Mueller Water Products Inc (MWA) 2011 Q1 法說會逐字稿

Welcome, and thank you for holding. I would like to remind all parties that your lines are on a listen-only mode until the question-and-answer session of today's conference call.

I will now turn the call over to Miss Martie Zakas. Ma'am, you may begin.

Very good. Thank you. Good morning, everyone, and welcome to Mueller Water Products first quarter fiscal 2011 conference call. We issued our press release reporting results of operation for the quarter-ended December 31, 2010 yesterday afternoon. A copy of it is available on our website muellerwaterproducts.com.

Mueller Water Products had 155.3 million shares outstanding at December 31, 2010. Discussing the first quarters results this morning are Greg Hyland, our Chairman, President & CEO; and Evan Hart, our CFO. This morning's call is being recorded and webcast live on the internet. We have also posted slides on our website that you should use. The slides related to this morning's call are available to help illustrate the quarters results as well as to address our Safe Harbor disclosure statement and our non-GAAP disclosure requirements.

At this time please refer to slide 2.This slide identifies certain non-GAAP financial measures that we reference in our press release, on our slides and on this call and discloses the reasons why we believe that these measures provide useful information to investors. As required by Regulation G, reconciliation between non-GAAP and GAAP financial measures are included in the supplemental information within our press release and on our website.

Slide 3 is our Safe Harbor disclosure statement addressing forward-looking statements. This slide includes cautionary statements identifying important factors that could cause actual results to differ materially from those included in the forward-looking statements, as well as specific examples of forward-looking statements. Please take note of the information provided on slides 2 and 3 in their entirety.

During this call, all references to a specific year or quarter refer to our fiscal years which end September 30, unless specified otherwise. The archived webcast and the corresponding slides will be available for at least 90 days in the Investor Relations section of our website. 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 first quarter of 2011.

I will 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 the second quarter and comments for the second half of the fiscal year 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.

Overall, our financial results for the first quarter were about as we expected. Financial results of both US Pipe, and Anvil improved on a year-over-year basis, and as anticipated, volume at Mueller Company was down. We believe volume was down at Mueller Company primarily due to higher inventory levels at our distributors coming into the quarter, especially as we enter the non-construction season, coupled with the uncertainty in the municipal market. We continue to benefit from manufacturing and other cost reduction actions at US Pipe. Higher sales prices benefited all three of our business segments in the first quarter which offset increased raw material costs.

In 2011, we expect to continue to realize ongoing benefits from operational savings and reduced fixed cost associated with our continuous improvement initiatives in addition to our US Pipe plant closure in April 2010. With rising raw material costs and market uncertainty, specifically within the municipal market, we remain cautious with our near-term outlook. As we get closer to the second half of our year, which coincides with the construction season, we anticipate that we will see an improvement in volume on a year-over-year basis.

I will now turn the call over to Evan who will provide more details on the first quarters financial results.

Good morning. I will first review the consolidated results and then discuss segment performance. Consolidated net sales for the 2011 first quarter of $287.6 million decreased $25.5 million, from $313.1 million for the 2010 first quarter. Net sales were essentially flat for the first quarter, excluding the 2010 first quarter net sales of $24.9 million from two divested Anvil businesses. Net sales benefited from $12.8 million due to higher prices across all three business segments and $700,000 of favorable Canadian currency exchange rates.

However, they were reduced by $14.1 million of lower shipment volumes. Consolidated gross profit of $49.6 million for the 2011 first quarter decreased $6.3 million, from $55.9 million for the 2010 first quarter. Gross profit, as a percentage of net sales, was 17.2% in the 2011 first quarter, compared to 17.9% in the prior year period. Gross profit increased $13.7 million due to manufacturing and other cost savings and $12.8 million due to higher sales prices. These factors were more than offset by $10 million of higher raw material costs, $9.2 million of higher per unit overhead costs due to lower production, $6.3 million of over shipment volumes and the gross profit from the two divested Anvil businesses.

Consolidated Selling, General & Administrative Expenses of $52 million for the 2011 first quarter compared with $55.2 million for the 2010 first quarter. Excluding prior-year Selling, General & Administrative Expenses and a gain related to Anvil's divested businesses, Selling, General & Administrative expenses decreased $200,000. The 2010 first quarter included a $1.6 million gain from the Anvil business sold during that quarter. Adjusted loss from operations for the 2011 first quarter of $2.4 million decreased $3.1 million from adjusted income from operations of $700,000 for the 2010 first quarter. This decrease was due to $10 million of higher raw material costs, $9.2 million of higher per unit overhead costs due to lower production, $6.3 million of lower shipment volumes and the $1.6 million prior-year gain from the sale of one of Anvil's businesses.

These decreases were partially offset by benefits of manufacturing and other cost savings of $13.7 million and higher sale prices of $12.8 million. Adjusted EBITDA as a percent of net sales for the 2011 first quarter was 6.2%, compared to the 2010 first quarter of 6.9%. Net interest expense for the 2011 first quarter of $15.9 million decreased $900,000 compared to the 2010 first quarter. The 2011 first quarter included $1.9 million of non-cash cost related to interest rate swap contracts. Although these contracts were terminated prior to 2011, the related costs are being amortized over the original term of the swap contracts. Excluding the $1.9 million of non-cash interest rate swap costs, interest expense declined due to lower debt levels and a lower effective interest rate during the 2011 first quarter.

