Mueller Water Products Inc (MWA) 2011 Q3 法說會逐字稿

Welcome and thank you all for patiently holding. (Operator Instructions). At this time I will turn the call over to Ms. Martie Zakas. Ma'am, you may begin.

Thank you, Laurel, and good morning everyone. Welcome to Mueller Water Products' fiscal 2011 third quarter conference call. We issued our press release reporting results of operations for the quarter ended June 30, 2011 yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Mueller Water Products had 155.6 million shares outstanding at June 30, 2011.

Discussing the third quarter's 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 two. 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 reconciliations between non-GAAP and GAAP financial measures are included in the supplemental information within our press release and on our website.

Slide three is our Safe Harbor disclosure statement addressing forward-looking statements. This slide includes cautionary statements identifying important factors that could cause actual result 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 two and three 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 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 2011 third quarter. I'll begin with a brief overview of the quarter followed by Evan's detailed financial report which covers key drivers affecting our businesses. After that I will follow with our outlook for the fourth quarter and we will then open the call to questions.

The third quarter adjusted operating income improved on a year-over-year basis although not as much as expected because municipal budgets continued to be constrained. However, in spite of this environment we were able to at least cover increased raw material costs with higher pricing at all three of our businesses.

Additionally, US Pipe's third quarter operating performance improved both year-over-year and sequentially. US Pipe's year-over-year performance benefited both from productivity gains and higher pricing even with a significant decline in volume. Ductile iron pipe pricing also improved sequentially.

Anvil's third quarter performance was particularly strong with a 15.7% increase in net sales and a more than doubling of operating income. Anvil's performance was driven by both ongoing volume growth and productivity improvements.

The market receptions of our newer water technology businesses is encouraging with Mueller Systems experiencing year-over-year double-digit net sales growth in the quarter. Third quarter bookings from up at both Mueller Systems and Echologics, our lead detection and pipe condition assessment business.

I will discuss these businesses in more detail later on the call. I will now turn the call over it Evan who will provide more details on the third quarter financial results.

Good morning, everyone. I'll first review the consolidated results and then discuss segment performance. Consolidated net sales for the 2011 third quarter of $366.7 million compared to net sales for the 2010 third quarter of $375.9 million. Net sales decreased primarily due to lower shipment volumes of $28.6 million partially offset by higher prices of $17.5 million.

Consolidated gross profit of $73.3 million for the 2011 third quarter was essentially flat compared to gross profit for the 2010 third quarter of $70.6 million yielding an improvement in gross margin to 19.2% for the 2011 third quarter compared to 18.8% for the prior-year period. Factors impacting gross margin for the 2011 third quarter compared to the prior-year period were higher sales prices of $17.5 million and manufacturing and other cost savings of $9.2 million which were offset by higher raw material cost of $10.8 million, higher pre unit overhead costs due to lower production of $9 million and lower shipment volumes of $5.9 million.

Consolidated selling, general and administrative expenses declined $2.5 million to $54.7 million for the 2011 third quarter compared with $57.2 million for the 2010 third quarter. Adjusted income from operations for the 2011 third quarter of $15.6 million improved $2.2 million from adjusted income from operations for the 2010 third quarter of $13.4 million.

Adjusted income from operations for the quarter improved at both US Pipe and Anvil. Higher sale prices of $17.5 million, manufacturing and other cost savings of $9.2 million and lower selling general and administrative expenses of $2.5 million from partially offset by higher raw material costs of $10.8 million, higher pre unit overhead costs due to lower production of $9 million and lower shipment volumes of $5.9 million.

Adjusted EBITDA margin for the 2011 third quarter improved to 9.8% from 9.2% in the 2010 third quarter. Net interest expense for the 2011 third quarter of $16.8 million included $2.1 million of noncash costs related to terminated interest rate swap contracts. As we had previously discussed, although these contracts were terminated prior to 2011, the related costs are being amortized over the original term of the swap.

Net interest expense for the 2010 third quarter was $15.8 million. Excluding the terminated swap contract cost, net interest expense decreased $1 million primarily due to a lower effective interest rate.

