Mueller Water Products Inc (MWA) 2011 Q4 法說會逐字稿

Welcome, and thank you all for patiently 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.

It is now my pleasure to turn the call over to Mr. Gregory Hyland. Sir, you may begin.

Laurel, thank you. This is Martie Zakas. And welcome to Mueller Water Products fiscal 2011 fourth quarter conference call. We issued our press release reporting results of operations for the quarter ended September 30, 2011, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Mueller Water Products had 155.8 million shares outstanding at September 30th, 2011.

Discussing the fourth 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 on September 30th, 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 furnish 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 2011 fourth quarter. I'll begin with a brief overview of the fourth quarter, followed by Evan's detailed financial report which covers key drivers affecting our business. After that, I will follow with our outlook for the full year 2012, and then the first quarter. We will then open the call to questions.

As we discussed last quarter, municipal budgets continue to be under significant pressure, and that is impacting demand for our products. In addition, we had a very difficult year-over-year comparison at Mueller Company. Lower production levels in our Mueller Company business negatively affected our 2011 fourth quarter performance as compared to 2010. Mueller Company's production was down appreciably this year compared to last year, largely due to the pulled forward of orders in advanced of our July 2010 price increases.

We continue to make progress in evaluating strategic alternatives for US Pipe, including divestiture, and are actively engaged in this process with our financial advisor, Bank of America Merrill Lynch. I'll provide additional detail concerning US Pipe later in the call.

Anvil had another strong quarter, with net sales increasing 8.2%, and adjusted operating income increasing 38% on a year-over-year basis. Anvil's results continue to be driven by ongoing volume growth, notably in its oil and gas business and productivity improvements.

We have been able to manage through unprecedented volume declines with our Mueller Company and US Pipe businesses and have improved the efficiency of our operations. We believe we are well positioned with our market leadership, and continue to invest in newer technologies, which leverage our brand leadership and address the evolving needs of the water infrastructure industry.

We continue to move our businesses in directions that we believe will allow us to grow as municipalities emerge from their current budget restraints.

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

Good morning, everyone. I'll first review the consolidated results and then discuss segment performance.

Consolidated net sales for the 2011 fourth quarter of $373.6 million, increased 7.8%, compared to net sales for the 2010 fourth quarter of $346.7 million. Net sales increased due to higher shipment volumes of $12.6 million, primarily at US Pipe, higher prices of $12.6 million, and $1.7 million of favorable Canadian currency exchange rates.

Consolidated gross profit of $66.5 million for the 2011 fourth quarter compared to gross profit of $71.7 million for the 2010 fourth quarter. Gross margin for the 2011 fourth quarter was 17.8%, and gross margin for the 2010 fourth quarter was 20.7%. Gross profit for the 2011 fourth quarter was negatively impacted primarily by higher per unit overhead cost due to lower production of $15.3 million, $12.6 million of which was at Mueller Company. Higher sales prices of $12.6 million more than covered higher raw material costs of $11 million. Additionally, gross profit benefited from manufacturing and other cost savings of $10.7 million.

Consolidated selling, general, and administrative expenses of $57.4 million for the 2011 fourth quarter, increased $1.1 million, compared to $56.3 million for the 2010 fourth quarter. One contributing factor for higher SG&A expenses was the further development of our newer technology businesses.

Adjusted income from operations for the 2011 fourth quarter was $9.1 million, compared to adjusted income from operations for the 2010 fourth quarter of $15.4 million. Adjusted income from operations for the quarter improved at both US Pipe and Anvil, but was down for Mueller Company and on a consolidated basis. The results were negatively impacted by higher per unit overhead cost due to lower production, of $15.3 million, higher raw material costs of $11 million, and higher selling, general, and administrative expenses of $1.1 million. These items were partially offset by higher sales prices of $12.6 million, and manufacturing and other cost savings of $10.7 million.

Adjusted EBITDA margin for the 2011 fourth quarter was 7.9%, compared to 10.6% for the 2010 fourth quarter.

Interest expense net for the 2011 fourth quarter of $16.6 million included $2 million of non-cash cost related 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. Interest expense net for the 2010 fourth quarter of $20.6 million included $6.5 million of cost related interest rate swap contracts. Excluding the swap cost, interest expense was essentially flat year-over-year.

A 2011 fourth quarter income tax benefit of $1.7 million reflected an income tax benefit on current operations partially offset by an adjustment to the expected effective tax rates for state and non-US income taxes. Our effective income tax rate for the 2011 fourth quarter was 18%, while the full year 2011 effective income tax rate was 35%.

