Mueller Water Products Inc (MWA) 2010 Q4 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 Martie Edmunds Zakas. Ma'am, you may begin.

Thank you, and good morning everyone. We appreciate your joining us today as we discuss Mueller Water Products results for the 2010 fourth quarter.

Yesterday afternoon we issued our press release reporting results of operations for the quarter and fiscal year ended September 30, 2010. A copy of it is available on our website.

Mueller Water Products had 154.7 million shares outstanding at September 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 financial measures in our press release, on our slides and on this call, including internal measurements we use to show the differences from prior periods. These non-GAAP measures derive from GAAP financial measures and are provided because they are used by the financial community. We believe these measures will assist in assessing the company's underlying performance for the periods being reported.

These non-GAAP measures have limitations, and reconciliations between non-GAAP and GAAP financial measures are included in the supplemental information within our press release.

This morning we will refer to adjusted net income loss or adjusted net income loss per share, adjusted income loss from operations and adjusted EBITDA, all of which exclude impairment, restructuring, debt extinguishment related charges, swap settlement charges and a tax from 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 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 are not guarantees, and such statements involve risks and uncertainties that could cause actual results to differ materially from these statements.

Please see our Form 10-K for the fiscal year ended September 30, 2009, for a discussion of these risks.

Undue reliance should not be placed on any forward-looking statements.

We do not have any intention or obligation to update forward-looking statements, except as required by law.

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 are presenting this morning, will be available for at least 90 days after the presentation in the investor 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 fourth quarter of 2010.

I'll begin with a brief overview of the quarter. Evan will then provide a detailed financial report and cover some of the key drivers affecting our business. I will then follow with our outlook for 2011 and the first quarter, as well as the actions we continue to take to strengthen our position in the marketplace. We will then open up the call for your questions.

During the fourth quarter Mueller Co. had very solid results. Operating income grew year over year as we saw benefits of our cost reduction actions, lower overhead cost per unit, and higher pricing. The operating income margin was 16.2%, even though we only utilized about 60% of our capacity.

We experienced manufacturing inefficiencies at U.S. Pipe as a we ramped up utilization at our receiving operations due to the closure of our North Birmingham facility, which negatively impacted our operating performance. We believe that most of these ramp-up costs and the associated inefficiencies are behind us, and we should experience the full cost savings benefits of this plant closure in 2011.

We saw positive movement in the market price for ductile iron pipe. This was the first quarter and 2010 that we had positive year-over-year pricing, and on a sequential basis our price per ton increased approximately 13%.

Anvil's performance compared favorably on a year-over-year basis as we benefited this quarter from a higher margin mix and positive growth in our addressed energy markets. Overall, the Anvil business is performing well in a down nonresidential construction market.

I will now turn the call over to Evan, who will provide more details on the fourth quarter financial results.

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

Consolidated net sales for the 2010 fourth quarter of $346.7 million decreased $28.1 million from $374.8 million for the 2009 fourth quarter.

Sales increased 1.1% excluding the 2009 fourth quarter net sales of $31.9 million from two divested Anvil businesses.

Net sales increased due to $11.2 million of higher pricing across all three businesses and $1.6 million of favorable Canadian currency exchange rates, offset by $9 million of net lower shipment volumes. U.S. Pipe was the only business that had lower shipment volumes this quarter.

Gross profit of $71.7 million in the 2010 fourth quarter increased $2.5 million from $69.2 million in the 2009 fourth quarter.

Gross profit as a percent of net sales increased to 20.7% compared to 18.5% in the prior-year period.

Gross profit increased due to $13.9 million of higher manufacturing and other cost savings and $11.2 million of higher sales pricing. These items were partially offset by $18 million of higher raw material costs.

Selling, general and administrative expenses of $56.3 million in the 2010 fourth quarter compare to $54.4 million in the 2009 fourth quarter. This increase resulted primarily from personnel related costs and additional development expenses of our Mueller Systems business. These increases were partially offset by the elimination of selling, general and administrative expenses due to the divestiture of Anvil's Canadian distribution business.

Adjusted income from operations for the 2010 fourth quarter of $15.4 million increased $600,000 from adjusted income from operations of $14.8 million for the 2009 fourth quarter. This increase was driven primarily by $13.9 million of higher manufacturing and other cost savings and $11.2 million of higher sales pricing, offset mainly by $18 million of higher raw material costs, as well as higher selling, general and administrative expenses.