The 2012 third quarter income tax benefit of $200,000 reflected an income tax benefit on current operations offset by certain discrete income tax expense items. Income taxes for the 2010 third quarter included a one time $2.2 million expense related to the repatriation of earnings from Canada. We paid $4.7 million of income taxes, net of refunds, during the first three quarters of 2012.

Adjusted net loss per share of zero for the 2011 third quarter improved from an adjusted net loss per share of $0.1 for the 2010 third quarter. The 2011 third quarter adjusted results exclude after-tax noncash interest rate swap cost of $1.3 million and after-tax restructuring charges of $1 million. The 2010 third quarter adjusted results excluded tax adjustments for the repatriation of earnings from Canada and after-tax restructuring charges of $500,000.

There was an average of 155.5 million shares outstanding for the 2011 third quarter compared to an average of 154.5 million shares outstanding for the 2010 third quarter. I'll now move on to segment performance.

Net sales for Mueller Company for the 2011 third quarter came in lower than expected due to volume declines. Net sales were $165.8 million compared to net sales for the 2010 third quarter of $174.6 million. Our shipment volume declined $17 million compared to third quarter last year which we believe was the peak of ARRA shipments. However, we benefited from higher prices of $6.6 million and favorable Canadian currency exchange rates of $1.6 million.

As a reminder over the last 12 months we implemented price increases for valves and hydrants of 7% in July of 2010 and 7% in February 2011. Additionally, for brass products we implemented a 4% price increase in April 2010 and an 8% increase in February 2011.

The volume decline that we saw on a year-over-year basis negatively impacted third quarter income from operations. 2011 third quarter adjusted income from operations was $22.8 million with an adjusted operating margin of 13.8% and adjusted EBITDA was $34.6 million with an adjusted EBITDA margin of 20.9%.

Prior-year adjusted income from operations was $28.8 million with an adjusted operating margin of 16.5% and adjusted EBITDA was $41.1 million with an adjusted EBITDA margin of 23.5%.

In addition to being negatively impacted from lower shipment volumes of $6.4 million, adjusted income from operations also decreased due to higher per unit overhead costs due to lower production of $5.1 million, higher raw material costs of $4.3 million and higher other expenses of $1.6 million. We did, however, benefit from higher sell prices of $6.6 million in manufacturing and other cost savings of $5.2 million.

The [patzy] utilization for the 2011 third quarter was down appreciably from the prior-year period which had some impact on margins in the third quarter and will negatively impact margins in the fourth quarter due to higher per unit overhead costs due to lower production. We are continuing to invest in our newer water technology businesses as we believe the market growth opportunities are there and are encouraged by the market receptivity to both Mueller Systems and Echologics. Nonetheless expenses associated with investments to grow Mueller Systems and Echologics negatively impacted Mueller Company margins by about 200 basis points in the third quarter.

Turning to US Pipe. I should know note that this quarter represents the third consecutive quarter that year-over-year operating results improved even with lower shipment volumes. Net sales for US Pipe for the 2011 third quarter of $107.1 million decreased $13.1 million from net sales for the 2010 third quarter of $120.2 million largely due to lower shipment volumes of $21.8 million.

As a reminder the 2010 third quarter included $12.4 million of pipe shipments that we sourced and provided for a project outside the United States. Additionally, we believe the third quarter of 2010 was the peak of ARRA related shipments.

Third quarter net sales benefited from higher pricing of $8.7 million with pricing per ton for ductile iron pipe for the 2011 third quarter increasing both year-over-year and sequentially by 12% and 3% respectively.

The adjusted loss from operations of $9.4 million and anadjusted EBITDA loss of $4.8 million for the 2011 third quarter improved from an adjusted loss from operations of $10.4 million and an adjusted EBITDA loss of $5.8 million for the 2010 third quarter.

The 2011 third quarter benefited from higher sale price of $8.7 million manufacturing and other cost savings of $1.9 million and lower selling general and administrative expenses of $1.1 million. These items were partially offset by higher raw material costs of $5.3 million, lower shipment volumes of $2.9 million, and higher pre unit overhead costs due to lower production of $2.6 million.

