $3.9 millionof bad debt expense in the third quarter of 2009 for a specific customer. Partially offset by slightly higher SG&A expenses at Mueller Company, Incorporated.

Adjusted income from operations as a percent of net sales was 3.6% and adjusted EBITDA as a percent of that sale was 9.2% for the 2010 third quarter compared to negative 1.3% and positive 4.7% perspectively. Debt interest expense of $15.8 million for the 2010 third quarter decreased $1.4 million from $17.2 million for the 2009 third quarter primarily due to lower debt levels during the 2010 third quarter partially offset by higher interest rates.

Income taxes for the 2010 third quarter included a one time $2.2 million expense related to the repatriation of earnings from Canada. After the divesture of a Canadian business earlier this year, we determined that the Canadian operations no longer needed approximately $21 million of cash which we repatriated during the third quarter. Excluding this one time expense, income taxes for the 2010 third quarter would have been of benefit of $1.7 million.

Adjusted net loss per share of $0.01 at 2010 third quarter improved from the adjusted net loss per share of $0.13 for the 2009 third quarter. As a reminder there were 154.5 million average shares outstanding for the 2010 third quarter compared to 160 million average shares outstanding for the 2009 third quarter. I'll now move on to segment performance.

Net sales for Mueller Company $174.6 million for the 2010 third quarter increased 12.9% or $20 million from $154.6 million for the 2009 third quarter due to $15.2 million of higher shipment volumes, $4.1 million of favorable Canadian currency exchange rates, as well as higher pricing.

For the 2010 third quarter, unit shipment volumes of iron gate valves, hydrants, and brass service products increased 19%, 9% and 27% respectively on a year-over-year basis. Income from operations of $28.8 million and adjusted EBITDA of $41.1 million for the 2010 third quarter compared to adjusted income from operations of $13.6 million and adjusted EBITDA of $26.3 million for the 2009 third quarter.

Income from operations increased $15.2 million due to $7.2 million of lower per unit overhead cost on products sold, $5.5 million of higher shipment volume and $4.8 million of manufacturing and other cost savings. These items were partially offset by $1.1 million of higher selling, general administrative expenses primarily associated with growth investments in Mueller Systems. As we discussed last quarter, Mueller Systems is our meter and metering technology business that offers utilities advanced automated meter infrastructure systems.

Year-over-year adjusted income from operations as a percent of net sales at Mueller Company improved to 16.5% from 8.8% and adjusted EBITDA of as a percent of that sales improved to 23.5% from 17%.

Net sales for US Pipe of $120.2 million for the 2010 third quarter increased 24.3% or $23.5 million from $96.7 million for the 2009 third quarter. This increase was driven by $27.5 million of higher shipment volumes, partially offset by $4 million of lower sales prices. Included in the shipment volume was $4.4 million of pipe revenue that we sourced and provided for a project outside the United States.

Tonnage shipped of ductile iron pipe for the 2010 third quarter increased 16% on a year-over-year basis and was up 21% sequentially. Pricing for ductile iron pipe declined 5% on a year-over-year basis but was up 6% sequentially. Adjusted loss from operations of $10.4 million and an adjusted EBITDA loss of $5.8 million for the 2010 third quarter compared to adjusted loss from operations of $16.8 million and an adjusted EBITDA loss of $12.5 million for the 2009 third quarter.

2010 third quarter results were positively impacted by $5.8 million of manufacturing and other cost savings, $4.4 million of higher shipment volume, $4.1 million of lower per unit overheard cost of products sold, $3.1 million of lower selling, general, and administrative expenses due to bad debt expense of $3 million in the prior year for a specific customer. These items were partially offset by $6.4 million ofhigher raw material costs and $4 million of lower sale prices.

We closed our North Birmingham facility in April. A projected savings of $20 million to $25 million on an annualized basis remain on track with net savings of $4 million to $6 million expected in the fourth quarter of 2010. During the third quarter we reported $900,000 in restructuring charges and have recorded $11.6 million through June 30th, 2010. We expect to report additional restructuring charges for the closure of North Birmingham of approximately $3 million to $4 million in the fourth quarter.

Net sales for Anvil of $81.1 million for the 2010 third quarter declined $30.8 million from $11.9 million for the 2009 third quarter, which included $30.8 million of 2009 sales associated with two businesses that were divested earlier this year. Net sales of Anvil were flat year-over-year, excluding net sales associated with these divestitures. The decline in the nonresidential market appears to have slowed and we believe it may be nearing the bottom. We believe we have at least maintained our market share with most of our products.

Income from operations of $4.5 million and adjusted EBITDA of $8.4 million for the 2010 third quarter compared to adjusted income from operations of $6.7 million and adjusted EBITDA of $11.1 million for the 2009 third quarter. Adjusted income from operations decreased $3 million from higher per unit overhead cost of products sold primarily due to lower production, and $900,000 from lower shipment volumes. These decreases were partially offset by $1.5 million ofmanufacturing and other process.