Adjusted income from operations as a percent of net sales and adjusted EBITDA as a percent of net sales improved to 4.4% and 10.6%, respectively, for the 2010 fourth quarter, compared to 3.9% and 9.8%, respectively, for the 2009 fourth quarter.

Net interest expense of $20.6 million for the 2010 fourth quarter decreased $6.6 million from $27.2 million for the 2009 fourth quarter.

Net interest expense for the 2010 fourth quarter included $6.1 million related to selling interest rate swap contracts, and net interest expense for the 2009 fourth quarter included $6.3 million related to swap contracts settled during that quarter.

Excluding swap settlement costs, net interest expense of $14.5 million declined $6.4 million for the 2010 fourth quarter, compared to $20.9 million for the 2009 fourth quarter, primarily due to lower debt levels during the 2010 fourth quarter and lower effective interest rates.

The effective income tax rate for the 2010 fourth quarter was a benefit of 34% compared to the 2009 fourth quarter benefit of 37%.

The effective income tax rate for the 2010 full year was a benefit of 34.1%.

Adjusted net income per share of zero for the 2010 fourth quarter improved from the adjusted net loss per share of $0.03 for the 2009 fourth quarter.

As a reminder, there was an average of 154.6 million shares outstanding for the 2010 fourth quarter, compared to an average of 119.4 million shares outstanding for the 2009 fourth quarter.

The adjustments between reported net loss and adjusted net income are due to interest rate swap settlement costs, loss on the early extinguishment of debt, and restructuring charges.

I will now move on to segment performance.

Net sales from Mueller Co. of $163.7 million for the 2010 fourth quarter increased 3.5% or $5.6 million from $158.1 million for the 2009 fourth quarter due to $4 million of pricing, $1.5 million of favorable Canadian currency exchange rates, and higher shipment volumes.

Adjusted income from operations of $26.6 million and adjusted EBITDA of $39.1 million for the 2010 fourth quarter yielded adjusted income from operation margins of 16.2% and EBITDA margin of 23.9%. These results improved compared to adjusted income from operations of $25.4 million and adjusted EBITDA of $38.1 million for the 2009 fourth quarter.

Income from operations increased $1.2 million, primarily due to $6.2 million of lower per unit overhead costs on products sold, $4 million of higher pricing, and $3.6 million of manufacturing and other cost savings. These items were partially offset by $9.2 million of higher raw material costs and $2.9 million of higher selling, general and administrative expenses.

Net sales for U.S. Pipe to $94.9 million for the 2010 fourth quarter decreased $10.4 million from $105.3 million for the 2009 fourth quarter. Although net sales for the fourth quarter at U.S. Pipe benefited from $5.6 million of higher pricing, net sales for the quarter declined due to lower shipment volumes of $16 million.

Pricing for ductile iron pipe in the 2010 fourth quarter increased 9% on a year-over-year basis and 13% sequentially.

Adjusted loss from operations of $11.3 million and an adjusted EBITDA loss of $6.4 million for the 2010 fourth quarter compare to adjusted loss from operations of $7.1 million and an adjusted EBITDA loss of $2.6 million for the 2009 fourth quarter.

The 2010 fourth-quarter results were negatively impacted by $7.8 million of higher raw material cost, $5.7 million of higher per unit overhead costs on products sold, and $3.3 million of lower shipment volumes. These items were partially offset by higher manufacturing and other cost savings of $8.4 million and $5.6 million of higher sales price.

The process of shutting down our North Birmingham facility while simultaneously ramping up utilization in Bessemer and doubling the production at our Mini Mill created some short-term inefficiencies which reduced our net savings in the fourth quarter to about $3 million, which is about $2 million less than what we expected for the quarter.

However, since we have now cycled through this process, we believe these inefficiencies are mostly behind us.

During the fourth quarter U.S. Pipe recorded $900,000 in restructuring charges related to the North Birmingham closure and recorded $12.2 million in such charges over the entire year. We expect to record additional restructuring charges of approximately $1 million to $2 million in 2011.

Net sales at Anvil for the 2010 fourth quarter increased 10.8% or $8.6 million year-over-year to $88.1 million, excluding $31.9 million of net sales associated with the two businesses that were divested earlier this year. Total net sales were $111.4 million for the 2009 fourth quarter.

The increase was driven by $6.9 million of higher shipment volumes and $1.6 million of higher pricing.

