Mueller Water Products Inc (MWA) 2011 Q2 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 Zakas. Ma'am, you may begin.

Good morning, everyone. Welcome to the Mueller Water Products Second Quarter Fiscal 2011 Conference Call. We issued our press release reporting results of operations for the quarter ended March 31, 2011, yesterday afternoon. A copy of it is available on our website.

Mueller Water Products had 155.5 million shares outstanding at March 31, 2011.

Discussing the second quarter results this morning are Greg Hyland, our Chairman, President and 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, which are available to help illustrate the quarter's 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 our 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 disclaimers provided on slides 2 and 3 in their entirety.

During this call, all references to a specific year or quarter refer to our fiscal year, which ends 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 up 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 second quarter of 2011. I'll begin with a brief overview of the quarter. Evan will then provide a detailed financial report and cover key drivers affecting our businesses. I will then follow with our outlook for the third quarter and comment on the balance of the fiscal year and the actions we continue to take to strengthen our position in the marketplace. We will then open up the call for your questions. Overall, our financial performance for the second quarter was about as expected. Adjusted operating income at all three of our businesses improved on a year-over-year basis. We benefited from both higher sales pricing, which covered increased raw material costs, and ongoing cost savings initiatives in all three of our businesses. Anvil's operating results, excluding a 2010 one-time gain, more than doubled. We continued to invest in new products and services at Mueller Company that we believe have significant growth potential, including advanced metering infrastructure at Mueller Systems and pipe condition assessment and leak detection services at Echologics. In the short term, the expenses associated with these investments, as these businesses are in their development phase, are masking the higher margins of the rest of our Mueller Company business. We believe municipalities will recognize the need to upgrade their water infrastructure systems; however, they appear to be remaining cautious in the near term as they balance this need against current budget concerns. With this caution, as well as the delayed recovery of the residential construction market, we believe that volumes in our water infrastructure businesses for the second half of the year will be roughly flat on a year-over-year basis, although our earnings performance should continue to improve given the benefit of our cost savings initiatives and the other operational improvements we have made. I will now turn the call over to Evan who will provide more details on the second quarter's financial results.

Good morning, everyone. I'll first review the consolidated results and then discuss segment performance. Consolidated net sales for the 2011 second quarter of $311.3 million increased 3.1%, or $9.5 million, from $301.8 million for the 2010 second quarter. Net sales increased primarily due to higher prices of $13.9 million across all three business segments, partially offset by net lower shipment volumes of $5.1 million. U.S. Pipe was the only business with lower shipment volumes this quarter. Consolidated gross profit of $50 million for the 2011 second quarter increased $11.8 million, or 30.9%, from $38.2 million for the 2010 second quarter. Gross profit as a percentage of net sales was 16.1% for the 2011 second quarter compared to 12.7% for the prior-year period. Gross profit increased due to manufacturing and other cost savings of $15.8 million and higher sales prices of $13.9 million. These factors were partially offset by higher raw material costs of $11.2 million and higher per-unit overhead costs due to lower production of $5.1 million. Consolidated selling, general and administrative expenses of $54.8 million for the 2011 second quarter compare with $50.6 million for the 2010 second quarter. Excluding a $3.1 million 2010 second quarter gain from the sale of Anvil's Canadian distribution business, selling, general and administrative expenses for the 2011 second quarter were roughly similar to the 2010 second quarter. Adjusted loss from operations for the 2011 second quarter of $4.8 million improved $7.6 million from adjusted loss from operations of $12.4 million for the 2010 second quarter. Manufacturing and other cost savings of $15.8 million and higher sales prices of $13.9 million were partially offset by higher raw material costs of $11.2 million, higher per-unit overhead costs due to lower production of $5.1 million, and higher selling, general and administrative expenses of $4.2 million. As previously mentioned, selling, general and administrative expenses for the 2010 second quarter included a gain of $3.1 million from the sale of Anvil's Canadian distribution business. Excluding that gain, adjusted operating loss improved $10.7 million year-over-year. Adjusted EBITDA margin for the 2011 second quarter improved to 5.1% from 3.0% in the 2010 second quarter.