Reduced production during the first half of 2010 in response to the ongoing downturn in nonresidential construction contributed to Anvil's higher per unit overhead cost of products sold in the third quarter compared to the prior year period. Free cash flow which is cash from operating activities less capital expenditures was a negative $15.4 million for the 2010 third quarter driven primarily by general timing of shipments and disbursements. We expect free cash flow for the fourth quarter and full year. Year-to-date free cash flow was $14.3 million.

Inventory turns at June 30th, 2010 were at their best level in the last several years. Inventory turns improved approximately one turn over the prior year period. Total debt at June 30th, 2010 of $692.7 million was comprised of $52.8 million of term Adebt and $218.1 million of term B debt. Both bearing interest of LIBOR plus 500 basis points.

$420 million of senior subordinated note at a fixed rate of [7.375]% and $1.8 million [EBITDA]. We reduce total debt by $2.2 million for March 31st, 2010 and by $268.5 million for June 30th, 2009. A scheduled principal payments are $2.5 million due over the remainder of 2010 and $10 million due in 2011.

Our first significant scheduled debt repayment totaling $47 million occur in 2012 when our term A debt matures. We expect remaining compliance with our covenants for the next four quarters. At June 30, 2010 our trailing 12 month EBITDA as defined under our credit agreement was $110.5 million. I will now turn the call back to Greg.

Thanks, Evan. Evan has provided details of our third quarter financial performance and an analysis of our results. I will now highlight some current trends, our out look for the fourth quarter and the key drivers we are experiencing.

As a brief recap of our third quarter, it was the second consecutive quarter of year-over-year net sales and volume growth, excluding divested operations. The previous six quarters had shown year-over-year decline. As Evan mentioned, shipment volume was up $43.1 million over the 2009 third quarter. We continue to see some positive developments. I'll begin with pricing.

We have implemented price increases in all three of our businesses and we expect to see even better pricing trend as we move into the fourth quarter. I'll discuss pricing in greater detail with each business unit. We also expect to continue to benefit from cost savings, particularly at US Pipe, as we experience further savings from the closure of our North Birmingham facility.

Now let's turn to our outlook for Mueller Company for the fourth quarter. For three quarters, unit orders for valves, hydrants and brass service products, Mueller Company core products, were up approximately 25% year-over-year. Shipments were up about 20%. As a result of our July 1st price increase we believe we saw a significant pull forward of distributor orders late in the third quarter.

Therefore, we expect to see a drop off of bookings in the fourth quarter due to this pull forward of orders as well as our belief that our distributors and customers are becoming more cautious given the uncertainties in the economy. Although we expect modest year-over-year growth in our core product shipment in the fourth quarter, it is likely to be much less than we have seen through the first nine months of the year.

Finally, we believe we have received most of the orders that were funded by the stimulus program. These orders have either been shipped in the third quarter or will be shipped out of backlog in the fourth quarter. With regard to residential structure, it appears that although we believe the US housing market has reached bottom it is yet to play indicators that we are in the early stages of a sustainable housing recovery.

Given our current minimal sales to the residential construction market we don't believe we have seen any deterioration in our sales to this end market. We don't expect to benefit materially for at least 12 to 18 months after a sustainable housing recovery begins. During the quarter, we began to realize some of the benefits from the 7% price increase for valves and hydrants which became effective in late January, and the 4% price increase on brass service products which became effective in late April. We expect to further realize the benefits of these price increases in the fourth quarter.

We announced an additional 7% price increase on valves and hydrants effective July 1st. As we just discussed, we do believe we saw some pull forward of orders during June as distributors protected existing and expected orders. Therefore, we do not expect to realize benefit from this price increase until late in the fourth quarter. This July price increase is necessary to cover higher raw material costs that we have experienced over the last several quarters.

Therefore, given the timing of our price increase in relation to the higher raw material costs we have been experiencing we expect that we will be negatively impacted by higher raw material costs in the fourth quarter. Capacity utilization at Mueller Company has increased year-over-year over the last three quarters. In the third quarter, for example, production hours at Mueller Company manufacturing facility increased about 20% year-over-year. With this increased capacity utilization in the third quarter we expect to realize lower per units overhead costs on products sold in the fourth quarter.

Although our expected incremental investment in Mueller systems in the fourth quarter of about $1.5 million will negatively impact our year-over-year performance at Mueller Company, we are optimistic about the future opportunities for this business. For example, we announced last week that Asheville, North Carolina has selected Mueller Systems to improve the efficiency and service of its water operations. With 52,000-meters to be installed over three years this is the single largest meter order in our history.

Mueller Systems also recently announced a new product for its AMI systems. Mi.Hydrant which enhances the functionality of a fire hydrant by transforming it into an active part of an AMI network by placing a transceiver into the actual hydrant. Mi. Hydrant reduces communication costs by using existing water infrastructure components to transmit data rather than having to contract with third parties. We expect this product to be available this fall.

In summary, for Mueller Company in the fourth quarter we expect to see modest revenue growth due to moderately higher volumes and the benefit from the price increase. However, we believe operating income for the fourth quarter will be slightly less than the prior year as the benefits from revenue growth and lower per unit overhead costs will be more than offset by higher raw material costs and incremental investments in Mueller Systems.