As we look at Anvil it's 2011 third quarter adjusted income from operations was its highest quarterly performance in two years. Net sales for Anvil for the 2011 third quarter increased 15.7% to $93.8 million from net sales for the 2010 third quarter of $81.1 million. Net sales increased $10.2 million due to higher shipment volumes across most of the sectors we serve as well as higher prices of $2.2 million.

Adjusted income from operations for the 2011 third quarter of $9.6 million more than doubled from adjusted income from operations for the 2010 third quarter of $4.5 million. Higher shipment volumes of $3.4 million, higher sell prices of $2.2 million and manufacturing and other cost savings of $2.1 million improved operating results. These improvements were partially offset by higher per units overhead cost of $1.3 million and higher raw materials cost of $1.2 million.

For the 2011 third quarter, Anvil improved both its adjusted EBITDA and adjusted EBITDA margin. Adjusted EBITDA increased to $13.3 million, or an adjusted EBITDA margin of 14.2% for the 2011 third quarter compared to adjusted EBITDA of $8.4 million, or an adjusted EBITDA margin of 10.4% for the 2010 third quarter.

Free cash flow which is cash flows from operating activities less capital expenditures benefited primarily from improved working capital performance. Free cash flow was $4.4 million for the 2011 third quarter, an improvement of $19.8 million compared to negative $15.4 million for the 2010 third quarter.

At June 30, 2011 total debt was $693 million and included $420 million of 7.375% senior subordinated notes due 2017, $221.7 million of 8.75% senior unsecured notes due 2020, $49 million drawn under our asset-based credit agreement and $2.3 million of other.

Net debt at the end of the 2011 third quarter was $647.2 million. As of June 30, we have $174.1 million of excess availability under our asset-based credit agreement. I'll now turn the call back to Greg.

Thanks, Evan. Evan detailed our third quarter financial performance and has provided an analysis of our results. I will now discuss our outlook for the balance of the year highlighting some of the . market trends and key drivers affecting our businesses.

The municipal market continues to be challenging as we believe municipalities remain cautious as they balance the need to repair and replace aging water infrastructure against ongoing budget concerns. Consequently we believe municipalities continue to slow or delay spending on water infrastructures.

In its second quarter construction outlook McGraw-Hill cited two constraints on the fiscal picture for state and local government. They noted tight budgets and greater difficulty in obtaining financing through the bond market given the rise in municipal bond rates. For example, municipal bonds issuance through the first five months of this calendar year was down approximately 50% compared to last year.

In June, municipal bond issuance was approximately $25 billion, which is 60% greater than the monthly average through the first five months of the calendar year although down 17% from June 2010. And in July, bonds issuance represented some of the busiest weeks of the year. Also, despite some dire predictions the number of defaults on municipal bonds is down 60% from the same period last year.

According to the June issue of Municipal Market Advisors, no municipalities from so-called safe sectors which includes water, have gone into default since they started collecting data in 2009. However, while recent activity suggests there may be a rebound in bond issuance, we do not believe that we will see spending increases that will benefit us in 2011.

Purchase cost for scrap steel and brass, our two largest raw material inputs, increased during the third quarter. The average quarterly unit price for brass ingot was up 25% year-over-year and was up 4% sequentially. The average quarterly unit purchase price of scrap steel increased over 15% on a year-over-year basis, but was about the same as the second quarter.

Now I will turn into what we are a seeing for the fourth quarter. I'll begin with Mueller Company.

Overall, we expect fourth quarter net sales to increase marginally year-over-year despite a decline in volume in our core higher margin valve and hydrant products due to higher pricing and greater year-over-year net sales from Mueller Systems and Echologics. We expect Mueller Company's higher sales pricing in the fourth quarter to at least offset the increase in raw material costs.

As Evan referenced, our production in the third quarter was down appreciably this year compared to last year largely due to the third quarter volume decline. As a result we expect fourth quarter adjusted income from operations will be negatively impacted by higher costs due to lower production. Taking all these factors into account, Mueller Company's 2011 fourth quarter adjusted income from operations is expected to be below last year's and third quarter results.

I'll now turn to US Pipe. As mentioned previously, pricing on ductile iron pipe improved in the 2011 third quarter both year-over-year and sequentially. We expect 2011 fourth quarter pricing to increase both year-over-year and to be higher than in the third quarter. The average price on orders and backlog at the end of the third quarter was higher than the average price of third quarter shipments. We anticipate this trend continuing throughout the balance of the construction season.