Net interest expense for the 2011 second quarter of $16.3 million included $2 million of non-cash costs related to interest rate swap contracts. As we have previously discussed, although these contracts were terminated prior to 2011, the related costs are being amortized over the original term of the swap contracts. Net interest expense for the 2010 second quarter of $14.8 million included a benefit of $800,000 related to terminated interest rate swap contracts. Excluding these terminated swap contracts, net interest expense decreased $1.3 million primarily due to a lower effective rate. The effective income tax rate for the 2011 second quarter was a benefit of 40.9% compared to the 2010 second quarter benefit of 38%. Adjusted net loss per share of $0.07 for the 2011 second quarter improved from an adjusted net loss per share of $0.11 for the 2010 second quarter. The 2011 second quarter adjusted results exclude after-tax restructuring charges of $1.3 million and after-tax non-cash interest rate swap costs of $1.2 million. There was an average of 155.4 million shares outstanding for the 2011 second quarter compared to an average of 154.4 million shares outstanding for the 2010 second quarter. I'll now move on to segment performance. Net sales for Mueller Company for the 2011 second quarter of $148.9 million increased 5.5% from net sales for the 2010 second quarter of $141.2 million. The increase was due to higher sales prices of $4.4 million, higher shipment volumes of $2.4 million and favorable Canadian currency exchange rates of $900,000 million. 2011 second quarter adjusted income from operations was $10.5 million, or an operating margin of 7.1%, and adjusted EBITDA was $22.7 million, or an EBITDA margin of 15.2%. Prior year adjusted income from operations was $9.7 million, or an operating margin of 6.9%, and adjusted EBITDA was $22.2 million, or an EBITDA margin of 15.7%. Adjusted income from operations increased due to manufacturing and other cost savings of $5 million and higher sales prices of $4.4 million. These items were substantially offset by $4.5 million of higher raw material costs and $4.4 million of higher per-unit overhead costs due to lower production and other higher manufacturing costs. As Greg mentioned, expenses associated with investments at Mueller Systems and Echologics are negatively impacting Mueller Company margins as we are in the development phase. Net sales for U.S. Pipe for the 2011 second quarter of $75.8 million decreased $7.2 million from net sales for the 2010 second quarter of $83 million. Lower shipment volumes of $14.0 million were partially offset by higher prices of $6.8 million. Pricing per ton for ductile iron pipe for the 2011 second quarter increased 15% on a year-over-year basis, but declined from last quarter as pricing became more aggressive in the second quarter. Adjusted loss from operations of $15.7 million and an adjusted EBITDA loss of $11 million for the 2011 second quarter improved from an adjusted loss from operations of $19.6 million and an adjusted EBITDA loss of $14.6 million for the 2010 second quarter. The 2011 second quarter benefited from manufacturing and other cost savings of $8.0 million and higher sales prices of $6.8 million. These items were partially offset by higher raw material costs of $5.3 million, higher per-unit overhead costs due to lower production of $3.3 million and lower shipment volumes of $2.9 million. The cost savings included benefits from closing our North Birmingham facility during 2010. Net sales for Anvil for the 2011 second quarter of $86.6 million increased 11.6% from net sales for the 2010 second quarter of $77.6 million. Net sales increased due to higher shipment volumes of $6.5 million primarily in our energy and mechanical markets and higher prices of $2.7 million. Adjusted income from operations for the 2011 second quarter of $6.9 million increased $900,000 from adjusted income from operations for the 2010 second quarter of $6 million. Manufacturing and other cost savings of $2.8 million, higher sales prices of $2.7 million and higher shipment volumes of $1.8 million improved operating results. These improvements were partially offset by higher selling, general and administrative expenses of $4.6 million and higher raw material costs of $1.4 million. Included in 2010 second quarter selling, general and administrative expenses was a $3.1 million gain from the sale of the Canadian distribution business during that quarter. Adjusted EBITDA increased to $10.4 million, or an EBITDA margin of 12%, for the 2011 second quarter compared to $9.7 million, or an EBITDA margin of 12.5%, for the 2010 second quarter. Free cash flow, which is cash flow from operating activities less capital expenditures, was negative $27.8 million for the 2011 second quarter compared to negative $21.7 million for the 2010 second quarter. The primary driver to the $6.1 million variance was higher pension contributions in the second quarter of 2011 that historically have been made in the fourth quarter. As you recall, our water infrastructure businesses are seasonal. As a result of that seasonality, we typically experience lower cash collections and higher cash disbursements in the second quarter compared to other quarters. At March 31, 2011, total debt was $692.5 million and included $420 million of 7 3/8% senior subordinated notes due 2017, $221.5 million of 8.75% senior unsecured notes due 2020, $49 million drawn under our asset-based credit agreement and $2.0 million of other. Net debt at the end of the 2011 second quarter was $648.7 million. I'll now turn the call back to Greg.