Adjusted income from operations increased $4.4 million to $7.6 million for the 2010 fourth quarter, compared to $3.2 million for the 2009 fourth quarter.

Adjusted EBITDA increased $3.7 million to $11.5 million for the 2010 fourth quarter, compared to $7.8 million for the 2009 fourth quarter.

These increases were primarily due to $3.4 million of higher shipment volumes and a more profitable mix, $1.9 million of higher manufacturing and other cost savings, $1.6 million of higher sales pricing, and $1.4 million of lower per-unit costs on products sold.

These items were partially offset by $1 million of higher raw material costs.

Anvil's volume increased primarily due to a pickup in demand from our addressed energy market, oil and gas, and the shipment of a high-margin engineered pipe hanger order to a nuclear power plant.

Free cash flow, which is cash flow from operating activities less capital expenditures, was $15.9 million for the 2010 fourth quarter. This included payments of $14.8 million to terminate interest rate swap contracts. Free cash flow benefited from improved management of accounts receivable and inventory.

On August 26, 2010, we issued $225 million aggregate principal amount of 8.75% senior notes due 2020 and entered into a $275 million asset based credit agreement, the ABL agreement, that matures in 2015. Net proceeds from the senior notes, $49 million borrowed under the ABL agreement, and $26.3 million of cash were used to repay all of the existing debt under the 2007 credit agreement, a principal amount of $270.9 million, settle certain interest rate swap contracts using $14.8 million, and pay fees and expenses related to the credit agreements.

We reduced total debt by $48 million from September 30, 2009.

At September 30, 2010, total debt was $692.2 million and included $420 million of 7 3/8% senior subordinated notes due 2017, $221.4 million of 8.75% senior unsecured notes due 2020, $49 million drawn under the ABL agreement, and $1.8 million of other.

I will now turn the call back to Greg.

Thanks Evan. Two of our primary end markets face significant challenges in 2010, but we believe they hit bottom during the year.

For example, residential construction as measured by housing starts showed some accelerated improvement early in the year but dipped after the Federal Housing Tax Credit expired. Housing starts are now up about 4% year-over-year in September.

Nonresidential construction dropped precipitously in 2010, but more recently has begun to level off.

On a positive note, we believe that municipal spending on water infrastructure grew in 2010 year over year.

As we review 2010, we had very positive results at Mueller Co. Our Anvil business performed well in a very challenging, nonresidential construction market, and we took further actions at U.S. Pipe, which we believe will contribute to a much better performance beginning in 2011.

We also continued to integrate operational excellence initiatives throughout the organization, which are helping us to generate cost savings to offset higher expenses as well as improve working capital efficiency and generate free cash flow. For example, average working capital as a percent of net sales declined to 29.4% in 2010 versus 38.1% in 2009.

Mueller Co.'s performance improved notably in 2010, with net sales increasing 12% year-over-year, and adjusted operating income increasing 62% year-over-year, producing an adjusted EBITDA margin of 21.3% for the year.

We implemented a number of price increases during 2010, including two on valves and hydrants. We were able to maintain our pricing premium in the marketplace due to the recognized quality, customer service levels, and the lifecycle value of our products.

We realized net year-over-year cost savings of approximately $18 million as we benefited from a number of our previous actions and process improvement initiatives.

Clearly, the performance at U.S. Pipe significantly depressed the financial results of Mueller Water Products, and we understand and appreciate the focus on U.S. Pipe, given its financial performance.

I want to take a few minutes to share with you the factors that have driven its performance and the actions we have taken and are taking to move U.S. Pipe towards profitability.

We believe that U.S. Pipe has considerable long-term strategic value for Mueller Water Products. Ductile iron pipe remains the preferred pipe for water distribution systems, not only because it is better suited to the strength and pressure needs over the long term, but also because it has lower lifecycle costs and is more environmentally friendly in production, use and disposal.

More than 95% of our ductile iron pipe is made from recycled materials, and we are one of the largest providers of ductile iron pipe in North America.

U.S. Pipe's primary end markets are the residential construction and the municipal markets, both of which have been under considerable pressure the past couple of years. Ductile iron pipe is also used in nonresidential construction.

Annual housing starts have dropped from an average of 1.5 million over the last 50 years to an unprecedented low of 477,000 units in April 2009.

Considering that residential construction has historically accounted for about 50% to 60% of U.S. Pipe's net sales and dropped to about 5% of net sales in 2010, you can understand the commensurate impact the decline in housing starts has had on U.S. Pipe's net sales and profitability.