We expect this volume in our US Pipe business will be up significantly in the 2011 fourth quarter year-over-year due to several factors. During this time period a year ago we had just closed our North Birmingham facility and were ramping up production at our remaining facilities. We were cognitive of not over extending ourselves and risking a decline in customer service levels. We were also very focused on improving our pricing and walked away from some orders. Therefore, we think we saw some share erosion last year which we believe we have recovered.

Additionally in July, we began shipping part of an order to a major water project in the Middle East. Overall, we believe net sales at US Pipe for the 2011 fourth quarter will be significantly higher than last year driven by increased volume and higher pricing.

For the fourth quarter adjusted income from operations we expect price increases to more than offset higher raw material costs and cost savings from our initiatives to more than offset higher production costs due to inflation. As a result of these factors in addition to the anticipated volume increases, we expect a substantial year-over-year improvement in US Pipe's income from operations. We also expect adjusted EBITDA to be positive for the fourth quarter.

Now I will turn to Anvil. We expect to see slightly higher shipment volumes in the 2011 fourth quarter year-over-year primarily due to the continued strength in our [regressed] oil and gas and industrial markets. We also expect to benefit modestly from higher pricing. As a result of these factors, we anticipate 2011 fourth quarter net sales to improve modestly over last year. We expect pricing increases to offset higher raw material costs and for cost savings to offset increases in production costs. We expect 2011 fourth quarter adjusted income from operations to be roughly comparable to the same period last year.

As a reminder, in the fourth quarter of last year, Anvil had a very favorable margin mix largely due to the shipment of a high margin engineered pipe hanger order to a nuclear power plant. But we expect Anvil's margin to be down slightly this year from the fourth quarter of last year.

Now I will summarize for the Company as a whole. We believe 2011 fourth quarter net sales will increase year-over-year attributable primarily to volume increases at US Pipe and higher pricing across all three businesses. We expect to see continued improvement in our adjusted income from operations compared to last year due to higher sales pricing, greater volume at US Pipe, and manufacturing and other cost savings which we expect to more than offset higher raw material costs and other higher production costs due to inflation. However as we've previously mentioned, at the Mueller Company business we will be negatively impacted by the lower production levels.

We expect free cash flow in the 2011 fourth quarter to substantially improve from last year due to operating performance and working capital management. Additionally, we made pension contributions of $13.4 million in the 2010 fourth quarter and anticipate making contributions of approximately $4 million in the fourth quarter this year.

In the 2010 fourth quarter we also incurred cash costs for terminating our swaps of $14.8 million. We expect that free cash flow for fiscal 2011will be marginally less than fiscal 2010.

We continue to improve our working capital efficiency. For example, inventory turns for the 12 months ended June 30 improved about a half a turn from the comparable prior-year period. Additionally, for the latest 12 months average receivables, inventory and accounts payable, as a percentage of net sales at the end of the third quarter, improved over 200 basis points from a year ago.

Other key variables for 2011, our corporate spending is estimated to be $30 million to $32 million, depreciation and amortization is estimated to be $82 million to $83 million and interest expense is estimated to be $65 million to $66 million, which as a reminder, includes $8 million of noncash interest expense associated with the terminated swap contracts.

Our effective income tax rate is expected to be between 38% and 40%. Capital expenditures are expected to be between $33 million and $35 million.

Two of the areas in the water infrastructure industry projected to have the most significant growth opportunities over the next several years, are metering systems and pipe condition assessment services. We are enhancing our offering by investing in Mueller Systems and Echologics to capitalize on these market growth opportunities. And while these two businesses currently represent less than 10% of Mueller Company's net sales, we believe we are well positioned for growth and are steadily gaining traction in the marketplace.

However, since both businesses are still in the investment stage, as we mentioned earlier, they currently mask the performance of Mueller Company's core business. Mueller Systems and Echologics help utilities improve the efficiencies of their water systems through Advanced Metering Infrastructure, or AMI, and acoustic leak detection in pipe condition assessment services, respectively. Today Advanced Metering Infrastructure, or AMI systems, account for 20% of the total market served and is projected to be more than 45% of the market in three years.