Thanks, Evan. Evan detailed our second quarter financial performance and has provided an analysis of our results. I will now discuss our outlook for the third quarter and the balance of the year highlighting some of the market trends and key drivers affecting our businesses. I'll begin with Mueller Company While we were encouraged that unit orders for core products were flat to slightly positive in the second quarter on a year-over-year basis, especially in light of all the discussions of municipal budget issues, we have no indication right now if municipal spending will increase on a year-over-year basis. We believe municipalities remain cautious with regard to their capital spending as state and local budgets continue to be scrutinized. And, as expected, we have seen little change in residential construction. For the third quarter at Mueller Company, we expect to see a slight year-over-year increase in net sales driven by the price increases implemented this year and last year. Costs for scrap steel and brass, our two largest raw material categories, appear to have flattened out after large run ups in the second quarter. The price for brass ingot was up 24% for the second quarter year-over-year. The price of scrap steel has increased over 25% on a year-over-year basis. Mueller Company implemented price increases that became effective mid-February to cover these cost increases. We expect to begin to realize the benefits of these price increases later in the third quarter and realize the full benefits throughout the fourth quarter. At Mueller Company for the third quarter, we expect higher sales pricing to at least offset the increase in raw material costs. We also expect that our continuous cost savings programs will help cover higher costs due to inflation. Taking all these into account, we expect that Mueller Company's adjusted operating income will be roughly similar to the prior year. Turning to US Pipe for the third quarter, as mentioned previously, pricing on ductile iron pipe improved year-over-year but declined sequentially from the first quarter. We believe second quarter pricing softened a bit due to lower demand, exacerbated by inclement weather across much of the United States. We expect pricing in the third quarter to increase both on a year-over-year and on a sequential basis. We expect higher prices since the average price on orders received in the second quarter that are currently in our backlog came in at a higher level than the average price of second quarter ductile iron pipe shipments. We anticipate this trend continuing as we enter the construction season. We believe that volume in our US Pipe business will be down in the third quarter on a year-over-year basis. There are several contributing factors for the year-over-year decline. First, as you may recall, in the third quarter of 2010, we had $12.4 million of pipe revenue for a project outside the United States that we sourced. We also began shipping the bulk of the orders that were received related to the stimulus-funded projects in the third quarter of last year. We have recently been awarded a $35 million order to manufacture and supply large diameter pipe and fittings to a major water project in the Middle East. While we expect to begin shipping this order late in the third quarter, most of the shipments should occur in the fourth quarter and in early fiscal 2012. Overall, we believe net sales at US Pipe for the third quarter will be lower than last year, primarily due to the impact of the international sourced order in the prior year partially offset by higher pricing. For the third quarter we expect price increases to more than offset higher raw material costs. We expect our cost-saving initiatives to more than offset higher production costs due to inflation. As a result, we expect the adjusted operating loss at US Pipe to improve on a year-over-year basis. Turning now to Anvil -- in the third quarter we expect to see higher volumes in selected markets, primarily in our addressed oil & gas and industrial markets, and for distributors to increase their inventory levels. We also expect to benefit modestly from higher pricing. As a result of these factors, we expect net sales to improve year-over-year and sequentially. With the benefits of cost savings and volume increases, we expect adjusted operating income to be higher in the third quarter on a year-over-year basis and slightly higher sequentially. On a consolidated basis for the third quarter, we believe net sales will increase on a year-over-year basis attributable primarily to higher pricing across all three businesses, and volume increases at Anvil. We expect to see continued improvement in our adjusted operating income on a year-over-year basis, with higher sales pricing and manufacturing and other cost savings more than offsetting higher raw material costs and other higher production costs due to inflation.