Turning now to US Pipe. [Business] volumes of ductile iron pipe increased 16% in the third quarter over the prior year period. Capacity utilization increased both sequentially and year-over-year. We realize manufacturing cost savings of $5.8 million, including the initial benefit of closing our North Birmingham manufacturing facility which was completed during the third quarter. The closure of this facility has eliminated a portion of fixed overhead costs, and we have increased production in our most efficient facility. Both of which are contributing to cost savings.

A positive factor for US Pipe during the third quarter was a 6% increase in the average price per ton in shipment on a sequential basis. While average quarterly prices were down 5% year-over-year, pipe prices increased every month during the quarter and the average price per ton shipped in June 2010 was 6% higher than in June 2009. The average monthly shipment price for ductile iron pipe has increased sequentially every month since February.

The average price for ton on ductile iron pipe orders in July was up again sequentially and year-over-year. As we look to the fourth quarter, we believe this will be the first quarter in 2010 we will experience higher year-over-year pricing. However, we do not expect it to offset higher raw material costs.

We also had a large oversea pipe sale in the third quarter which was produced to our specifications by an offshore manufacturer. This quarter increased revenue and was profitable, but it had much lower incremental margins because we did not manufacture the pipe. Now let's turn to the outlook for the fourth quarter.

We entered the fourth quarter with a tonnage backlog of US Pipe that was comparable to the previous year. We expect our capacity utilization in the fourth quarter will be comparable to the third quarter. As I mentioned, the average price per ton of ductile iron pipe shipped in the 2010 third quarter was 5% below a year ago. However, the average price per ton on orders booked improved throughout the quarter.

The average price on ton booked in June and July were 7% higher than a year earlier. These price improvements are necessary to address the impact of rising raw material costs. April 2010 we saw the highest purchase price for scrap steel since August 2008, which impacted our third quarter. Although we have seen purchase costs decline on a monthly basis since April, on a year-over-year basis we expect raw material to have a greater negative impact in the fourth quarter than they did in the third quarter.

We expect to benefit from higher pricing in the fourth quarter which should be the first quarter of fiscal 2010 with higher year-over-year pricing. We continue to focus on improving the multiple between pricing, and raw material and energy input costs on ductile iron pipe, which for the last several quarters has been well below historical spread. Although we expect it continue to lessen the negative impact of higher raw material costs with higher pricing, we don't expect to cover year-over-year higher raw material cost increases with higher prices in the fourth quarter.

Among the positives we saw in the third quarter were increase in ton shipped, higher capacity utilization rates, the closure of our North Birmingham facility which allows us to increase production in our most efficient facility, and higher monthly pipe prices on tons booked. We believe that we will have operating inefficiencies of between $3 million and $4 million associated with the North Birmingham closure that will flow through the P&L in the fourth quarter. However, we expect this will be the last quarter that we experience those inefficiencies associated with this closure. In summary we expect shipment volumes to be flat year-over-year with some benefit from sales price increases. We expect US Pipe to post an operating loss in the fourth quarter comparable to the prior year period as the benefit from closing the North Birmingham and higher sales prices are expected to be offset by higher raw material costs and the inefficiencies I just discussed.

Now turning to Anvil. Excluding the two divested businesses, Anvil's revenues and volume were essentially flat in the third quarter. We believe we have at least maintained our market share across Anvil's primary products. 2009 we began to see the fall in nonresidential construction markets and aggressively cut back production.

While most of our markets are flat, we increased production in the second and third quarters of this year which should result in slightly lower per unit overhead costs in our fourth quarter. Anvil is also seeing increasing raw materials cost but has implemented price increases totaling between 4% and 17% on a majority of its products throughout the year. Given the timing of our price increases we expect to see some of the benefits of higher pricing in the fourth quarter and to at least cover any greater raw material costs. We also expect to see year-over-year benefit from the cost reduction actions previously implemented.

As we look to the fourth quarter, we believe our net sales and income from operations for Anvil will remain roughly comparable sequentially. As a reminder, Anvil businesses have limited seasonality. Other key variables for 2010. Our corporate spending is estimated to be between $33 million and $35 million and net interest expense estimated to be within the range of $63 million and $64 million. Our effective income tax rate is expected to be between 37 % and 38% excluding the taxes spent associated with the repatriation of Canadian earnings.

Capital expenditures are expected to be between $37 million and $39 million. We expect to generate positive free cash flow for the fourth quarter and the full year. As we have discussed, water infrastructure volume has increased the last two quarters on a year-over-year basis. However, we believe that our distributors and municipal customers are approaching near term spending decisions with caution given the conflicting reports on the state and timing of an economic recovery. And we also believe that we have essentially received most of the orders for our water infrastructure products that are associated with projects funded by the stimulus program.