Almost all AMI systems today are one way fixed networks. We believe the water market will quickly transition from one way to two way AMI driven by additional needs to remotely monitor and control aspects of the water distribution system. We are meeting that need through enhancements to Mi.Net , our two way AMI system. For example, we recently introduced a remote disconnect water meter which allows utilities to initiate or discontinue service from the utility itself, increasing service time and reducing labor costs.

The Mi.Net system has been well received as evidenced in our growth in bookings in the third quarter and the bookings we expect to see in the fourth quarter. Given delayed spending in the municipal marketplace, we are particularly encouraged that we have experienced year-over-year sales growth, as well as an even greater increase in third quarter bookings. Similarly we are finding that municipalities are increasing their focus on leak detection and pipe condition assessment as a way to make appropriate replacement, rehabilitation decisions, protect water quality and maintain service levels.

Last December we invested in the leak detection and pipe conditioning assessment arena with the acquisition of Echologics engineering. Echologics is a pioneer in the area of acoustic noninvasive technology. Municipalities such as New Orleans, Toronto and Las Vegas are example of cities Echologics is helping to improve the efficiency of their water distribution systems.

We are encouraged with the reception both Mueller Systems and Echologics are receiving in the market. We are leveraging the strength of the Mueller brand with innovative technology that is helping municipalities improve efficiencies and customer service levels.

On last quarters' call I discussed Mueller Water Products' Board of Directors authorizing 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. We are continuing to explore these alternatives.

We appreciate your interest and know that you may have questions. As we have said before, it is our policy not to comment on any specific discussions, or any potential corporate transactions unless and until we enter into a definitive agreement with respect to such a transaction. No decision has been made to enter into any transaction and there can be no assurance that the exploration of alternatives will result in a transaction or add to the terms, conditions or timetable of any such transactions.

With that I will open this call for your questions.

Thank you. (Operator Instructions). Our first question today comes from Seth Weber. Your line is open and please state your company name.

Hey. Good morning. It's RBC.

Morning, Seth.

Morning. I guess maybe just a big picture question. Greg, can you talk about your comfort with the balance sheet at this point? The debt level is close to $900 million, the growth has been a little bit slower to come around. Can you just talk about how you're thinking about the balance sheet versus pursuing some of the growth initiatives that you talked about with some of these new business ventures and whether there are other levers that you could potentially pull if this US Pipe thing doesn't come through? Thank you.

Yes. Seth. First of all, and I will ask Evan to correct me if I'm wrong, but I think our absolute debt level is roughly or slightly less than $700 million, net debt around $640 million or $650 million.

Yes. Total debt is $693 million and net debt is roughly $647 million.

So the debt is slightly below that which you just mentioned, but still it's certainly, when you talk about the debt load, I think we are comfortable primarily due to the actions that we took a year ago.

A year ago we went to the bond market and essentially pushed out our maturities to 2020 and 2017. We replaced term debt. We used debt to replace some term debt and we replaced the rest of the term debt with an ABL.

If you recall in Evan's prepared remarks, he referenced that our primary covenant or measurement is availability under the ABL of which we need to maintain $34 million. We're currently at roughly $173 million, so we have, we think, a long run way.

So I think you're right about the growth in our end markets. I think that the picture right now is cloudy.

There has not been any change in the dynamics of our marketplace and all municipalities are doing is just delaying the inevitable, but I think the restructuring that we did of our capital structure and completed that a year ago, we feel very comfortable that we do have the long run way that allows us to continue to invest in these new technology and needs businesses as well as a potential delay in the rebound of our markets. I don't know, Evan, if you have anything more to add to that.

No. That's right. Under the ABL $174 million of excess availability at the end of this quarter and $163 million at the end of the prior quarter. So we feel that provides certain comfort that we have sufficient liquidity. That coupled with the $45 million of cash that we have on the balance sheet.

Okay. Thanks for that. I guess if I could just ask some follow-ups on the business. In April you had filed in your prior quarter Q you talked about the disruption from some storm activity. Did that affect the June quarter results at all?