We believe for example the decline in residential construction has caused our net sales into this end market to drop over $200 million from 2008 to 2010.

Pricing of ductile iron pipe has been another recent challenge, but we have seen improvements, with average pipe prices increasing every month since February 2010 on a sequential basis. For the fourth quarter of 2010, we were up 9% year-over-year, 13% sequentially, and September's average sales price was 11% higher than what we saw in June 2010.

We've been very focused on improving our pricing and have walked away from some orders when the competitive bidding was unreasonable.

From an industry perspective, there have been recent changes materially impacting the manufacturing footprint in the United States. Over the past three years all the ductile iron pipe manufacturers have reduced capacity by either closing or idling facilities, including our closing U.S. Pipe's North Birmingham facility earlier this year, whereby reducing headcount. In aggregate, the industry footprint has declined about a third, from 12 to eight plants.

Additionally over this period, we have invested in automating a portion of our ductile iron pipe manufacturing processes, which lowers labor costs and improves production efficiency.

Prior to the closure of the North Birmingham facility, we were utilizing less than 50% of this newer capacity. We believe we will realize the full benefit of this automated operation now that we have closed operations in North Birmingham and moved a significant portion of that production into this automated operation.

During the quarter we announced a new President for U.S. Pipe, Paul Ciolino, a seasoned executive with considerable experience in the ductile iron pipe industry and established, strong relationships with end users and distributors.

U.S. Pipe has taken a number of steps over the past several years to improve its cost structure, which will allow for enhanced performance as end market demand grows. These steps include closing our Burlington facility in 2008 and North Birmingham earlier in 2010, investing in a new automated facility, and installing new leadership.

As we look to 2011, with the carryover savings from the North Birmingham closure and an expected improved pricing environment, we believe that U.S. Pipe's financial performance should be appreciably better in 2011 from 2010, even if volumes remain flat.

At Anvil in 2010 we took the necessary steps to respond to a significant decline in our primary market, which is nonresidential construction. For the year we had net cost savings of about $8 million. We were proactive in passing along raw material cost increases to the marketplace, and we've streamlined the business as we divested two of Anvil's non-core operations in the first half of the year.

Free cash flow for 2010 was $30.2 million. We continue to improve our working capital management and tightly controlled capital spending. Free cash flow was reduced by $18.3 million for the full year due to the cash used for the settlement of interest rate swap contracts.

As Evan mentioned earlier, we refinanced a portion of our debt in August 2010. This recapitalization provides an extension of maturities with no payments due under our principal agreements prior to 2015, attractive rates from a historical perspective, and some deleveraging capability.

The refinancing also reduces limitations on business operations, including acquisitions, investment, [referred to] payments and divestitures.

Finally, financial maintenance covenants have been eliminated as long as excess availability is the greater of $34 million or 12.5% of the facility amount.

For 2011 on a consolidated basis, we expect to achieve appreciably improved EBITDA performance. We do believe we will see the benefit of modest volume growth in all three businesses, as well as the benefits of higher pricing at Mueller Co. and U.S. Pipe, based on the actions we implemented in 2010.

In addition, we expect to see the carryover cost savings driven by the structural changes we made at U.S. Pipe. We estimate these savings should be between $15 million and $20 million in 2011.

At Mueller Co. we believe we will see continued growth from municipal spending on repair and replacement and expect minimal growth from residential construction, as we may see some investment in certain regions of the country.

American Water Works Association recently published state of the industry reports -- state of the industry, reports that municipalities expect to increase their capital expenditures on repair and replacement by 3% in 2011, which is the same growth rate they projected for 2010.

Water rates continue to increase, and as we have discussed in the past, a number of water systems are organized as enterprise funds which require those monies to be designated for specific use in water systems and kept separate from general operating funds of the municipalities. And clearly the need to replace our aging water infrastructure continues to intensify. There are a number of options for funding water infrastructure investment, including water rates, municipal bonds, grants and loans.

Looking to 2011, we believe all these sources remain readily available.

We also expect to benefit from carryover price realization from the two price increases on valves and hydrants and one price increase on brass service products. With the price increases implemented in 2010 on roughly 50% of our business, we expect sales pricing carryover realization of 6% to 7% in 2011.

In total, we expect higher pricing to more than offset higher raw material costs in 2011.