Now I'll provide some color on factors which could affect the fourth quarter. We expect to continue to benefit from higher sales prices particularly at Mueller Company and US Pipe. If raw material costs remain at current levels, we believe that these higher sales prices will more than cover our higher raw material costs. We said previously that municipalities had been exhibiting caution in their spending. Based on order levels that we saw in the second quarter, we believe that our Mueller Company distributors have roughly the same level of inventory they did a year ago. So at this time we are a little more confident that we will not see a year-over-year drop in demand. However, we do not expect to know if we will see an increase in spending until we get further into the construction season to see how quickly distributors reorder. We also do not expect to see any significant change in our residential construction business, although there may be regional pockets of growth. We expect US Pipe volumes to be higher in the fourth quarter year-over-year primarily due to the export order to the Middle East. As I mentioned at the beginning of the call, we continue to invest in new products and services at Mueller Company that are part of our intelligent water technology portfolio, and which we believe have significant growth potential, including advanced metering infrastructure at Mueller Systems and pipe condition assessment and leak detection services at Echologics. According to industry research, the AMI market is growing at an annualized growth rate of about 20%. Our new products and services leverage the Mueller brand and build on our expertise in water infrastructure while helping municipalities increase operating efficiencies and improve service and communication with their customers.

Interest in our two-way water AMI system increased nicely over the last two quarters, and more municipalities have contracted for our leak detection and pipe wall condition assessment products and services. Our unique ability to accurately identify small leaks in both distribution and transmission systems without invading the water stream is of high interest. We are also seeing utilities taking advantage of our condition assessment services to help prioritize their capital spending and to potentially identify weak points in their water distribution infrastructure before a catastrophic failure occurs. There are efforts to reduce the number of water main breaks nationwide. For example, an AWWA initiative is looking to reduce national main breaks to 135,000 annually from the current 240,000. We believe that Echologics' leak detection and pipe condition assessment services can play a key role in achieving this objective. We're encouraged by the reception of these products and services by our customers. Last quarter we projected higher consolidated free cash flow for the full year 2011 compared to 2010 due to both improved operating results and continued working capital efficiency improvements. Although we continue to benefit from working capital efficiency improvements, we believe the timing of the export order into the Middle East could negatively impact our fourth quarter working capital. Therefore, free cash flow in 2011 could be less than 2010, benefiting only from improved operating results due to the timing of the export order. We continue to improve our working capital efficiency. For example, inventory turns for the twelve months ended March 31 improved about 0.7 turns from the comparable prior year period. Additionally, average trailing twelve-month working capital as a percentage of net sales at the end of the second quarter improved over 500 basis points from a year ago. Other key variables for 2011 are -- corporate spending is estimated to be $30 million to $32 million, down from our previous estimate of $34 million to $36 million. Depreciation and amortization is estimated to be $82 million to $84 million, and net interest expense is estimated to be $64 million to $66 million which, as a reminder, includes noncash 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 $36 million and $39 million. The Board of Directors of Mueller Water Products, after considering many factors, has authorized the exploration of a variety of alternatives for US Pipe, including strategic alternatives such as the sale of a controlling interest in that business to a third party, a joint venture with a third party or other financial or structural alternatives both domestic and international.  A key objective will be to ensure that US Pipe continues as a strong brand by delivering quality goods and services to its customers with the same commitment to high customer service that has distinguished its business in the past. No decision has been made at this time to enter into any transaction, and there can be no assurance that the exploration of alternatives will result in a transaction or as to the terms, conditions or timetable of any such transaction.  It is the Company's policy not to comment on any specific discussions or any potential corporate transaction unless and until it enters into a definitive agreement with respect to such a transaction.

(Operator Instructions) Seth Weber.

Hi, good morning, it's RBC. I guess on the US Pipe, can you give us some color as to why now? Why the board today is making this decision versus where we've come from over the last couple of years, and we had talked about the business potentially getting better. And then I guess the follow-up question to that would be is there a scenario where you shed the entire business, or close it, and are there any kind of tax implications we need to think about?

Seth, the board regularly evaluates the strategic direction of the Company. And as I said in our prepared remarks that they consider many factors. Obviously, our board's discussions are confidential, and our policy is to not publicly comment on those.