The effective income tax rate for the 2011 first quarter was a benefit of 40.1%, compared to the 2010 first quarter benefit of 35.2%. The higher rate in 2011 resulted in an additional benefit of about $1 million, primarily related to adjustments of uncertain tax positions. Adjusted net loss per share of $0.06 for the 2011 first quarter improved from an adjusted net loss per share of $0.07 for the 2010 first quarter. These adjusted results exclude after-tax restructuring charges of $1.2 million and after-tax non-cash interest rate swap costs of $1.2 million. There is an average of 154.9 million shares outstanding for the 2011 first quarter, compared to an average of 154 million shares outstanding for the 2010 first quarter.

I will now move on to segment performance. Net sales for Mueller Company for the 2011 first quarter of $129.8 million decreased 2.6%, or $3.5 million from $133.3 million for the 2010 first quarter. Net sales for the quarter benefited from $3.7 million of higher prices and $700,000 due to favorable Canadian currency exchange rates. These items were more than offset by $7.9 million of lower shipment volumes as core product unit shipments declined about 7% on a year-over-year basis. We saw some softness in our end markets, which we will discuss later, as well as higher distributor inventory levels coming into the first quarter when distributors pre-bought ahead of the July 1 price increase.

2011 first quarter adjusted income from operations of $8.8 million was 6.8% of net sales and adjusted EBITDA of $20.5 million was 15.8% of net sales. Prior-year adjusted income from operations was $16 million, yielding 12% of net sales and adjusted EBITDA was $28.4 million, yielding 21.3% of net sales. Adjusted income from operations decreased $7.2 million, primarily due to $5.4 million of higher per unit overhead cost due to lower production, $4 million of higher raw material cost and $3 million of lower shipment volumes. These items were partially offset by the benefits of $3.7 million of higher sales prices and $3.2 million of manufacturing and other cost savings.

Net sales for US Pipe for the 2011 first quarter of $74.4 million decreased $5.3 million from $79.7 million for the 2010 first quarter. Net sales increased $6.4 million due to higher sales prices, but this was more than offset by $11.7 million of over shipment volumes. Pricing per ton for ductile iron pipe for the 2011 first quarter increased 19% on a year-over-year basis and 4%, sequentially. Even with volume declines, US Pipe performance improved year-over-year largely as a result of management actions to reduce fixed costs and higher sales prices. Adjusted loss from operations of $9.4 million and adjusted EBITDA loss of $4.9 million for the 2011 first quarter improved from an a adjusted loss from operations of $11.9 million and an adjusted EBITDA loss of $7.5 million for the 2010 first quarter.

The 2011 first quarter benefited from $7.5 million of manufacturing and other cost savings and $6.4 million of higher sales prices. These items were partially offset by $4.2 million of higher costs due to lower production, $3.7 million of lower shipment volumes and $3.2 million of higher raw material costs. The cost savings included benefits from closing our North Birmingham facility during 2010. We still anticipate cost savings in the range of $15 million to $20 million in 2011, associated with the closure of North Birmingham. Anvil's 2011 first quarter net sales increased 10.9% to $83.4 million over the 2010 first quarter, excluding $24.9 million of net sales from the divested businesses.

Net sales increased $5.5 million, primarily due to higher shipment volumes as we saw an improvement across our Mechanical, Fire Protection and Energy markets. Anvil also benefited from $2.7 million due to higher prices as we implemented a number of price increases throughout 2010. Adjusted income from operations increased $2 million to $6.5 million for the 2011 first quarter, compared to $4.5 million for the 2010 first quarter. Adjusted income from operations increased $3 million due to manufacturing and other cost savings and $2.7 million from higher sales prices. These items were partially offset by $2.8 million of higher raw material costs.

The 2010 first quarter included a gain of $1.6 million from the sale of a business during that quarter. Adjusted EBITDA increased $1.8 million to $10.2 million, or 12.2% of net sales for the 2011 first quarter, compared to $8.4 million, or 8.4% of net sales for the 2010 first quarter. Free cash flow, which is cash flow from operating activities less capital expenditures, was negative $1.2 million for the 2011 first quarter, compared to positive $51.4 million for the 2010 first quarter. Although free cash flow declined year-over-year, this was due primarily to the timing of cash collections from customers and an income tax refund of $26.7 million in the 2010 first quarter.

For example, days of sales outstanding in the 2010 first quarter where much lower than the historical average. On December 31, 2010, total debt was $692.5 million and included $420 million of seven and three-eighths percent senior subordinated notes due 2017, $221.5 million of eight and three-quarter percent senior unsecured notes due 2020, $49 million drawn under our asset-based credit agreement and $2 million of other. Next debt at the end of the first quarter was $620.6 million.