We have taken a number of actions over the last several years to manage our controllable spending such as closing several manufacturing facilities, including our most recent closure of our North Birmingham pipe manufacturing facility. As well as implementation of a number of lean initiatives. We believe we are well positioned to realize the benefits of positive operating leverage as our production volume and shipments increase. As a reminder the prepared remarks in this morning's call are being filed on Form 8-K. With that I'll open it up for questions.

Thank you. (Operator Instructions). Our first question today comes from Mike Halloran of Robert W. Baird. Your line is open, sir. Mr. Halloran, you may go ahead with your question. I'm not getting a response. We'll go on to Seth Yeager from Jefferies & Company. Your line is open, sir.

Good morning, guys. Good quarter.

Good morning, Seth.

Good morning.

You mentioned that most of the stimulus related funds have been spent, but I believe in your prepared remarks that you had said some of that was in the backlog still as well. Can you give us a sense as to how that split works?

Yes. .

YesThat's what we meant to say is that we think that the orders that we are going to get from projects reported by stimulus funding that we have received those orders. We think that -- more of those have shipped in the third quarter than what we have left in the fourth quarter, but from what we're seeing and our field is reporting that we will probably -- there may be a few orders or projects that are still in the marketplace that we may see in fiscal year 2011, but we think, at least for our products, most of those have shipped in the third quarter or are already in our backlog and will ship in the fourth quarter.

All right. And then as far as those funds, can you give us an idea as to the amount of the funds that were spent if they were going towards new projects or the backlog of MRO type activities that had been held off for the past year or so?

Yes. Tough to get an exact reading, but I will tell you that our belief and this is certainly echoed by our field people is that most of that stimulus money went to projects that were probably already planned and we saw very little going to what would be called brand new projects. So we think in essence it probably just replaced spending that the municipalities or the water utilities had to spend anyhow.

So is it fair to say given the -- because I believe that the vast majority of funds are allocated on a local level considering the fiscal situation most municipalities that the MRO stuff is continuing to be held back outside of that one time flush of money that came through?

I don't know if we would say continue to be held back. I will say that probably there is an additional level of analysis before the money is being spent, but I think that we would categorize it as a little more caution. We might be seeing some held back, but I don't think that we're ready to conclude that all spending is being put on hold.

All right. And then you mentioned that there was a timing issue I think in a working capital in the third quarter that kept you from being free cash flow positive. Can you just tell us the size of that particular order?

Sure. I'll let Evan address that.

Yes. When you look at pre-cash flow for the third quarter, it was negative $15.4 million which was down from the prior year quarter due to the inventory reduction that we had last year, but in this year in particular it was primarily just timing related to our shipments and a little bit disbursement but impacting our accounts receivable. So if you look at the change in accounts receivable for the quarter, you know, that was the primary impact that we were referencing.

All right. And then one final question. You have got a pretty sizeable [stub] piece of term debt that's coming due in 2011. Have you started to think about how you're going to address that?

Our term A is $52.8 million and term B is 218.1 million. Term A matures in 2012, so there is some time before that period of time, but we always continue to evaluate our capital structure and look at the market. But certainly we have until May of 2012 before Term A matures.

All right. I will get back in queue. Thanks.

Thanks, Evan.

Our next question comes from Ryan Connors, Janney Montgomery Scott. Your line is open, sir.

Good morning. A couple of questions. First off, just on a pricing dynamics (inaudible) andUS Pipe and ductile iron pipe in general. Why not better pricing there? I mean are there competitors out there acting irrationally? I mean it seems to me everyone is probably hurting pretty badly from profitability standpoint right now. Most are probably losing money and presumably there are some switching costs for the customers, so I guess a rhetorical question why not move with a major price increase, a bold move? What do you think would be the customer reaction to something like that?

Well, Ryan, good question. And as we said in our prepared remarks we have steadily seen pricing increase on the orders we've received since February. That trend continued in July. We did have a -- announced a price increase in May of a little over 10%. Our competitors announced similar price increases.

I'll tell you that we are managing and attempting to achieve higher prices on a project by project basis. The one difference in the pipe business I'll say from the Mueller business, is that we quote quite often on a project by project and it has been our objective to steadily get those prices higher. We have seen I think movement, higher pricing overall in the marketplace, but I do think from time to time and I have mentioned this in the past we see some skirmishes on a project by project basis. We have attempted, I would say the last several months, to stay out of those skirmishes because we do think there is a much greater benefit to focus on getting higher pricing at the expense at times on giving up a little bit of volume.

And I think we see the pricing activity reflect perhaps what manufacturing loads are at different manufacturing facilities throughout the industry. Good question. Certainly I think that as we have said in the past that better environment for pricing to increase is when we've seen steadily rising raw material costs, especially scrap steel that has been the case for awhile. Those scrap steel prices are coming down somewhat and our objective -- our focus as we said in the prepared remarks is trying to get back to what I would say is that historical thread between price per ton, and raw material and energy input per ton, and we're focusing on the price side of that equation. Tough for me to comment why we haven't seen even greater increases in pricing over the last four or five months, but we have seen a steady improvement.