In addition, I would not want to discuss one or two of those items out of context but, obviously, pipe performance is weighed on our overall performance. We have done a lot of restructuring structurally, and it's a much better business today than several years ago. If you look at the year-over-year improvement that we've seen the last two quarters, and the outlook that we have just provided, we expect that improvement will continue throughout the fiscal year.

We believe that the ductile iron pipe market is still in for some volatility, and so I think the board and management believe that we should explore alternatives. We really, relative to closure, we won't be able to discuss this until we actually come to an agreement -- have a definitive agreement or a conclusion -- as to what specifically we will do.

So now at this time we don't have any guidance to give what any potential alternative -- what impact any potential alternative may have on our balance sheet or our results.

Okay, thank you. And if I could just ask a quick follow-up -- is there any characterization of the margin on the mideast sale? I think the foreign sale that you guys did last year, you kind of characterized as lower margin. Is that fair to -- ?

Seth, we didn't get into those specifics, but we are manufacturing most of this order. We'll be sourcing some fittings, but we will be manufacturing all the pipe. And as a result of manufacturing the pipe, obviously, we get the benefit of the overhead absorption. And we don't have to pay, obviously, a source markup. So, clearly, we would expect that this will be much higher margin than what we did on the source order.

Okay, thank you very much.

Christopher Glynn.

On US Pipe, as we look into the back half of the year, particularly the fourth quarter, is there a way to ballpark the Middle East, maybe two-thirds of that order in the fourth quarter? Or what's a way to (multiple speakers) that up?

Yes, Chris, I think by the end of the year, we will have expected to ship, I think -- two-thirds is a pretty good level that we would think that that would be at the end of this fiscal year.

Okay. And then the fourth quarter last year coming up -- some of the third quarter benefits had a pretty steep drop-off. It doesn't look like a particularly tough comp. Would you expect the underlying to be up year-over-year in the Middle East or -- ?

No, I think we would think the underlying would be up also year-over-year. If you recall, in the fourth quarter last year, we were really in the midst of transferring production from the North Birmingham facility to the Bessemer facility. And I think we had a number of inefficiencies related to that move. So when we look on a year-over-year basis that we think the fundamental performance will also be improved on a year-over-year basis.

Okay, well, it sounds like we might expect a bit of a breakeven reported EBIT there in the fourth quarter. Is that a fair comment?

When we look at all the variables, and we look at those variables now for the fourth quarter, I think that those are looking positive with the -- as we pointed out, the year-over-year improvement as well as the volumes in the Middle East order.

Okay, so no specific comment relative to breakeven?

Yes. We don't give the specific guidance, but I would say certainly we do have the positive trends I will address. And your question that we've discussed on the last several calls has been about -- will pipe break even at the EBITDA level? And at that time I talked about three variables that were essential for our pipe business to break even at the EBITDA level for the full year. And first we had to achieve savings that we expected from the North Birmingham plant closure. During the first half of the year US Pipe benefited for about $15.5 million of year-over-year cost savings. Almost 80% of those savings came from the closure of the North Birmingham plant. So I think, clearly, we're on track with the cost savings.

The second variable is pricing, and specifically relative to the movement of raw material costs, primarily scrap steels costs, and as we discussed in our prepared remarks, pricing per ton for ductile iron pipe for the second quarter increased 15% on a year-over-year basis but declined sequentially. And in the first quarter our price/cost relationship was at the level we needed to break even at the EBITDA level. We've seen raw material costs escalate, and the price/cost relationship in the second quarter was below where we needed it to be in order to meet the breakeven EBITDA level.

We said that we expect higher pricing in the third quarter as we saw orders come in at a higher rate than the average price per ton that we shifted in second quarter. These were in our backlog. We need that price/cost relationship to increase sufficiently to not only make up for the ground we lost in the second quarter but to continue for the rest of the year.

The third variable is volume. We said we needed volume to be flat year-over-year. We just discussed that our order and shipment volume for the second quarter was down year-over-year for the first half of the year. The first half of the year, ton ships were down about 28%. We also discussed that we expect volume to be down in the third quarter year-over-year.