I will now turn to call back to Greg.

Thanks, Evan. Evan detailed our first quarter financial performance and has provided an analysis of our results. I will now discuss our outlook for the second quarter and the balance of the year, highlighting some of the market trends and key drivers affecting our business. I will first discuss Mueller Company. For the second quarter, we expect to continue to see the benefits of the price increases implemented last year. Within our end markets, we have seen little change with residential construction and believe that municipalities, at this time, are not increasing their capital budget due to perceived uncertainty in the municipal market place, which we will discuss later.

One of the challenges we currently face is that of rising raw material costs. The price for brass ingot was up 33% for the first quarter year-over-year, which was at it highest point since 2008. The purchase price of scrap steel has increased over $120 per ton from October to January, and as of January is 40% higher than this time last year. As a result of these rising raw material costs, Mueller Company announced a 7% price increase on valves and hydrants and an 8% increase on brass service products, both effective February 18. Our competitors have also announced price increases on their products. In total, we expect a modest increase in net sales in the second quarter on a year-over-year basis, primarily due to higher prices and our expectation that our distributors will place orders in advance of the February 18 price increases, just as they did in advance of last January's price increase.

At Mueller Company for the second quarter, while we expect higher raw material costs, we expect higher sales prices to at least offset the increase in raw material costs. As a reminder, we use the first in/first out method of accounting. Therefore, higher purchase costs of raw materials will flow through our cost of goods sold on a lagged basis. We also expect to see the impact of higher per unit overhead costs in the second quarter due to lower production on a year-over-year basis in the first quarter. These cost increases are expected to be partially offset by our continuous cost savings programs. Taking all of these items into account, we expect that Mueller Company's adjusted operating income will be comparable to the prior-year.

Turning to US Pipe for the second quarter, as mentioned previously, pricing on ductile iron pipe improved nicely in the first quarter, when we expect to see an even larger impact from pricing year-over-year for the second quarter as price per ton reached it's lowest point in the second quarter last year. For example, ductile iron pipe pricing for the 2011 first quarter was about 24% higher in the second quarter of 2010. However, we expect that due to our lower orders in 2011 first quarter, our shipment volumes will be below last year's levels. Year-over-year booking units for US Pipe in the first quarter declined about 35%. We believe there are two primary factors that impacted the year-over-year declines in the first quarter. First, in the 2010 first quarter, we were beginning to see orders that were driven by stimulus funding. As you recall, all stimulus-related orders had to be under contract by mid-February 2010, or municipalities would lose the funding.

Secondly, we also believe we had seen some slowdown in activity due to the uncertainty municipalities faced during the quarter. Overall, we believe net sales will be comparable to last year, due to the benefits of higher prices being offset by volume decline. US Pipe is also experiencing similar increases in the purchase price of scrap steel, with costs up substantially year-over-year and since October. To offset these higher scrap steel costs, in January, we announced a price increase for ductile iron pipe and our competitors announced price increases, as well.

In the second quarter, we expect an improvement in price, the cost savings from the North Birmingham closure and other cost savings initiatives will more than offset the increase from raw material costs, costs associated with lower production in the first quarter and lower shipment volumes. We expect the adjusted operating loss at US Pipe be greater in the second quarter than in the first, which is our typical pattern due to the seasonal nature of this business. Notably, we expect our performance will improve more in the second quarter on a year-over-year basis than it did in the first quarter as a result of these initiatives.

Turning now to Anvil. In the second quarter we expect to benefit modestly from pricing. We also expect to see a slight volume growth over the prior-year as the nonresidential market slowly begins to improve, as well as continued growth from the oil and gas market. As a result of these factors, we expect net sales to improve on a year-over-year basis and to be in line with the first quarters net sales. We expect adjusted operating income to be down slightly to last year as the benefit of cost savings and volume increases will be modestly offset by the $3.1 million gain on the sale of the divested business included in last year's results.

On a consolidated basis for the second quarter, we believe net sales will increase on a year-over-year basis, attributable primarily to higher pricing at Mueller Company and US Pipe. We expect higher sales pricing and lower manufacturing and other cost savings will more than offset higher raw material costs and higher per unit overhead costs due to lower production. Therefore, we believe our adjusted loss from operations will improve and be less on a year-over-year basis.

Now, I will provide some color on our second-half outlook. Spending growth on water infrastructure by municipalities appears to have paused which we believe is due to perceived uncertainty around both funding availability and financing costs. For example, towards the end of calendar 2010, some municipalities were hopeful that there would be a another federal stimulus program during the last Congress and may have delayed spending in anticipation of receiving some of those funds. Additionally, new stories about municipalities discussing growing credit risks and unstable yields have increased. Furthermore, there have been recent news stories about possible legislation that would permit states to declare bankruptcy. Our sense is that as these discussions and proposals garner headlines, it is causing this near-term pause in spending growth in the municipal water market.