Finally, we expect our process improvement and cost savings initiatives will essentially offset other higher expenses that we may incur during 2011.

Turning to U.S. Pipe, we expect U.S. Pipe's overall addressed market to be essentially flat in tons in 2011. Based on input from discussions with our end users and distributors, we believe that municipalities will focus on smaller projects, and therefore we expect U.S. Pipe to see slightly different end market dynamics than we expect to see in Mueller Co.

We enter 2011 with positive pricing trends. The ductile iron pipe price that we realized in the fourth quarter of fiscal 2010 was approximately 15% higher than the average price we received for the first half of the year.

However, as we have seen in the past, pricing can be volatile. As we mentioned earlier, we expect to realize $15 million to $20 million of lower cost in 2011 related to closure of our North Birmingham facility and improved efficiencies at our Bessemer operations.

Turning to Anvil, overall we expect their markets to remain stable in 2011. We believe the nonresidential construction market will hit bottom in calendar 2010, and economists are forecasting spending to be essentially flat in 2011.

If you recall, in the first half of fiscal 2010 we had total gains of $4.6 million from businesses that were divested which were reflected in our operating income. For Anvil in 2011 we expect to generate further cost savings from our process improvement initiatives, savings from planned consolidations, and volume gains in selected market segments that should help cover this year-over-year variance.

On a consolidated basis we project significantly higher free cash flow in 2011 over 2010, benefiting from both improved operating results and continued working capital efficiency improvements.

Other key variables for 2011 --

Our corporate spending is estimated to be between $33 million and $36 million.

Depreciation and amortization is estimated to be $82 million to $84 million.

And net interest expense is estimated to be within the range of $64 million to $67 million, which includes non-cash interest expense of $8 million associated with the swap contracts we have terminated.

Our effective income tax rate is expected to be between 38% and 42%.

Capital expenditures are expected to be between $38 million and $42 million. This range includes some investment in process improvement.

Now I will provide some color on our first quarter. As we look at the first quarter for Mueller Co., of course we expect to see our typical seasonal decline. Additionally, we expect volume to decline further year-over-year due to the higher distributor inventory levels compared to the prior year as a result of the orders that were pulled forward prior to the July 1st, 2010, price increase.

In addition, our specialty large valve water treatment business is expected to be down year-over-year in the first quarter due to the timing of projects.

We expect that both of these are timing issues. We believe that the distributor inventory build is only a short-term matter, as we expect our distributors will bring down inventory levels throughout the quarter, and we believe that our water treatment business will be better on a year-over-year basis throughout the remainder of 2011.

As a result, we reduced production late in the fourth quarter and expect that will continue into the first quarter. Therefore, we expect to have higher per unit overhead costs this quarter as compared to the first quarter last year.

We continue to experience solid year-over-year price realizations and expect to more than offset higher raw material costs in the quarter.

Finally, we expect to see additional wrap-around SG&A expenses driven by our investment in our Mueller Systems business.

Overall, we expect to see lower first quarter net sales and operating income on a year-over-year basis. However, as seasonal demand increases, the distributor channel inventory balances, and production hours increase, we expect operating income and margins to substantially improve.

For the first quarter at U.S. Pipe on a year-over-year basis, we expect volume to decline. We expect this decline to come from a slight drop in market demand as well as a drop in our fourth-quarter bookings, as we passed on some orders, as we were focused on driving higher pricing.

At the operating income level we expect the benefits of higher pricing and cost savings from the closure of North Birmingham will be offset somewhat with higher raw material costs and lower volumes.

In total, we expect U.S. Pipe's operating loss to decrease year-over-year and sequentially.

For Anvil in the first quarter, excluding net sales due to the 2010 second quarter divestiture of Anvil's Canadian distribution business, we expect next sales to be essentially flat year-over-year.

As part of our ongoing cost reduction initiatives, we have begun the process to close a regional distribution center and a smaller manufacturing operation, which will be relocated into existing facilities. We expect to incur about $1 million in expenses this quarter associated with these closures that are not eligible for restructuring accounting treatment.

However, throughout the remainder of the year we expect to benefit by about $1.5 million from the lower costs from these relocations.

During the quarter we expect that these closure costs will be offset with other cost savings.

As a reminder, during the first quarter of 2009 Anvil recorded a $1.6 million gain associated with the divestiture of its non-core electrical fittings and couplings business. Therefore, we expect Anvil's operating income will be down year over year, given the gain recorded in the first quarter of 2010.