Okay. And I guess just a follow-up on that. Do you believe right now after all the capacity shut-ins by Shell and the competitors of the industry is where it needs to be from capacity standpoint, or do you think there will be further shut-ins either by yourselves or competitors from here?

Good question. It would be very difficult for us I think to take on any more capacity. We are essentially down to two locations, two melting locations, Bessemer, Alabama where we feed both our pipe producing facilities in Bessemer and the mini mill, and then the one in California. We think that in the long run that the plant in California is very strategic for us. We are the only manufacturers on the west coast which gives us a transportation cost advantage. And when you look at the long term, certainly the West Coast and the Southwest, clearly need to increase their investments and upgrade their water infrastructures, so I think we would be very hesitant to close that facility.

As I look throughout the industry, I'm not sure how much flexibility our competitors have. I will answer part of your question in saying there still is excess capacity. Again, I'm not so sure if that capacity is going to be absorbed by any further plant consolidation. I don't see that on the horizon. I think we need that capacity to be absorbed by increase in demand and, again, I think that as we have discussed this on previous calls that if you look in the last 18 months that demands for ductile iron pipe, as clearly as far back as we can see, is at an all time low.

We do think when we look over the next 12, 18 months we will see greater demands. I think more than likely that's how capacity will be absorbed. It will be more on the demand side rather than any plant consolidations.

Got it. And then just one more if I could on a separate topic. I'm intrigued by the Asheville win for the systems business and congratulations to you and your people on that. If you can just give us a little bit more color on that. First of all, can you give us any quantification of the financial magnitude of that contract and then, secondly, just qualitatively, that's a pretty big win for them. Can you talk about the competitive dynamics there that enabled the Company to win that business? Was it pricing, was it an incumbent situation, just what the driver was?

Yes. One, that order will amount to over a period to be between about $5 million and $6 million in revenue for us over a three year period. It was a very nice win for us. I think probably the greatest -- one of the major contributing factors is this was an order for AMR technology. AMR has been in the marketplace for at least probably ten years.

We believe our AMR, and Asheville believes our AMR technology is such where it provides the platform to where it is a very easy move to AMI technology. And while Asheville at the time elected to continue with AMR, but I think they looking at the benefits in the future of moving to AMI. So we believe the ability to convert our AMR platform into, especially our AMI offering, is perhaps -- our end users are finding that to be a very desirable feature of our AMR platform in relation to moving to an AMI platform.

Okay. Great. Well, thanks for your time this morning.

Thank you,.

Our next questions comes from Jerry Revich, Goldman Sachs. Your line is open, sir.

Hi. Good morning.

Good morning, Jerry.

Good morning.

Could you please give us some more color on order trends this quarter by segment. Perhaps if you could share backlog at quarter end versus start that would be helpful. Thank you.

Sure. Our order trend at, certainly at Mueller if you look on our core products on a year-over-year basis, and not look at it, certainly from a unit, we were up probably about 25%. Now that weighted a little bit differently between our brass products, our hydrants and valves, but if you look its up about 25%. I think the biggest contributor to that was, as I referenced a little earlier, the price increase that we implemented July 1st that we believe our distributors pulled forward a number of orders, and that's why we're expecting to see our fourth quarter orders drop off.

Our backlog, again, if you look in our core product at Mueller from where we began the year it's up about $30 million. If you look on a year-over-year, we're entering the fourth quarter of fiscal year 2010 with about $17 million more in backlog than we entered -- this is Mueller on our core product than we entered the third quarter of 2009. We think the big difference is, though, that we do expect that orders probably that will be entered in the fourth quarter will be less in fourth quarter 2010 than we saw in fourth quarter 2009 which led to our prepared remarks where we would see just a slight improvement on volume on year-over-year.

If you look at our US Pipe in term of tons on a year-over-year basis, our orders were down about between 9% and 10%, and quite frankly, I think that's a little more related to, again, our focus on getting prices up. Our thinking that is by far we'll have the best -- biggest impact on our bottom line on, and on an occasion, focusing on pricing and less focus on volume. If you look at tons on a year-over-year basis in our backlog, we're down probably about 20% of tons in our backlog entering Q4 of 2010 as compared to entering Q4 of 2009. And relative to the Anvil business, backlog is not meaningful since we book and ship most of everything that we ship in the quarter during the quarter.

That's very helpful, Greg. Thank you very much. And can you talk about the strong cost control you had in the US Pipe business on the raw material side considering what we've seen across steel markets? I guess we would have expected a bigger headwind this quarter. Can you just talk about some of the cost control actions, or maybe purchasing actions you took over the past couple quarters? Thank you.

Yes, Jerry, and I think when you look on a year-over-year basis raw materials costs, as we said, were a little over $6 million. The P&L $6 million more this year, a little over $6 million than it did last year. It's more timing as it moves through inventory and flows through the P&L. That's why in our prepared comments that I mentioned that in Q4, actually, the raw material costs year-over-year impact will be greater in Q4 than it was in Q3.