Historically, municipalities and, particularly, issues of municipal bonds for water projects have been very stable. There are certain characteristics of municipal water issuers that create the case that the water sector has a more stable outlook. A recent Fitz Report discussing credit quality of water bond issuers, site factors such as the essentiality of water, the local rate setting ability and monopoly status which help to shield this sector from economic factors. The reality of the condition of our nation's water infrastructure remains the same and repair and replacement remains critical. As we move closer to the construction season, we will have a better sense of how municipalities will respond in calendar 2011. But we expect that over the long-term, municipalities will continue the trend of focusing on the needs of their water infrastructure system and the need to raise capital for their systems. The municipal bond market remains open and available.

As we discussed in our last conference call, we believe we will see continued growth from municipal spending on repair and replacement and minimal growth on residential construction this year. We believe there could be some pent-up demand in the market for any projects that might have been delayed due to the uncertainty surrounding a second stimulus package as well as the municipal bond market. As we believe distributor inventory levels normalize throughout the first quarter, we could see greater-than-normal seasonality in the second half of the year. This outlook is very dependent upon municipal spending volume increases on a year-over-year basis during the construction season.

At Mueller Company, the price increases implemented late last year, plus the price increase effective mid-February and the additional volume we expect from pent-up demand should drive net sales higher in the second half on a year-over-year basis. We believe that our market share has remained stable. We expanded our ability to help municipalities rebuild North American's aging water infrastructure with the acquisition in December of Echologics. Echologics is a leader in water infrastructure diagnostic technology for water loss management, leak detection and pipe condition assessment. With Echologics, we can now help municipalities identify leaks and potential leaks and assess the overall condition of their piping system.

We recently were awarded a contract to oversee the water loss management and water distribution pipe integrity assessment for the City of New Orleans. This contract includes leak detection, pipe condition assessment and water meter calibration and maintenance. We also continue to invest in Mueller Systems, our advanced metering infrastructure business and expand our portfolio of smart infrastructure offerings. The latest enhancements to our portfolio is an agreement with Landison Gear. The agreement leverages Landison Gear's Energy Management Systems and expertise with Mueller System's Innovative Water Management Technologies and addresses the needs of utilities that manage both water and electric services. Under the terms of the agreement, utilities that manage both water and electric services will be able to deploy Landison Gear electric meters and Mueller's System water meters in an end-to-end solution.

We were recently awarded a more than $4 million contract with the City of Port Angeles, Washington to utilize our AMI system and install our water meters and Landison Gears electric meters as part of the City's advanced metering infrastructure initiative. We also expanded our customer base in North Carolina with a new engagement with Winston-Salem Forsyth County, the third-largest water system in the state. Through Mueller Systems and Echologics, we are leveraging the strength of the Mueller brand and sales force. Our reputation for safety, quality and service and our customer and end-user relationships, Mueller is starting to bring intelligent water technology to existing infrastructure systems by providing the diagnostic tools and technologies increasingly needed by municipalities to more efficiently manage their systems. These businesses represent a small portion of our current revenue, but they expand and diversify our products and service offerings.

We are excited about the long-term growth opportunities in Smart Water infrastructure and we continue to invest in our sales force, engineering and R&D to meet the growing need for intelligent water management solutions. As we look out to the second half of the year for Mueller Company's operating income, we expect our price increases, shipment volumes and manufacturing and other cost savings to more than offset higher raw material costs and other higher expenses we may incur during 2011 on a year-over-year basis.

Turning to US Pipe. We expect to see end market conditions comparable to Mueller Company with improved year-over-year pricing and the potential of pent-up demand driving higher year-over-year net sales in the second half of the year. The key drivers for adjusted operating income will be the impact of raw material costs, pricing, volume and manufacturing and other cost savings initiatives. We are on track to achieve the expected cost savings from the closure of our North Birmingham facility. We also expect volumes for the second half of the year will be at least flat to last year and for pricing to least cover higher raw material costs, which should lead to substantially improved operating performance for the full year.

I will now turn to Anvil. We continue to see signs that the nonresidential market is stabilizing. For example, the architectural billings index for December was above 50 for the second consecutive month, and the index is at it's highest point since November 2007. Also, demand for our energy market products, which represents about 15% of Anvil's net sales continues to increase. We intend to cover any raw material cost increases with higher pricing. The improving nonresidential environment indicates some moderate improvement in net sales in our second half of the year. As a reminder, Anvil experiences slight seasonality, but not nearly to the same sense as the water infrastructure businesses.

On a consolidated basis, we project higher free cash flow for the full-year of 2011 compared to 2010, reflecting both improved operating results and continue working capital efficiency improvements. For example, inventory turns for the 12 months ended December 31 improved about a full turn from the comparable prior-year period. As further indication of our improved working capital efficiency, average trailing 12 month working capital as a percent of net sales at the end of the first quarter improved over 700 basis points from a year ago. Other key variables for 2011 are corporate spending is estimated to be between $33 million to $36 million. Depreciation and amortization is estimated to be $82 million to $84 million. And net interest expense is estimated to be between $64 million and $67 million, which, as a reminder, 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. We continue to believe that the water infrastructure market holds considerable potential and we are very confident in the future given our leadership position as well as opportunity to bring infrastructure diagnostic technology and AMI Solutions to our end markets.