The question you just asked about the fourth quarter -- I think, certainly, the Middle East order we discussed will help us make up some of the ground for the year. We need a little additional growth in the fourth quarter for volume to be flat year-over-year. So I think, overall, we've made several significant hurdles. We have several significant hurdles to be able to get to breakeven EBITDA for the year. We need to see substantial improvement in the price/cost relationship and additional volume growth. But we do believe that the Middle East order -- with the Middle East order -- that we will be EBITDA positive for the second half of the year and right now we have some question if we'll be able to make up the first half shortfall.

So that's a long answer to your question about the fourth quarter, but we are feeling pretty positive that we'll be breakeven EBITDA for the second half of the year, primarily aided by what we expect pipe to produce in the fourth quarter.

That's really helpful. Could you just remind annual D&A for US Pipe?

Yes, it's around $19 million.

Okay. And then on the strategic issue, fair enough if you can't talk, this is a more conceptual question. I believe the space, a little bit concentrated, would a JV or combination of the majors be a regulatory issue in your view?

I can answer that generally that we think, and you never know, obviously, until the Justice Department will make a final decision -- but, again, we think if you look at the ductile iron pipe, concrete pipe, plastic pipe, and you include all functional competition, that certainly under that scenario that it would make it easier to do.

Jerry Revich.

Good morning, it's Goldman Sachs. Greg, can you please give us an update on backlog or book to bill from Mueller Co and US Pipe in the quarter? And in the past you were kind enough to give us bid volumes. I'm wondering if you'd give us an update there as well.

Yes. When we look at Mueller backlog and, Jerry, I have to remind everyone again that when we look at Mueller that our average delivery is about three weeks. So backlog, at any given time, is not that significant. It varies by product line. Our backlog is up on hydrants, our backlog is down on valves. All in all, I'd say we're probably at Mueller at about the same range as we were a year ago.

Pipe is up. I think it's somewhere in double digits -- 15%, 20% -- but that is driven by the order from the Middle East that I just referenced. If we look at our US Pipe public bids, obviously, our bids are up because this is a big order for us to win in the Middle East and so on. But we bid that in a previous quarter.

But our public bids, on a year-over-year basis, were down in tonnage. We're down a little over 20%. And, again, we think that in the second quarter last year that we were just seeing the very end of the stimulus projects because -- so we had a big spike in bid activity in the first and second quarter last year, as I said. So if you look at the tons that we bid in the second quarter this year as compared to last year, pipe is down a little over 20%.

That's helpful context. And on the US Pipe topic, I'm not sure if you can comment on this, but I'm wondering if you can just broadly talk about what kind of business combinations would be at the top of your evaluation list? And I understand if you don't feel comfortable commenting on that at this point.

Jerry, we -- and I appreciate the question, and I appreciate that this announcement has raised more questions than we can answer at this time. But we are exploring alternatives, which could result in negotiations with a third party. So it's in our policy not to comment on the process until we have entered into a definitive agreement. We think that that's the best practice, and we do think that's in the best interests of our shareholders. So it was -- I understand the frustration, but, again, as we look at the total process that we think it makes sense to just stick with our policy because we do think that that's a best practice and, as I said, best interest in our shareholders.

It's perfectly understandable, just worth a shot from our end. You know, lastly, Evan, can you say more about the nature of the restructuring charges you took in the quarter? The payback period you expect out of those and also comment on any additional restructuring actions that you're planning for the remainder of the year?

The restructuring charges, net of tax, were approximately $1.3 million, and that was primarily due to some headcount reduction in certain areas. And as we look out, I don't think that we'll see any significant manufacturing footprint reductions or things of that nature, but there will be always ongoing improvements as we move forward.

Okay. And the payback period, Evan?

The payback period would -- really, it's just associated with the headcount reductions, but I would say two years.

Jonathan Ellis.

Thank you, it's BofA Merrill Lynch. First question, if we could talk about just the Mueller Division. I think if I heard this correctly, last quarter you talked about price increases that were going to be implemented as of the middle of February. If I recall this correctly, you said that now the price increases really should be taking hold or providing a benefit in the third quarter but a full effect in the fourth quarter. Has the timing been pushed out for those price increases? And, if so, why?

No, Jonathan, the prices were announced. The increase went into effect on February 18th. As we've discussed, that, generally, our distributors will place orders ahead of those -- that announced price increase, and so we ship those in Q2. Some of those will still carry over because some of those were on several releases. Some of those will carry over into, I'd say, early to mid-Q3. So a lot of what we are probably -- what we shipped in April were still at the pre-price increase level. But I think we will have expected to ship probably all those releases by the time we get to the mid-third quarter. So that's why the comment that we said that later in the quarter that we'll see the new price increase, and then we'll see the benefit in the fourth quarter.