However, the net effect will probably -- it will be somewhat less because, as we also said, we expect to see for the first quarter in 2010 year-over-year positive pricing. So it's a little less related to the cost containment actions that we've implemented. More just timing as to when we purchase the scrap and when it flows through cost of good sold.

That's helpful. And lastly, can you talk about the impact on costs in the quarter from shipping production from North Birmingham to the other facility that you already recognized in the quarter? Any significant benefit to speak of yet?

It's around the $2 million benefit in Q3 and, again, that's just the timing and, again, how it flows through our inventory and then flows through the P&L. We are beginning to see the benefit, but we said in Q4 that we expect that to be somewhere between $4 million and $6 million.

Thank you very much.

Thanks, Jerry.

Our next question comes from Jonathan Ellis, Bank of America Merrill Lynch. Your line is open.

Good morning. This is [Anya Norikal] in for Jonathan.

Good morning.

Good morning. I guess my first question is what portion of the 10% price increase announced in the US Pipe division earlier this year has been accepted by customers, and does that appear to be driven by capacity reductions at one of your competitors?

Yes. I would say that -- and as we comment in the -- and that was the first price increase that was announced in probably over 18 months. If you look, as we said, in our bookings in the June and July months, we said that those were up about 6% to 7% on a year-over-year basis. So a simple calculation would say that we're getting 60% to 70% of that price increase. And, again, I think that certainly some of that, I would think, would have to be related also to capacity coming out of the industry. Both the closure of our North Birmingham facility in April and then the announcement of one of our competitors that they were idling a facility in May. So I do think that contributed to the price increase being accepted in the marketplace.

Okay. And I guess follow-up on North Birmingham. What is the utilization rate across the US Pipe facilities following the closure of that plant? And what are you expecting for Q4?

We estimate that we're probably were about 73% capacity utilization in Q3. That's up from about 45% capacity utilization in the second quarter and we're estimating in Q4 the capacity utilization will be pretty much in the same range.

Okay. Thank you very much.

Thank you.

Our next question comes from Brian Meyer, Robert W. Baird. Your line is open.

Hey, guys.

Morning, Brian.

I apologize Mike is having some technical difficulties earlier so filling in for him here. Just a follow-up on orders real quick. You guys talked about in the year-over-year, just trying to get a feel for what they look like sequentially throughout the quarter. You mentioned that Mueller Co. benefited from a pull forward. Just trying to getting a better feel from you what you saw in Pipe, month-to-month, and of course trying to back out the impact of the International project.

Yes. It varies by product line, Brian. But if you look sequentially that our bookings jumped up about, if I'm looking on valves, it was up about -- and again I'm looking at June, we were up sequentially in Q3 about 10% over Q2. If you look at our hydrants, our hydrants were up just a couple percentage points and if we look at our brass products, our brass products were up probably over 20%, 25% sequentially. That of course that gets into some of the seasonality. So all three of our Mueller product lines, the orders on a units basis were up sequentially in Q3 over Q2, but I would again say that the primary driver for that was the July 1st price increase and the pull forward. On a sequential basis at US Pipe, we actually saw a little deterioration in pipe orders entered in Q3 over Q2 and I think that was both a combination of timing of quarter relative to stimulus funded projects as well as probably a function of some of the pricing actions that we took during the quarter.

Okay. Thanks for that. And on the pipe pricing it's good to hear that it's increasing on the orders sequentially, just I guess on the products that are currently being quoted as opposed to booked. Has the pricing changed at all on those?

Yes. You're talking about the orders being quoted versus what's being booked?

Correct.

Yes. If you look at it and the quotations that we issued in May and June that turned into July orders that we saw a continued increase in pricing in July and we continue to in our quotation activity to at least maintain the price increase that we have seen the last couple months.

Okay. Great. And then one last one just to make sure I understand this right. I think you said you realized about $2 million in cost savings in the June quarter from the North Birmingham shutdown and your expectation next quarter is $4 million to $6 million. Such that you get $2 million to $4 million sequentially on an incremental basis? Is that about right?

Yes. $2 million to $4 million. But I will say that we expect that will, if you listen to my comments, that we do have some startup in efficiencies that will be hitting the fourth quarter. So I would expect it's going to be at the lower end of that quarter though our operating people are focused, on still learning on how to squeeze out more efficiencies but yes, on a net basis we expect to have slightly more savings Q4 than what we've had in Q3.

Okay. And then one last one. The price cost gap and we've talked about the year-over-year. If I could just look at it sequentially from 3Q to 4Q, is it similar, does it get worse sequentially?

I'm sorry, Ryan. Would you ask that question again.

You guys mentioned that the year-over-year impact of price versus cost gets worse from 3Q to 4Q. I'm wondering if I look at it sequentially does it get worse?

In pipe?

Pipe. Yes. Pipe would be the primary concern but overall.