With that, I will open it up to questions.

Thank you. (Operator Instructions)

Our first question today comes from Kevin Maczka. Your line is open and please state your company name.

Kevin Maczka, BB&T Capital Markets.Good morning.

Good morning, Kevin.

Good morning.

Greg, I may have missed something here, but just going back to your comment on the municipal environment, in general. I think in the past you have downplayed it somewhat and talked about water rates and other sources of funding that are much more stable and not pressured like the municipal budgets are. But it sounds like you are describing a situation now where the outlook from municipal, in general, is worse. I just want to square that with your comment about greater seasonality and pent-up demand in the second half. Is your outlook in those markets worse now than it was a quarter a go?

Kevin, there is no question, that the municipal market I think is currently cloudy. However, I would say we have no input to suggest that municipal water infrastructure demand will drop on a year-over-year basis. When we look at the internal studies we have conducted, we have surveyed a number of our municipal customers about their infrastructure spending plan, as well as the results of the external surveys we have seen, all conclude that spending will be at least equal to last year.

But when we look at it, the difference between - - I think the difference between what we have seen from our internal studies and the external studies is the level of growth that each predicts. Our extrapolation is that it will be modest. That is pretty consistent with what we've said on our call last quarter. So, when we look at it, we believe the demand will be down in the first half of our fiscal year. We believe there are a number of reasons why it will be down. I think the first, if you look at a year-over-year basis, the demand was pushed into late 2009 because we think, because of the pause in early 2009 because of all of the stimulus discussion. But we actually saw a spike in our first quarter last year in demand and shipments, especially in our Mueller business.

Secondly, last year we began to see orders and began shipping stimulus-funded projects in the first half of last year. I think the other variable that's impacting the timing this year is distributor inventory levels for Mueller products. We implemented two price increases on valves and hydrants within first five months of last year. Each time distributors placed orders in advance of the price increase. We think that as we enter the first quarter of 2011, distributors had more than enough inventory. We believe that most of our distributor's inventory are at normalized level. So as we enter the construction season, we think they will need to increase inventories.

Finally, and let's get back to the point that you made in our prepared comments. We do believe that municipalities have paused the last several months, given the uncertainty and even the turmoil relative to financing alternatives and their overall financing status. We believe this will settle down for the very same reasons that you cited that we have mentioned in the past, for water projects. Obviously, we are stringing together a number of variables to drive our hypothesis. Again, I would say that it is somewhat cloudy at this time. However, I think that we continue to believe, as we did in our call last quarter, that when we get into the second half of the year, overall, we will still see a modest increase in municipal spending on water infrastructure, repair and replacement.

Okay. Greg, if I could switch gears to US Pipe and just ask you to square some comments that you made there, as well. The orders are down 35% in the quarter, but you are still expecting flat volumes for the year, and maybe there is a pent-up demand situation in the back half. Can you give a little more color around that dynamic?

Yes. When you look on a year-over-year basis, and if you recall, a year ago when we were talking, our quotation activity, and conversely, our order activity, took a significant spike late in the fourth quarter of 2009 and in the first quarter of 2010. In fact, I think, if I recall, that we almost bid on over 200,000 tons in the first quarter of 2010 and over a-third of that was ARRA bids. So we were really seeing a pike at this time last year. A lot of the projects supported by ARRA funding. And we were seeing it, primarily, on the order front, but even somewhat, very slightly on the shipment front. As I mentioned in our prepared comments, that on the ARRA funding, it was all those contracts had to be placed - - at least the contracts had to be placed by mid-February of 2010 in order to be able to receive that funding. So we saw a real flurry of activity, especially on the order front this time last year.

I think that when we actually got into our second half of fiscal 2010, we saw a pretty good drop off in order activity in the second half of the year. We saw some very unusual seasonal trends in pipe last year, especially on the order front, versus what we traditionally see. I think that this year we expect, especially with the weather we have been seeing, we expect it will be a more traditional seasonality and even more backend loading. That is our hypothesis on why we think that there is a reasonable chance that we will see - - still see flat volume on a year-over-year basis at pipe.

Okay, Greg, thank you.

Thanks.

Our next question comes from Jerry Revich. Your line is open, and please state your company name.

Hi. Good morning. It is Goldman Sachs.

Good morning, Jerry.

Good morning.

Greg, can you say more bout the nature of the restructuring charges you took in the quarter and what the pay back period you expect?Also, are there additional restructuring opportunities that we should think about in future quarters, or are the cost saving initiatives you have been focused on roughly behind us at this point? Sure. Evan, why don't you cover the restructuring charges?

Yes. The restructuring charges in the quarter were all related - - mostly related to our North Birmingham closure last April. We indicated on the last that we would see somewhere between $1million and $2 million in 2011 relating to the finalization of that closure and that is what the charges primarily relate to.