It impacted Mueller by about $1 million on the bottom line. The primary impact was that our Albertville hydrant facility where we lost probably about four to five weeks of production. So not only did we lose that overhead absorption then we had to work overtime to be able to meet our customer delivery requirements. But the amount that it did impact us was just under our deductible, so it did impact the quarter at Mueller by about a $1 million.

Okay. Great. And then just on the pipe backlog. Can you give us, excluding the Middle East order, can you just talk about it on an apples to apples basis how that's trending?

Yes. It's trending in fact to do that, Seth, we will just look at June and July orders. Our June and July orders this year over last year are up 20% in tons, so I think it gets back to the comment we made earlier that some of the market share rose. And we saw last year with what was happening with pricing, our closing the plant and I think getting that behind us now, I think we have recovered that share that we lost.

So the backlog is up a little over 50% on a year-over-year basis. Now, you're right. Some of that certainly, is the Bahrain order, but without the Bahrain order the backlog is still up and it is primarily being driven by the order input and the orders that we have taken in June and July as compared to last year.

Great. Okay. Thank you very much.

Thanks, Seth.

Thanks.

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

Good morning. It's Goldman Sachs.

Good morning.

Morning, Jerry.

Greg, can you give us an update on backlog or book-to-bill for Mueller Co. similar to what you just gave us on Pipe? Thanks.

Yes, Jerry, and again I will remind everyone that we're down to one to two week delivery promises on most of the Mueller product line, so backlog is a little less meaningful. But if you look at last year, our total backlog at Mueller was slightly under $120 million and this year it's $102 million. So it is down year-over-year, but again, to put it in context, and I think of market demand and what we saw last year, we had a 7% price increase on valves and hydrants that was effective July 1 last year. That was our second price increase last year.

So probably in the third week and fourth week of June we saw a significant pull forward of orders from our distributors ahead of the price increase, and a lot of that was in our backlog a year ago. So when we look at year-over-year backlog, we see that most of that difference was the orders that were pulled forward by our distributors. As we look at it, we think that it's down maybe just very slightly relative to where it was a year agoif we look at pure market demand.

That's helpful. And, Evan, on the Bahrain order how much contribution do you expect in this quarter, and any similar opportunities that you're bidding on that we should keep in mind?

We're always looking at opportunities, selected opportunities internationally, but for competitive reasons have chosen not to provide profitability on the order, but I would say in Q4 somewhere around 15% of the order will ship with the bulk of the order shipping in the first half of 2012.

And lastly the restructuring charges you took in the quarter, what the payback period and can you say more about those restructuring actions, and are there any others that you're considering?

The primary restructuring activities in the quarter were headcount reduction related, and as we take a look at opportunities within each of our business segments, we continually look at ways to be more efficient and through that efficiency sometimes there are headcount reductions. So I would say all of these restructuring activities are around headcount related.

Jerry, I will just expand upon that a little bit. If we look at the number of plants that we've closed the last several years, we've taken out our least efficient, our higher cost facilities. And today if we were to make any significant restructuring costs, it might be potentially some further combination of, I would say, some of our smaller volume product lines, and see if we can't move those into some of our larger facilities, but, I would say, that's something that we're always looking at. That's something that we've been hesitant to do only because we think it could impact our flexibility for the future, but we always have some of those opportunities.

Thank you very much.

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

Oppenheimer. Thanks. Good morning.

Morning.

Yes. Just looking at Anvil, pretty nice top line. Just wondering if you think you're gaining share there or if maybe there's some channel gains from getting out of the distribution business?

Well, a couple things I think. In fact, yes, I think Anvil and the management team there has done a great job in managing that business, both I think on the cost side and how they're managing in the marketplace.

Several things impacting, I think, the Anvil top line growth. Again, almost between 15% and 20% of the revenues of Anvil come from the oil and gas market here in the US and that market has continued to be very strong. So we're getting some benefit from that market.

Also, when you look at the diversity of the nonresidential construction markets that Anvil services and provides products to, that we cover a lot of ground. So from high rise office buildings, to strip malls, to industrial facilities, and I would say in the last four or five months we have seen manufacturing facilities and industrial facilities increasing some investment. So I think that those markets have helped drive some of the top line, but also we have grown market share I think from several accounts.