Yes. No. If we look at it sequentially, the actual raw material costs for pipe that will flow through when I look at it on a year-over-year basis. We will have a bigger hit from raw material costs flowing through in the fourth quarter than we did in the third quarter. However, as I said, we'll have some positive pricing so that net impact will be less negative in Q4 than it was in Q3. Now, when I look on a sequential basis for -- and I'll start with pipe -- that a very slightly raw material costs are going to be higher in Q4 than they were in Q3. However, we think pricing will offset that. When I look at our total Company, actually Q4 sequentially, we will see raw material costs will be more negative sequentially for Q4 than Q3. And the biggest impact actually will be coming from our Mueller business and that is where we increased prices in July to address that. But just given the timing of those price increases we expect that we will have a negative impact sequentially on raw material costs.

Okay. Great, guys. Thanks a lot.

Our next question comes from Brent Thielman of D.A. Davidson. Your line is open, sir.

Hi. Good morning.

Good morning, Brent.

Yes, Greg. Let me follow-up to the previous question but I guess the lower scrap prices that we have seen in the market since the most recent peak in April. Should that be expected to start to flow through in Q1 of next fiscal year?

Yes, Brent. You know, we may see very little of it in the end of Q4 but more of it in Q1.

Okay. So I guess presumably if these latest price increases stick you should start to see your spreads widen further into early next fiscal year?

I think that's right.

Okay.

Yes that's right.

Okay, and I believe you indicated also that you were implementing further price increases in Anvil more recently. Any indications yet or any feel of how the market is accepting that?

No. We're optimistic. I think all of our competitors certainly are seeing the higher raw material costs and at the same time we've also seen some price increases out of those products offshore. So I would say that right now we're optimistic, and as we said that we think that even in the fourth quarter on a year-over-year basis that we should see some positive contribution at Anvil from price relative to what changes year-over-year raw material costs.

Okay. Great. Good luck in the quarter.

Thank you.

Thanks.

Our next question comes from Kevin Maczka BB&T Capital. Sir your line is open.

Good morning.

Good morning, Kevin.

Greg, can you say a little more about this shipment in US Pipe? It sounds like that was something unusual in the quarter, an outsourced shipment that was lower margin? Can you quantify that at all?

Kevin, we prefer not to because it's pretty sensitive from a competitive standpoint, but I will say that we found an opportunity and the end user had a lot of confidence in our specifications and our ability to manage another manufacturer to meet those specifications. So this was an order that we took six to eight months ago and, again, we saw just as an opportunity to generate some profit without any fixed investments. It was really -- we look at more as a one of, rather than as a change in our strategy. It is something that is competitively sensitive that I prefer not to make public.

Okay. But it's fair to say, though, that was a one time thing. That's not an ongoing contract?

Yes. No. It is a one time. We will have some shipments, but it's a one time and we'll look on it as a project by project, opportunity by opportunity basis.

Okay. Then just directionally, it sounds like from your revenue commentary as it relates to Q4, including this big order, it sounds like you're talking about revenues down sequentially in US Pipe and Mueller and maybe flat in Anvil. Is that an accurate summary?

Yes. I think that certainly is an accurate summary.

Okay. That's all I had. Thank you.

Thanks, Kevin.

Matt Vittorioso, Barclays Capital. Your line is open, sir.

Yes. Good morning. Just a quick clarification on the working capital front for the fourth quarter. Did you say that you expected it to be a contribution to cash or just that it would be better than what we saw in the third quarter?

We indicated that free cash flow would be positive for the quarter as well as for the full year.

Okay, and working capital for the fourth quarter?

And working capital for the fourth quarter should be a contribution.

Okay. Great. And then, Evan, you and I had spoken about the covenants, and I know you said today that you expect to be in compliance with all your covenants for the next four quarters. It does look like the coverage covenant gets a little bit tight over the next quarter or two. Could you just talk about your comfort with that. I know our EBITDA may be a bit lower than the credit agreement EBITDA, but you're pretty confident that you will be able to maintain that for the next year?

Yes. As we indicated on the call, we anticipate being compliant over the next four quarters with our free maintenance test under our credit facility. Total leverage, senior debt, and interest coverage ratio. Bank covenant EBITDA as I referenced was $110.5 million which was roughly about $9 million above reported EBITDA for the trailing fourth quarter, and as I mentioned, as we look out in the movement with EBITDA and we feel comfortable with the covenant line.

Okay. Great. And then lastly you know I certainly appreciated all the color on the fourth quarter guidance. Just again, we try to synthesize everything you said thus far. Should we be looking for a similar adjusted EBITDA in the fourth quarter as we saw in the third quarter? It feels like when I aggregate some of the comments you made today that's about where I'm coming out. Would you agree or disagree with that?

Well, I think that, again, when you look at the moving pieces that we describe, and I think we've done a pretty good job of sharing our expectations. So I think it's all there. Matt, I really can't confirm or not confirm your model.

That's fine. I appreciate all the color and thanks again.

Yes.

Thank you.

Next we have Joshua [Line] of Nomura. Your line is open.

Good morning, guys. I'll keep it quick because I know we're running a little late. First I wanted to ask a little bit about the stimulus that was done during the quarter, and you've got to finish in the fourth quarter. Can you comment on the type of project, how in-depth projects are most municipalities taking on? You had mentioned in the past that because a lot of stimulus funds were allocated towards -- for the water infrastructure. Part of the stimulus that those were allocated towards wastewater that you assumed these projects would gets done. They would rip up all the streets and the pipes and they would start making investments. Are you seeing that happen? And to what extent do you think that will continue?