So, Jerry, relative to the future, we don't see any, at this time, don't see any material restructuring. But, obviously, none that has been announced. As, obviously, if we find opportunities, we will look to implement those. Relative to the pay back, if you look at a year-over-year basis, our costs were down about $7.5 million at US Pipe. And almost three-quarters of that were related to the closure of North Birmingham. I think we are certainly on track to achieve the savings that we planned on when we made that closure and as I said, to meet our expectations and, certainly, demonstrate to us that it was the right decision.

Those savings are expected to be between $15 million and $20 million for 2011.

Thank you. As you think about the outlook for the back half of the year, obviously, we are all hopeful that construction activity really steps up. But I guess in the scenario where we - - you have municipalities continuing to push out their order levels. Are there any significant cost savings efforts that you would have available to you at that point? Can you just tell us how you are thinking about that contingency? Thank you.

Yes. Concerning the contingency, I do not think we would see any major - - we are at the point where I don't think we can disclose any major manufacturing operations. If you look at the actions we have implemented over the last several years and the five manufacturing plants - - six manufacturing plants we've closed, that we have taken out the major plants. Our contingencies would be on plant by plant level and, probably, certainly, would be focused on what could we do with indirect expenses that go into overhead.

Obviously, we have the flexibility - - we have the flexibility to move on our direct labor. We can very production on a day-by-day basis with really no limitations and no cost. We have gained that kind of flexibility with our recent contract negotiation and agreement that we have settled at US Pipe. So, it would be on a plant-by-plant basis. It would be focused on the indirect area. I think we are fine on how we can flex our direct cost and any other actions that we think that we might need to implement on a short-term basis. I don't think, as we look at it, there really is any other plant closings that we can implement.

Okay. Can you give us an update on backlog or book-to-bill for the Anvil business? I believe you mentioned Mueller Co and US Pipe order trends in your prepared remarks.

Yes. When you look at our backlog, always is minimal at Anvil. We typically have probably a two week, a two to three week delivery cycle at most on most of the Anvil products. Just to remind everyone, when we manufacture the product, we then carry that product in our regional distribution operations. We ship, then, right to a distributor, generally, a distributor's inventory and often it can go right to a job site. So, Jerry, it is about where it has always been, and that is minimal.

Okay. And last question, if I may, are you seeing rising inquiry levels before the pent-up demand comment that you made earlier? Are you starting to see more and more projects coming up for bid, or do you expect that later this year?

No, actually, it's interesting, on US Pipe, we track our public bids sequentially, the tons that we bid were up 23% from the fourth quarter. It usually takes a bit of time for those to turn into orders. Obviously, one quarter does not make a trend. But if we look at our quotation activity in the first quarter of US Pipe, in terms of tons, it was the highest activity we have had in the last four quarters. And as I said, was up about 23% over the quotes that we issued in the fourth quarter of fiscal 2010. We have a little less insight on Mueller. That tends to be less project quotations and more going through distributor inventory.

Thank you, very much.

Thanks, Jerry.

Our next question comes from Seth Yeager. Your line is open, and please state your company name.

Jefferies & Company. Good morning.

Good morning.

I apologize if I happened to miss this. It looks like you're at DSO's were quite a bit higher than your historical average. Is that something that's going to - - is that a timing issue, or is that something that is going to moderate over the next couple of quarters?

I read through some of the prepared remarks that last year we had a quarter with fairly low DSO's. But our DSO's during this quarter were maybe slightly above the historical average, but not too much out of line. I would say pretty much, right on line, or just slightly above but nothing significant. We did have some export orders that have slightly extended terms. But on an overall basis, we do not expect our DSO's to deviate from our historical norms.

Okay. Thank you. And then as far as free cash flow, with the rise in commodity prices, it may be partially offset, or solely offset by some of your price increases. What are your expectations for free cash flow for the fiscal year? Has that changed at all versus the last go around that we spoke?

Yes. They have not - - our expectations have not changed. I think we are certainly on track as I referenced earlier relative to our inventory turns, the year-over-year improvement. I would also reference that our working capital was a percent of improvement of revenues. Again, when you look at our business, the seasonality, historically our cash flows are much greater in the second half of the year. We would expect that to be even more so the year.

Got it. Okay.Thank you. And then as far as the couple of acquisitions you have made, have you disclosed what the operating margins are in those businesses? Are those seasonal at all?

We haven't. We have not disclosed that for competitive purposes. Probably less seasonality, certainly, in those business. When you think about leak detection, leak detection is year around. I think that overall market is in it infancy right now but we expect that it will grow pretty significantly over the next couple of years when you look at the need for leak detection.

Really, we do not think it is material on the meter side, a little bit. A little bit because I imagine there is certainly some parts of the country where it would be difficult to do any work outside. But, again, when you think of the meter side, they don't have to dig and are not worried about the frost lines. So, I would say it is not material on these businesses. Again, as we mentioned on our prepared remarks, they represent a very small portion of our revenues today.

Right. I guess last question. I think the last call you had mentioned that either in industry or market group or some of your surveys have indicated that municipalities had anticipated spending about 3% year-over-year on the R&R side. And it sounds like now that it may be more of a flattish. If we think about municipal bond issuance and with some of the uncertainty goes away around funding, do you feel as if that flat number could go back to the 3%, or is that sort of unchanged at this point?