Overall, we believe net sales will decline on a year-over-year basis, primarily due to the elimination of first-quarter 2010 sales of about $24 million from Anvil's Canadian distribution business. We believe that income from operations will decline on a year-over-year basis, primarily due to the volume decline at Mueller Co. and the gain of $1.6 million in first quarter of 2010 from the sale of one of Anvil's non-core businesses.

In fiscal 2011, even though we expect first-quarter operating income will likely be modestly down year-over-year, we expect significant operating income improvement thereafter.

We expect to see revenue growth and overall continuing improvement at Mueller Co.

At U.S. Pipe we expect to see better pricing, carryover cost savings, and improved performance.

And Anvil's end markets appear to have stabilized.

Therefore, even with modest revenue growth in 2011, we think our EBITDA in 2011 can grow significantly.

We continue to believe that the water infrastructure market holds considerable potential, and we're very confident in the future, given our leadership position. We see steady growth in 2011, and overall improvement in our financial performance, but don't anticipate accelerated revenue growth until we see a rebound in the housing market.

I'm proud of our employees and how they have performed in very challenging times with their focus on producing quality products and delivering exceptional customer service, helping us generate free cash flow year after year, even through these tough economic cycles.

With that, I will open it up to questions.

(Operator Instructions) Seth Yeager.

I'm with Jefferies & Company. Good morning and thanks for taking my questions.

So with some of the puts and takes for the U.S. Pipe division, you said operating losses would improve sequentially, and it looks like you guys have $15 million or $20 million worth of cost savings to flow through in fiscal year 2011. So with some of the pricing improvements and volumes being essentially flat, do you anticipate that over the course of the entire year to be roughly EBITDA neutral then at U.S. Pipe?

Seth, that's a good question. We think that we will see significant improvement, but based on how we see the various variables that impact performance playing out the next 12 months, we don't believe that Pipe will be profitable on an [EBIT] basis.

Today we believe that volume demand will be essentially flat year-over-year. We expect that scrap steel prices, our largest cost input, will remain flat with current levels, but the current levels are approximately 18% to 20% higher than what we saw during the first half of fiscal year 2010.

As we discussed earlier, pricing steadily increased throughout the second half of fiscal 2010. Current price is about 15% higher than what we saw in the first half of fiscal year 2010.

So if we can hold close to the current price level and the other variables play out as I just described, we did think that Pipe can break even at the EBITDA level.

Okay, that's great to hear. With the swap agreements, were those closed out completely in the fourth quarter?

I'll have Evan address that.

Yes, we have closed all of the swap contracts that we had outstanding, so those are all gone. We've settled with cash and paid about $14.8 million in the fourth quarter. But based upon certain accounting treatment, it was determined that the swap contracts were originally matched against a series of future interest payments as opposed to a specific tranche of debt, so we will have about $8 million of non-cash interest expense in 2011 associated with the swaps, but that is non-cash, and as I mentioned earlier, all swap contracts have been canceled and paid off.

Okay. Then I guess kind of following up on that, a final question -- so I guess all else equal, improvement in EBITDA, stripping out the non-cash interest expense, it looks like you guys, with your CapEx guidance, will be generating -- let's just say hypothetically -- close to $50 million of free cash flow. I guess what are your priorities as far as allocating that free cash flow over the course of the next year?

That's a good question. As we have stated for the last 18 months, one of our primary focuses continues to be on reducing debt, and with the improvements that we expect to see in our operating income and the cash that we generate obviously, our EBITDA to net debt, those leverage ratios (technical difficulty) [will come] down. But clearly I would say, as we're sitting here today, that our number one objective still remains to reduce debt.

Do you have a target for leverage?

Yes. I've said many, many times that we have a target to be below 3 times but would expect that we might be above 2 times because we do think there's opportunities for us to grow our products, our services and to grow geographically. So I think when we see our leverage ratio below 3 times, we would feel a lot more comfortable in looking at acquisitions.

Brent Thielman.

Good morning -- D.A. Davidson.

Greg, you talked about some of the competitive pricing pressures out there, I think particularly at -- or I guess in terms of pricing improvement -- or pricing pressure -- excuse me -- [post] quarter. Are you still continuing to see positive trends in terms of pipe pricing into this first quarter?

It is really one that it varies day-to-day. But I would say as we sit here today that we haven't seen any real variation from the prices that we were seeing in August and September, so I would say that overall we're encouraged with the price level.