One, the introduction of new products, but Anvil has been focused the last 18 months with investing and implementing lean systems that we have been able to reduce delivery lead times while also bringing down inventories, and that we think that with our lead times that we are now offering the marketplace and our level of customer service, that we have been gaining some share.

So I think that it is a combination of the markets we serve, a few of those niches have been growing. I think internally with new products and just our improved processes been able to take some share, and I think we're also seeing on the bottom line the benefits of some of this restructuring initiatives from improved operating leverage.

And as a follow-up to that, the year-over-year guidance I think implies a little bit down sequentially. Any reason why?

Yes. Sequentially that we may have a little bit of deterioration on a quarter-over-quarter basis from higher raw material costs and that will flow through in the fourth quarter. So I think that while we've been pretty much staying ahead with our price increases, that some of the higher raw material costs that are on our balance sheet at the end of the third quarter will flow through the income statement in the fourth quarter.

Thanks. And then just moving to US Pipe. You had a positive price cost in the quarter. Assuming price cost neutral going forward, how would you characterize what break even volumes would look like, and then from there, what kind of incremental margins is the business set up for?

Yes, what we said at the beginning of the year, that we needed from the volume standpoint, and you're right, there were three factors. Certainly cost savings from the North Birmingham plant closure. We achieved those cost savings and that's behind us now because that plant was closed a year ago.

The next is the selling relationship between price and cost of raw materials, as you pointed out, and where we expect that to be in the fourth quarter is where we think it needs to be for us from that factor to be at break even. Then it does get down the volume, and we said that we needed flat volume in 2011 flat with 2010.

If you look through our first three quarters, our shipment volume in tons is down about 20%. That certainly has been a factor that's impacted our ability to get to break even at the EBITDA level.

With the increased volume that we expect in the fourth quarter, as we said in our prepared remarks, we think that EBITDA will be positive. So again, I would say that with the factors of price and cost relationships that where we expect to come in this year, we would probably need to see on an annual basis volumes to be about 10% greater for the full year than what we expect to see this year.

Thank you.

I think once we get above that then I think we would obviously see -- even better operating leverage.

Okay. And would you care to characterize the kind of operating leverage that you think you have?

Yes. I think in the Pipe business that we thought that we would see that once we get to that break even, and if the other variables holds constant, that we would see 30% dropping to the bottom line.

Thanks. Just a final one. The growth investment impact on -- I think it was 200 basis points consolidated?

No. Just for the Mueller business unit.

Okay. Thanks for the clarification.

Yes.

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

D.A. Davidson. Good morning.

Morning, Brad.

Yes, Greg, I guess just taking a step back and looking at the quarter, it looks like results at Mueller Co. might have been through the biggest variance from maybe the Company's expectations coming into the quarter. I'm just wondering if there is anything else there, maybe just besides I guess weather as well, or was it just simply a change in market conditions for the worse as the quarter progressed?

Yes,Brad, as we look at the Mueller business, when you look on a year-over-year basis, volume was down about $17 million and I will say that going into the quarter we expected the quarter to be challenging. We did not expect to see that kind of fall-off.

I mean if we look at detail and the Mueller cost savings more than offset the overhead absorption issue. So the reduced -- using less capacity. Pricing offset higher raw material costs.

The big hit certainly was the fall-off in volume, and as I said, I think that while we expected a challenging quarter, it dropped off more than what we expected and that was all probably primarily in the June month. We were down on a year-over-year basis, orders were down a little bit in April and May, but we saw a big drop in June. Now, we expected some of that for the reasons that I mentioned earlier because of the price increase that we implemented last year July 1 and saw a pull forward of orders, but I think the overall drop-off in June bookings was a little greater than what we expected.

So there's nothing at Mueller that concerns us now relative to the cost side. They're delivering the cost savings that they committed to. I think that as I said, we're taking the lead on pricing to make sure we offset the raw material costs. The impact in the third quarter was volume, and as Evan and I mentioned in the prepared remarks, that reduction in production in third quarter will impact us in the fourth quarter.

Okay. That's helpful, Greg, and then US Pipe. Can you talk about whether you're seeing any more international opportunities like you booked, or is it still the one offs out there?