That is a good question. Obviously, that number we referenced came from the American Water Works Association, which is a trade association for the water utilities. They have not updated that, and they won't, probably, for about another year. Probably the most current external survey that we have seen came from Water and Wastewater Digest. Now they did not - - excuse me, they did not come out with an exact forecast of how much it would grow, rather than what percentage of the respondents that said that spending would grow; how many thought it would be flat; how many thought it would be down.

As I recall, the conclusions from that survey were most thought it would be flat, but there were more that thought it would grow versus those who said it would decline. It is tough to extrapolate exactly what that means in growth terms. Again, I think anywhere from flat to the 3%, to the AWWA reference, I think is reasonable expectation and I think it is consistent with what we say. We expect - - still continue to expect modest growth. But, we do think it's a little more cloudy now than, perhaps, it was when we had our call, our last call.

All right. Thank you for the color.

Our next question comes from Brent Thielman. Your line is open and please state your company name.

Hi. Good morning, D.A. Davidson.

Good morning, Brent.

Greg, can you remind me when we begin to pass for lack of a better word, fair year-over-year volume comparisons that don't include the benefit of stimulus-related orders?

Yes, Brett, I think when we get into the third quarter, we will, for sure, passed it for US Pipe. On a year-over-year basis we are talking, right?

Yes, correct.

I think in the third quarter of our fiscal year - - I think most of that would be true for Mueller. Now that is on an order, from an orders standpoint. From a volume standpoint, I think it would be probably later in the third quarter, and into the fourth quarter.

Okay. That is helpful. Any feel for the price increases that you implemented in January, or is it too early to say?

It would certainly be too early to say. But from our perspective, certainly, I think that all of the manufacturers are seeing the same kind of impact from higher raw material costs. Clearly, I think the price increases are justified, and needed. I would say, certainly, we are optimistic.

Okay. On US Pipe, I guess, obviously, some pre-material increases in scrap prices. But, scrap sustains itself to the current level, but you are able to get pricing. Are you still optimistic you can get the profitability in that segment in the second half?

Yes. I will say that we discussed this pretty extensively on the last call. And I think it was more, the question was, can pipe break even at the EBITDA level? At that time, I know that I talked about three variables that we thought were essential for the pipe business to break even. I think the first of those certainly that we had to achieve the savings that we expect from the North Birmingham plant closure that we implemented in April of last year. If you look during our first quarter, and I mentioned this a little earlier, US Pipe benefited from about $7.5 million of year-over-year cost savings, about three-quarters of that were from the North Birmingham closure. So, I think we're pretty comfortable. That we are on track with the cost savings.

I think that we just talked about the second variable, which was pricing. Again, in Evan's remarks, on a year-over-year basis prices were up 19% and up 4%, sequentially. The prices that we saw in the first quarter were about 24% higher than the second quarter of 2010. So when you look at it in the first quarter, the price cost relationship was at the level we need to be to break even at the EBITDA level. We talked about the price increases that we had just recently implemented. So I think given the price trends we have seen the last several quarters and provided that prices can move quickly enough if we see a rapid spike in scrap cost, we believe pricing relative to raw material costs, the relationship is about where it needs to be to break even.

Which gets down to the third variable and that is volume. We need volume to be flat year-over-year. We talked about volume in the first half on a year-over-year basis will be down. But, Brent, I think getting back to the seasonality that we expect, that we think, again, that there is a reasonable chance that with the pick-up in demand that we expect to see in the second half, volume will be flat. It is possible for us, for pipe to generate I think break even EBITDA. But I think the key right now - - the key variable that we see right now is the volume being flat with 2010. And that is going to be dependent on a pick-up in the second half of the year. Which is stringing the variables together and the variables that we have discussed, we think there is a reasonable chance that we could see that.

Okay. That is really helpful, Greg. Lastly, on Anvil, this market which are doing I guess reasonably well for you right now. Can you give me a sense what that represents in total end market pie for that segment?

Yes, when you look at our best market in that business, the way it is performing right now, is the investment in oil and gas. We provide forage couplings, primarily, to the piping systems there. That is about 15% of Anvil's overall revenues. When you look at non-resident construction spending, that is, by far, the biggest piece, represents probably close to 70%.

There, I think we are seeing - - the benefit we are seeing at Anvil is that the e non-residential construction - - the non- residential construction market that we serve or uses our product is very, very diverse. It goes from industrial facilities, to high-rise buildings, to hospitals, to schools, to hotels. I think we are benefiting a little bit from that diversity, because there are some sectors in the non-residential construction market that have started to rebound. So, as I've said in our prepared remarks, we are reasonably comfortable that we are going to see an overall, slightly better market demand in 2011 for Anvil than we saw in 2010. I don't know, Brent, does that cover what you were looking for?

Yes, that's helpful.Thank you.

Thank you.

Our next question comes from Jonathan Ellis. Your line is open and please state your company name.

Bank of America. And this is Jay [Chapar] in for Jonathan Ellis.