Yes. And I will just take a step back. Of course, then under the ARRA there was $6 billion available for water. $4 billion of that was for waste, $2 billion for drinking water. So we primarily compete in the drinking water. It was the $2 billion that would go towards funding the type of projects that consume water product. And I've got to say, Joshua, that what we've seen has been all over the board in terms of what qualified for ARRA funding.

What I mean -- in some cases and we get pretty good insight because on every product we ship we have to provide a certificate that it meets the requirements for buy America. We've had to provide certificates on projects that were replacing three hydrants and six valves. That was a project to where we had projects that were a couple thousand tons of pipe involved, to where, as you referenced, it was going to be digging up streets and installing pipe.

I would say that -- and this is more rather than I would say absolute accurate from our analysis, but our general belief is we saw more of this money spent on what, we would say, are day to day pipe activities. So more spent on "let's go and replace ten hydrants, 20 valves here", rather than "let's go ahead and replace ten mile of pipe." So I think that what we've seen for our type of products on ARRA has been more the MRO smaller projects with the exception of some of the pipe, but I think that the smaller projects by far were greater percentage of what we saw. Now, you're right on water treatment and a lot of that comes out of the $4 billion that -- and I think that they will take a little longer to come to fruition because you're talking about plant work and water treatment plant work does take I think a little longer.

Okay. Thanks. That's helpful. You mentioned that inventories in the channel are being held pretty tight. What do you think would it take to get your distributor customers to think about putting some more inventory on the shelves?

I think that when we look at it for the next six months we would expect that they'll manage those very tightly because we're going into the down season. We won't see anything for the next six months. I think confidence in the sustainability of the economic recovery is probably the biggest impact relative to how our distributors are viewing their best course of action and I would say that explains the caution. I can say for certain that if when we start seeing a rebound in the residential construction market that I think we will clearly then see distributors bumping up their inventory, but I think that for the next six months they're going to manage it very, very tightly because of the seasonality. And I think when we start getting into the February, March, April time frame of next year, I think it'll depend on the overall climate before they start appreciably increasing inventory.

All right. That sounds good. One last item for me. It seems to me your CapEx guidance indicates a pretty big sequential bump up in the fourth quarter. What is that going towards?

We record the capital when there is a real cash outflow. A number of that spending is for projects that we've begun, and actually, when you look at our fourth quarter this year, pretty similar to what we saw in the fourth quarter last year. So I just think that is more reflective of the timing of spending throughout the year rather than any specific project in the fourth quarter. Okay. Thanks very much for all the color.

Next we have Mr. [Bisterky] from RBC Capital Markets. Your line is open.

Hey, Guys. This is [Vlad] [Bisterky] on for Seth Weber.

Yes. Goods morning.

Good morning.

Just a couple ever quick questions on the Mueller water system and the Asheville contract.

Yes.

Have you guys disclosed at all whether that business is profitable?

We haven't disclosed. But yes, itwill be.

Okay. And then on the Asheville contract, specifically, were there stimulus funds involved with that?

Not that I'm aware of, but I can't definitively say if that was the case or not.

Okay. Great. And then do you currently have other contracts pending out there for Mueller?

We do. Actually in the last quarter and we're looking as you would expect at this very closely if we look at our sales funnel in the last quarter, our sales funnel the number of accounts that we've identified and potential projects have increased over 70% from quarter to quarter. So I think that's reflective that we're building momentum with this business. As said several quarters ago that we are now leveraging the full sales force that we have for Mueller Company. In the past it was more just the sales force of our meter sales force that focused on this area. We have a sales force that we believe touches every water municipality and water utility in the US and by expanding that sales coverage we think it's natural that we're going to see that funnel increase. And I've got to be honest that we were very slow in expanding our sales coverage until we were confident that we were making the right investments to make sure our technology was the technology that was needed. The AMI technology needed in the marketplace. So I would say that every indicator that we look at gives us -- and that's why I made the comment we're optimistic -- gives us the indication that we are gaining momentum. And I think that probably one of the areas we're focusing on even most is that we think, and I mentioned this earlier in addressing a question, that the migration to AMI from our AMR technology is one that we think is pretty smooth and is gaining the attention of municipalities. And certainly with the introduction of Mi. Hydrants that I discussed in the prepared comments that makes the hydrants an actual component of the communication system. That as I said, we're optimistic in the movement we're seeing in this business.

Great. That's helpful. Have you disclosed at all the size of that business at this point?

No. We still have it under the Mueller Company. As we progress we may very well make a decision of breaking it out as a stand alone.

Great. Thank you.

Thank you.

And that was our final question, sir.

Very good. Well, again, we thank you very much for your continued interest in Mueller Water Products, and I'm sure we'll see you all soon throughout the quarter. And that concludes our remarks today.

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