Okay. And then I guess if you backed out -- and I don't know if you can do this -- but if you backed out some of the positive impact our stimulus related sales last year, do you think you would've seen growth in volumes at U.S. Pipe?

That's a great question. And our overall hypothesis has been that what we ended up seeing in 2010 were projects that would have been done anyway. We think all the stimulus -- the stimulus monies were -- just replaced what the municipalities would have generated and would've had to pay from the funds that they generated internally -- or went to the bond market. So we think we would have, but only because we saw in early 2009 it dropped off so significantly I think as the overall market just became frozen due to the uncertainty over the stimulus.

So we believe -- as we gave the guidance for 2011, we think that for pipe it is going to be -- as we talked about 2011, we think that pipe demand is essentially going to be flat with 2010.

I think yes, we did see some growth in 2010 due to the stimulus, but I think it was due probably more to the fall-off we saw in the first half of 2009 when that market just seemed to be frozen.

Jonathan Ellis.

This is [Ani Anora] calling on behalf of Jonathan Ellis from Bank of America Merrill Lynch.

And my first question will be, how much of the volume decline in Mueller division was tied to a pull-in effect in 3Q from the price increases, versus a slowdown in municipal spending?

It's tough for us to get a absolute handle on that, but we believe that most of it was related to the pull-in. Our distributors reported that they had a slow August, but then again, they had a -- they said they had a significant pickup year-over-year in September. So as we look at it, there may have been a little bit of market slowdown, because in the second and third quarter on a year-over-year basis we saw pretty significant growth both in terms of -- in our bookings and shipments.

When we look at the fourth quarter, we believe that most of that slowdown was related to the pull-forward, but we haven't discounted that on a year-over-year basis there just may have been a little softness in the market, but very difficult for us to be able to determine that exactly.

Okay, that's helpful. And moving on to price, how much of the 10% price increase in the U.S. Pipe division as of the beginning of the fourth quarter has been accepted by the customers?

Well, as we said, if you look at -- and I don't know if I'll address your answer completely, but on a year-over-year basis, the pricing that we did achieve in Q4, we were up 9.3% on a year-over-year basis on our average price per ton.

So I think as we look at it -- and we have been saying all along -- given what we saw through most of fiscal year 2010 in terms of an increase in scrap steel costs and some other material increases, we thought the price increase was absolutely required, and I think that at least the feedback on our fourth-quarter results, as I said, on a year-over-year basis I think that reinforces that the market did accept that price increase.

And speaking of scrap prices, what are your expectations for 2011 in terms of pricing and buying needs?

As I said a little earlier, I think when I was answering Seth's questions, right now the different forecasts we're looking at are saying that scrap steel prices could be essentially flat in 2011. So that is pretty much what we're looking at right now.

Sorry I missed that. And then for the Anvil division, in the fourth quarter was there a one-off project that drove volume growth there? And (multiple speakers) if you can help me understand, are there any mix issues as well that (multiple speakers) profitability?

Yes, there was. We mentioned earlier that we did have -- we have a small business where we manufacture -- a small part of our overall sales -- where we manufactured pipe hangers or engineered hangers that go into primarily power plant applications, and we did have a very profitable shipment to a nuclear plant in the fourth quarter. So that certainly contributed to a much richer mix.

But if you look at our volume, I think that any increase in volume was more related to some positive demand that we saw in our addressed energy market and the oil and gas patch.

Thank you very much.

(Operator Instructions)

Well, seeing that there are no more calls, thank you very much for joining us on the call today, and -- I think we may have one more question. Sorry, several.

Excuse me sir. We do have a question from --

Yes, please. We'll take -- we certainly -- we have time for a few more questions.

Anthony Venturino.

Federated Investors. Thanks for taking the call. Sorry I jumped in there in the end.

But just wanted to get a little bit more color. In pipe you were talking about not really chasing deals. How is this affecting your share, if at all? You said it's been doing okay, it is day to day. But definitely if you're not chasing deals, that there's something out there. I just wonder if you can give more color on that.

Yes. I think when we look at our fourth-quarter results that we did see some market share erosion in the fourth quarter. I would say it was probably controlled erosion, as we mentioned that, one, we were focusing on price; two, we were also starting up -- we had closed a major facility in April. We were ramping up production at the existing -- at our existing facility. And we were very cognizant perhaps not over-extending ourself and seeing our customer service drop, substantially drop.