Hi, Jay.

Good morning.

Good morning. What is your utilization rate across your US Pipe facilities following the closure of the North Birmingham plant? What are you expecting for full-year 2011?

Yes. When you look at - - for the first quarter, we estimate that our capacity utilization was about 44%. That is up slightly from the first quarter last year. Last year I think we were barely over 40%. That is down pretty significantly from the third quarter. In the third quarter we were utilizing about a little over 70% of our capacity.

So, we would expect that as we get into the construction season, we would expect that we would see those quarters back in the 70%, 70% to 75% range. But I think, Jay, if you look traditionally, historically, our business is always been some pretty dramatic fluctuations due to the seasonality. But, as a result of the closure, even though our volume orders were down in the first quarter. Our capacity utilization was up slightly. We expect when get into the third and fourth quarter to be again above 70%, probably in that 75% range.

Okay. How does the shift to smaller pipe projects impact profitability for US Pipe segments?

It probably shift to smaller helps our overall profitability because we manufacture our smaller diameter pipe in our 6-inch to 12-inch using the processes that we invested in a couple years ago. We have referred to that on previous calls as the mini-mill. Those processes give us a nice cost benefit because of the automation that we have incorporated. And so as we see a shift to smaller diameter, we would expect that our margins would improve.

Okay. My last question is, what was the year-over-year change in hydrants, valve and brass shipments and also for the iron pipe product shipments?

When you look at the valves and hydrants on a unit basis on shipments, we were down - - both of them were down a little over 7%.

Okay, and brass products?

Brass products were down a little less. Brass products were down about - - between 2% and 3%.

Okay, and lastly, the iron pipe products?

The pipe products, we were down on a tonnage basis, probably a little over 30%.

Okay. Thank you.

Thanks.

Our next question comes from Seth Weber. Your line is open and please state your company name.

Hi, this is [Brad Destrickeon] for Seth.

Good morning.

Good morning.

Good morning, guys. Just a quick question on the higher input costs and the higher material costs. How those flow-through inventory with you being on FIFO.

Yes.

When do those higher costs start to flow-through on the P&L?

Sure, I will ask Evan to address that.

We are on the FIFO method of accounting. We have a lag before the higher input costs flow through the P&L. And, in general, that kind of varies from plant-to-plant. But on an overall consolidated basis, typically that is around a quarter in arrears, or a quarter lag, from the time we either purchase the raw materials or go through the manufacturing process. And that lag of a quarter is based upon inventory turns.

Thanks. That is helpful. Do you have any feel - - this is a follow-up to Jay's prior question, capacity utilization for pipe across the industry?

Again, I think it is pretty difficult, or it can be misleading looking at it at any specific quarter given the seasonality of demand for this product. If we look at an annual basis for 2010, given the plants, we took a plant out, one of our other competitors idled a plant. We think on a full-year basis that, that was somewhere between somewhere between 50% and 60%. But, again, that's going to vary by season.

Great. Thank you.

Thank you.

Our next question comes from Brian Meyer. Your line is open and please state your company name.

It is Brian Meyer from Robert W. Baird.

Good morning, Brian.

Morning.

Just a few quick ones here. First, I want to clear up something you said before. The inventories and the distribution channel were a bit heavy it sounds like in fiscal one quarter? But your assessment now is that, that level has normalized. Is that correct?

Yes.

Okay. Great. And then getting back to the project quoting, you mentioned it improved sequentially 23% of pipe, which is obviously, encouraging. I'm just curious, do you know what that translates to year-over-year? And also, if it is at possible to estimate the typical lag between when you receive these quotes and when you would be ready to ship the pipe?

Sure, Brian. On a year-over-year basis, it was down almost 24%. Again, if you recall in our first quarter of 2010, that is when we were, I think, at the height of quoting ARRA projects. And again, I know I am repeating this, but I think it is such an important factor, with the stimulus-funded projects, had to be under contract by mid-February, we were seeing a real flurry of activity in our first and early in our second quarter of last year. So, it was down almost 24% on the tons, up 23%, sequentially, quarter-over-quarter. I think it is also important to point out that our quote activity is directional. Sometimes, we can re-bid.

Obviously, we don't win all of our quotations. Back to your point, that can really vary between when those turn into orders and when those ship project-by-project. But I think we can typically expect that they will turn into orders maybe in a four week period and then it can be another six to 26 weeks depending on the demand from when we get the order on those kind of projects when we ship. So it is all over the board. We would expect though that most of what we quoted in the first quarter would turn into shipments if we're awarded the contract, would turn into shipments in the third quarter.

Okay. One last one with respect to North Birmingham. Are you at now the full savings run rate there such that going-forward on a sequential basis you wouldn't expect any incremental savings?

Yes, I would say it's safe to say that we are pretty much at the full run rate.

Okay. That is all I have. Thanks.

Thank you, Brian.

We have no further questions at this time.

Well, thank you. Seeing that there are no further questions, I want to thank everybody for their interest. I am sure we will be talking to a number of you soon. Take care.

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