And that's typical for our price increases because of the distributor pull forward. Then it takes us six to eight weeks, several releases, to be able to pick up the full impact of the price increase.

That's helpful. And then just -- can you help us understand the percentage of total Mueller revenue that was affected by the price increases?

Yes. Our total -- in fact, we increased prices across the board with our valves, our hydrants -- 7%. Our brass products went up about 8%. And our Pratt business unit, which is our butterfly valves for -- the goal in the water treatment and so on, that was about 7%. So -- I'd say 80% to 85% of our business, other than maybe, perhaps, where we may have an annual contract where we're locked into a price, we put in a price increase.

Okay. And then just -- is there any way to quantify -- and I appreciate you already talked about what orders are looking like heading into the third quarter -- but is there any way to quantify how much the pre-buy benefited volumes in the second quarter?

Difficult, but I think -- if I look at it on a year-over-year basis, it's about the same as we saw last year. Because last year we had our price increase we announced end of January. This year it was a couple of weeks later. But, again, I think on a year-over-year basis, just about the same. Because normally, without the other price increase -- without the price increase -- we expect volumes to be down in our second quarter of our fiscal year because this really is -- there's very little construction going on in a good part of the United States.

And those were the comments that I made. Certainly, when we gave the outlook after our first quarter earnings call, we talked about uncertainty. And the comments that we made (inaudible) on a year-over-year basis was all the discussion that we heard in December and January about municipal bonds issuance, about municipalities in budget crisis. The fact that our bookings were flat year-over-year and, in some product lines, up slightly, gives us some confidence that we may not see a deterioration as some were expecting.

Okay, that is helpful. And then just turning to US Pipe, I guess what I'm trying to figure out is given -- you talked about pricing being some soft in the second quarter, but that pricing showing some improvement on orders for the third quarter. Unless something has changed from a demand standpoint, what is allowing you to get better pricing on orders than what you were able to deliver on the second quarter?

I think it is demand. Certainly, when we get into the Q2 -- Q2, again, that is the off-construction season. We think it would maybe even exacerbate it a bit with the weather in much of the US where, typically, they can do construction. And I think you get into a period where there's a decision that says, "Hey, I'm willing to take this order and cover all my variables costs rather than going through the process of maybe having to do some layoffs in my factory that could result in some bumping because of union contracts that adds further disruption."

So I think we think just because of the capacity utilization and the fact that demand was down in Q2, that resulted in the sequential drop in demand. It was -- I mean price -- drop in pricing. It was still up on a year-over-year basis, and that's why we think, as we get into the construction season, capacity utilization goes up, that we will see higher pricing.

And, as I mentioned in our prepared remarks, that if we look at our backlog, orders that we received in the second quarter came in at higher pricing than some -- than what -- the average that we shipped in the second quarter.

Okay, that is helpful. Greg, one point of clarification. You went through the three factors that could drive breakeven EBITDA for US Pipe for the year. Just on the second point related to pricing relative to costs, I guess I'm not sure I'm clear. Based on what you see for the third quarter and isolating the other two factors -- the savings and volumes -- is the pricing-to-cost ratio at a point in the third quarter where you could be breakeven for the year?

I said that we'll have to see that -- how it unfolds. It's moving in the right direction. But my comments were -- Jonathan, my comments were that not only would we have to be at that point for the whole third quarter but then we would have to even be above that to make up for the shortfall in Q2. So we're in a catch-up mode from the falloff that we saw in Q2.

But, certainly, the trends are moving in the right direction as we expect higher pricing in Q3. And I did mention for the last several weeks, we have seen the price of scrap steel flatten.

Okay, great, that's helpful. And my final question is just in terms of the strategic review of US Pipe, can you help us understand when a customer, potential customer from a municipality, looking at various orders, is changes in ownership structure taken into consideration when they are evaluating bids from different suppliers?