Adjusted net loss per share was $0.03 for the 2011 fourth quarter, compared to adjusted net loss per share of zero for the 2010 fourth quarter. 2011 fourth quarter adjusted results exclude after-tax interest rate swap cost of $1.2 million and after-tax restructuring charges of $1.1 million. The 2010 fourth quarter adjusted results exclude after-tax interest rate swap cost of $3.9 million, after-tax loss on early extinguishment of debt of $2.5 million, and after-tax restructuring charges of $800,000.

There was a weighted average of 155.6 million shares of our common stock outstanding for the 2011 fourth quarter, compared to a weighted average 154.6 million shares outstanding for the 2010 fourth quarter.

I'll now move on to segment performance and begin with Mueller Company. Mueller Company's net sales were $161 million for the 2011 fourth quarter, compared to net sales for the 2010 fourth quarter of $163.7 million. Our shipment volumes declined $8.3 million, compared to the two -- to the fourth quarter last year. However, we benefited from higher prices of $4.2 million, and favorable Canadian currency exchange rates of $1.4 million.

As a reminder, over the last 18 months, we implemented price increases for valves and hydrants of 7% in July 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. Although they represent a small portion of total sales, net sales in our newer technology businesses, Mueller Systems and Echologics, grew in the quarter.

Volume in Canada was down due to the completion of their stimulus spending and the condition of the residential construction market.

Our per unit overhead cost due to lower production was the single largest factor negatively impacting fourth quarter adjusted income from operations. Our production was down appreciable this year compared to last year, largely due to the pulled forward orders in advance of our July 2010 price increases, as well as our inventory reduction during this fourth quarter, of approximately $15 million. Unit sales were down where production was down even more.

2011 fourth quarter adjusted income from operations was $14.1 million, with an adjusted operating margin of 8.8%, and adjusted EBITDA was $26.2 million, with an adjusted EBITDA margin of 16.3%. Prior year adjusted income from operations was $26.6 million, with an adjusted operating margin of 16.2%, and adjusted EBTIDA was $39.1 million, with an adjusted EBTIDA margin of 23.9%.

In addition to being negatively impacted by higher per unit overhead cost due to lower production, of $12.6 million, adjusted income from operations also decreased due to higher raw material costs of $4.3 million, lower shipment volumes of $3.7 million, and higher selling, general, and administrative expenses of $1.7 million.

We did, however, benefit from manufacturing and other cost savings of $6.3 million, and higher sales prices of $4.2 million. The [PTZ] utilization for the 2011 fourth quarter was down appreciably from the prior year period, which had some negative impact on margins in the fourth quarter and will negatively impact margins in the 2012 fourth quarter -- first quarter, due to higher per unit overhead cost due to lower production.

As we discussed last quarter, we continue to invest in our newer water technology businesses. Expenses associated with investments to grow Mueller Systems and Echologics negatively impacted Mueller Company margins by over 200 basis points in the 2011 fourth quarter.

Turning to US Pipe. The 2011 fourth quarter represents the fourth consecutive quarter that year-over-year operative results improved. Net sales for US Pipe for the 2011 fourth quarter of $117.3 million, increased $22.4 million or 23.6% from net sales for the 2010 fourth quarter of $94.9 million, largely due to higher shipment volumes of $18.1 million. 2011 fourth quarter net sales included about $9 million of exports, including a major order to the Middle East.

We believe that volume in the fourth quarter at US Pipe improved year-over-year largely due to market share gains and exports. As a reminder, in the fourth quarter of 2010, we had just closed our North Birmingham facility and were ramping up production at our remaining facilities. We were also very focused on improving our pricing and walked away from some orders. Therefore, we saw some share erosion last year, which we believe we have recovered.

Fourth quarter net sales also benefited from higher pricing of $4.3 million, with pricing per ton for ductile iron pipe for the 2011 fourth quarter increasing both year-over-year and sequentially by 6% and 7% respectively. Higher sales prices covered higher raw material costs in the fourth quarter.

The adjusted loss from operations of $6.8 million and an adjusted EBITDA loss of $2.1 million for the 2011 fourth quarter, improved from an adjusted loss from operations of $11.3 million, and an adjusted EBITDA loss of $6.4 million, for the 2010 fourth quarter. The 2011 fourth quarter benefited from higher sales prices of $4.3 million, higher shipment volumes of $2.3 million, manufacturing and other cost savings of $2 million, and lower selling, general, and administrative expenses of $1.3 million. These items were partially offset by higher raw material costs of $4.1 million.