When we look at international orders, the primary market area that we can we can compete in is the Middle East. Europe is pretty closed when you look at the indigenous manufacturers there. Asia, certainly their is a lot of ductile iron pipe manufacturing capacity in Asia.

The Middle East we can be competitive, but there are so many variables relative to if it's US funding and so on. So I would still categorize it as a one off rather than a broad, market opportunity, but certainly there's a lot of investment going on in the Middle East, and we continue to follow those opportunities.

Okay. That's helpful. And then I guess just the scrap price is the settling out here and I think most industry participants speculate it will stay that way, at least for now. Do you think you can continue to get the pricing momentum at US Pipe that you have been experiencing?

Well, we announced a price increase on July 1 of 7% just because, again, we are so under utilizing our capacity and trying to make up that kind of ground. So we'll have to wait and see, but again, I think when you look at all the under capacity utilization in the industry, I think that we have to look at not only what's happening to scrap costs, but also what's happening to capacity utilization.

But your point is a good one. I think generally we find it's easier to pass along price increases in an environment of rising raw material costs, but certainly we will know by the end of this quarter how that 7% price increase -- how much of that we were able to achieve.

Okay. And then I think you said $33 million to $35 million in CapEx for this fiscal year. Any thoughts on fiscal 2012?

We're in the process of finalizing our budget now, but I think if you look at the big picture on capital spending, we have closed a number of our plants the last several years. They were our older, our less efficient plants and those plants, just by their nature, required more maintenance capital.

Today we are utilizing on average 50% to 60% of our existing capacity, so we certainly have plenty of capacity and don't need capital for any capacity expansion. The level that we've spent the last couple years is the level that we think is satisfactory for maintenance needs and to make some productivity improvements. I mean mainly focused on reducing cycle times and improving inventory terms.

So we'll be able to give, obviously, much more definitive guidance on our next call for the year. But as I look at the big picture, I don't see a significant from where we've been running the last several years.

Perfect. Thanks a lot, guys.

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

Jefferies & Company.

Good morning.

Good morning.

Most of my questions have been answered, but just around US Pipe. Given your guidance in that segment potentially getting back to positive EBITDA, does that change your thoughts around any of the strategic actions that you guys have been looking at?

Seth, when we look at the business, the Board and management team considered a number of factors. We still think we are going to see some volatility in the ductile iron pipe market for some time. So we are going to continue to look at alternatives and then make a decision, not only what we think is best in the short-term but also the long-term. So we have a very open mind when we look at those alternatives

Alright. Then I know you don't want to give out too much detail, but do you care to share how many parties have done due diligence, or something like that?

No, Seth. Like I said, that we really think the best approach for us to take is when we have something more definitive, then make it be known. But at this point we think it's best just to make everyone aware that we are looking at alternatives.

Alright. No problem. Then lastly, do you have a sense of what the total market pie is for the metering and efficiency segment?

Today we think the AMI market is about $80 million. We think that over the next several years that's going to grow bout 20% per year. When we look at, we think it's in the early stages of development. When we look at our technology, we have good technology, we think we can leverage the Mueller brand name.

We don't think that in the AMI two way that there is a leader today, so we think that we have the opportunity to grab one of those leadership positions over the next couple years. We don't think it will probably be material for us in 2012, though we've been very pleased with the acceptance that we've seen from the technology people at water utilities. But again, we estimate it to being about an $80 million to $90 million market today, growing about 20% per year in the water space for the next several years.

Is that something that you guys can easily translate to opportunities overseas?

Good question. We're still trying to learn that.

Different meter technology overseas than what our current meter -- the US market primarily uses positive displacement meter. Overseas it's single jet meter. And there are certainly different frequencies used overseas, but we think the concept of what we're trying to incorporate into a smart water infrastructure, we certainly think those needs exist around the world, but our technology would need to be adjusted.

Got it. Alright. Thanks a lot. Good luck.

Thank you.

Thank you.

And that does concludes the question-and-answer segment of today's call.

Well again, thank you very much for your interest in today, and we look forward to seeing all of you soon.

That does conclude today's conference. Thank you all for participating. You may now disconnect.