We obviously thought quite a bit about that, and we're pretty comfortable that as long as we can have our employees focused on providing the quality that we've provided in the past -- meeting competitive delivery lead times -- that we think that our distributors will certainly stay loyal to the brand, and that we think that our customers will. I can give you an example of when Mueller in 2005 (inaudible) purchased Mueller from private equity. And they went through an auction process and, certainly, during that process their volume did not suffer under a -- maybe some uncertainty about ownership of the brand and the product.

So -- we think that we should not see an impact, and we think that the brand and the quality stands on its own. Our biggest concern that we have is making sure that we communicate with our employees, we communicate with our distributors, and they're comfortable through the transition period.

Matt Vittorioso.

Yes, Barclays Capital. Could you just confirm, quickly -- if you were to, say, to shut down US Pipe, would that have any impact on the cost structure of the other two businesses?

Again, Matt, it's difficult for us to comment on anything on that at this time. But we have said in the past, if you look at our corporate expenses, that we don't allocate corporate expenses. We keep those separate. So most of the cost that, you know, associated with the business is contained within that business.

Okay. And then just, secondly, for me, if we could narrow in at all on your free cash flow guidance for the full year. I know you're saying it may now be less than the $30 million of free cash flow that you generated in fiscal 2010. Any more color on that? Or how -- I think you're pointing to the working capital needs for the Middle East order in the fourth quarter. If you could size that up for us or just qualify the free cash flow on that.

Sure. When we were -- obviously, at the end of the year, we're looking at a snapshot in time as of September 30th. We will see -- we expect to see increased cash flow from improved performance from the business. We expect capital spending to be probably slightly the same or slightly less than what we -- in the same range as last year. But I think, again, while we're seeing working capital improvement that the timing of shipment of this order, that it will be -- what we have shipped will be a receivable, and what we haven't shipped will be inventory waiting for shipment. And we think that could impact the working capital to where, as I said, we could end up being below the cash flow that we generated last year. We still expect positive cash flow for the year. It's just the timing here could drop us below that level of last year.

Certainly, as Greg mentioned before, the order to the Middle East, over two-thirds will be shipped in the fourth quarter, which will be impacting receivables and inventor. And, as well, there's just general timing issues with other shipments that will come into play, as well, as we look forward. So, as Greg mentioned, it will be positive but could be less than the prior year.

That's helpful. And just on the third quarter, this coming quarter, are you building inventory now for the Middle East order, and would you expect working capital to be a use of cash in the third quarter because of that?

We won't give guidance, obviously, on the overall business. But relative to US Pipe, we are in the -- right now in the process of building inventory. When an order of this magnitude, it can stay in the factory a little longer because there were sorts and inspection, we'll have the engineers from our customers traveling to come also to inspect the product. So when you go through those types of steps, the inventories tend to stay in the factory a little longer.

Brian Meyer.

Hey, guys, it's Baird. First off, then, I apologize if I missed this the first time around, but is it possible to quantify the investment in Mueller Systems and Echologics that was made this quarter? Or at least comment directionally?

Yes, let me give a little more color. For competitive reasons, we don't give specific financial data. We think that could be sensitive. But, of course, we did make the comment that it masked Mueller margins. So Mueller margins would -- operating income margins would be about 240 basis points higher if the results -- if their results were adjusted for these two early-phase businesses. And on a year-over-year basis, margins would improve about 70 basis points.

So it's certainly having some impact but, again, we're pretty confident and bullish on the long-term growth opportunities for these -- the investments that we're making today.

Okay, thanks. That's really helpful. And then, lastly here, is it possible to quantify the degree to which pipe pricing eroded sequentially?

Yes. If I recall, I can tell you these, on a sequential basis, pipe pricing came down about 7% from what our average was in the first quarter, Brian.

Got it. That's very good.

Still, like we said, still off 15% year-over-year, but we did see that sequential decline.

Seth Weber.

Hi, it's RBC. Just quick for Evan -- the swap expense on the interest line -- does that go away next year?

As we entered the year, there was about $13 million that needed to be amortized -- noncash swap amortization. And I think we stated that approximately $8 million will flow through the income statement this year and the remaining between $4 million and $5 million in the first part of next year.

And that was our final question.

Well, again, thank you very much for your interest in Mueller Water Products and your understanding about the sensitivity of our announcement that we made last night and what we can and can't discuss at this time. So thank you very much.

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