So I think when we look overall, we did see some share erosion, but nothing that we would say is -- we're overly concerned about at this time.

Okay. And is that the -- is the plant movement, is that all completed?

Yes, we've completed that, and as we've said in the prepared comments that we believe that most of the inefficiencies that we saw in the fourth quarter are behind us, and right now I think that we're very close to operating the existing facilities the way we expect and want to operate them.

Then just one more in regard to that, you said you were at less than 50%, if I remember correctly, at the new plant. With the new volume that is coming on now, what kind of capacities do you see going forward? And then how do we expect margin ramp with that?

When you look at the fourth quarter, we operated actually about 63%, 64% capacity at our -- what we would say our overall capacity is at our plant business.

When we were mentioning that 50%, we were talking more specifically that prior to this closure that we were not enabling ourselves -- we were not really seeing the full benefits of the investments we made in our automated processes because we were under-utilizing that capacity.

So we for the fourth quarter -- no, we were well above 50% capacity utilization.

And as we ramp up, as we said, we think that probably one of our biggest contributions to year-over-year improvement at our pipe business is the $15 million to $20 million we think of carryover savings that will see. That certainly is a combination of eliminating fixed costs but also the benefits of increased overhead absorption by eliminating our overall capacity. So in that $15 million to $20 million number that we gave, that encompasses also what we expect to see from the benefits of increased capacity utilization.

So all of that $15 million to $20 million, it should be in the COGS line then?

Yes.

Kevin Maczka.

BB&T Capital Markets.

Greg, I just want to clarify something that I thought I heard you say in terms of the topline expectations for fiscal 2011. The 6% to 7% price increases that you mentioned, is that relevant to the entire company --

No.

-- or just some certain product lines?

No. Sorry if I wasn't clear. I was referring more in -- I was just referring strictly to Mueller Co., and I said on about 50% of our products.

Got it, clear.

When I say 50% of our products, I mean 50% of our revenues.

Within the Mueller Co. segment?

Within that, and that was Mueller Co. Yes.

And then switching gears over to the SG&A line, I just wanted to ask a question there. That's been somewhat stable in the last two quarters. With your comments about volumes and pricing increasing into next year, should that be relatively stable as we go forward throughout 2011 as well?

We will see some pickup in SG&A. For instance, if you recall last year that we suspended our 401(k) plan. We will start -- on a year-over-year basis, we will start having I would say unfavorable comparisons on that line that, as we see -- we did mention that we expect to at least see a modest volume growth across all three businesses. With that volume growth we would expect that some of our selling expenses on the commission side would increase.

So when we look at year over year, there are no major expansions planned, but I think we could see from just pure inflation, the 401(k) match kicking in on a year-over-year basis, and with volume growth, some slightly higher selling expenses, primarily driven by incentive commissions, we could see I think slightly higher SG&A expense.

Okay. Just finally, I was wondering if you could touch on the funding environment in the municipal market in general again. I know you touched on the large need that is always there and some of the funding avenues you can -- or you can see funding, which is not always there, but can you just give a little more color on is that improving that situation at all?

Well, it is when we look -- and again, that typically the water systems in municipalities rely a lot less on tax receipts. So as we said that on water rate increases, if you look at the last two years, reports that we've seen have said that water rate increases have increased on average about 9% per year for the last couple of years. And so I think that is certainly one force.

The second, when we look at municipal bonds, municipal bonds are -- I think the issuances are up slightly. I think again when we look at this year that we've seen some data that indicates as much as 20% of those bonds are Build America Bonds, so I think that the utilities are taking advantage of those options. And so when we look at -- we think that -- and we look at historical rates for bonds, I think they're very, very attractive.

So we think that given the traditional sources of funding for water utilities, that it is an environment that should contribute to some year-over-year growth.

We did reference the recent American Water Works Association survey that they publish this time every year, that they said they were calling for about a 3% growth this year. That is the same as they were calling for last year.

And even if we look at state revolving funds, they're -- from the best data we can look at, the state revolving funds that are available for drinking water are about flat year over year, not counting the stimulus. So we have not seen any deterioration there.

So certainly way think the municipal budgets will be under some constraints and under some pressure, but we think the water side is much better positioned than other parts of that budget.

Okay, great. Thank you.

That was our final question, sir.

Well, okay. With that question -- again, we thank you for your interest in Mueller Water Products, and this will conclude our call.

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