As we look an Anvil, it's 2011 fourth quarter adjusted income from operations was its highest quarterly performance in more than two years. Net sales for Anvil for the 2011 fourth quarter increased 8.2% to $95.3 million from net sales for the 2010 fourth quarter of $88.1 million. Net sales increased $7.2 million, due primarily to higher prices of $4.1 million and higher shipment volumes of $2.8 million. Anvil saw sales volume improvements across many end markets, especially oil and gas and industrial.

Adjusted income from operations for the 2011 fourth quarter of $10.5 million increased 38% from adjusted income from operations for the 2010 fourth quarter of $7.6 million. Higher sales prices of $4.1 million, manufacturing and other cost savings of $2.4 million, and lower selling, general, and administrative expenses of $500,000, all contributed to these improved operating results. These improvements were partially offset by higher raw material costs of $2.6 million and higher per unit overhead cost due to lower production of $2.2 million.

For the 2011 fourth quarter, Anvil improved both its adjusted EBITDA and adjusted EBITDA margin year-over-year. Adjusted EBITDA increased to $14.1 million, or an adjusted EBITDA margin of 14.8%, for the 2011 fourth quarter, compared to adjusted EBITDA of $11.5 million, or an adjusted EBITDA margin of 13.1%, for the 2010 fourth quarter.

Now turning to a discussion of our liquidity. Free cash flow, which is cash flows for operating activities less capital expenditures was $33.2 million for the 2011 fourth quarter, compared to $15.9 million for the 2010 fourth quarter. At September 30th, 2011, total debt was $678.3 million, and included $420 million of 7.375% senior subordinated notes due 2017, $221.7 million of 8.75% senior unsecured notes due 2020, $34 million drawn under our asset-based credit agreement, and $2.6 million of other. In the 2011 fourth quarter, we repaid [$15] million of the drawn amount under our ABL credit facility.

Net debt, which is total debt less cash and cash equivalents, at the end of the 2011 fourth quarter was $617.1 million. As of September 30th, we had $165.2 million of excess availability under our asset-based credit agreement.

I'll now turn the call back to Greg.

Thanks, Evan. As we look back on 2011 and forward to 2012, we continue to face end markets in our water infrastructure businesses that remain challenging. While the near-term prospects remain somewhat uncertain, we believe that we have demonstrated our ability to manage through these conditions, while making appropriate investments for future growth.

The current situation with municipal budgets is [cloudy] at best. And though public spending is currently under pressure given lower tax receipts, water utilities generally have more stable revenue streams and need to operate on regular maintenance cycles. In addition, most of their funding comes from water rates, which generally have been increasing.

However, while we believe that spending for our products is at the bottom, we currently see no signs that would lead us to believe that we will see increased spending for our products in the near future. However, we believe that the long-term prospects for both our end markets, municipalities and residential construction, remain encouraging and that we are well-positioned to benefit when they begin to return to historical levels. The residential construction market remains mired in a deep and long [trough] with annualized housing starts fluctuating between 550,000 and 650,000 units.

Blue chip economic indicators consensus forecast a roughly 20% growth in housing starts for calendar 2012, though this growth is often historically small-based. We have previously stated that we expect it to lag a sustained recovery by up to 18 months as the excess inventory of finished lots was absorbed. We now believe it is possible that the lag period may be shortened, as some finished lots and home vacancies are being worked through.

There are two key drivers supporting the 50-year historical average for housing starts of 1.5 million. The first is household formation, which over the past 50 years, has accounted for around 1.2 million units per year. The second is demolitions and rebuilds, which have been around 300,000 units per year. New household formation has plunged to less than half of its historical average since the latter part of 2008. Once the economy recovers and the job market improves, we should see improvement in household formations. For example, the US Census Bureau estimates 13 million new households will be formed over the current decade. Due to this demographic demand, housing analysts such as Ivy Zelman, are calling for new construction of over 14 million houses.

Municipalities continue to balance the need to repair and replace aging water infrastructure with ongoing budget concerns. As we have stated, we believe they continue to slow or delay spending on water infrastructure projects. However, given the deteriorating state of many drinking water systems and the need to meet various regulations, these projects cannot be put off indefinitely.

A growing number of municipalities have raised and continue to raise water rates to help fund these infrastructure repairs, replacements, and upgrades. For example, Chicago recently included $147 million of water and sewage rate increases in its 2012 budget. If approved, it would be used to replace 900 miles of the city's water pipes. Other cities with proposed increases include Cleveland, Ohio, where rates would rise 82% over the next four years.

We are also seeing activity pick up at the state level, including in Texas, which has a referendum on the November 2011 ballot that would allow additional municipal bonds to be issued to fund water infrastructure improvements. Additionally, California is scheduled to have an $11.4 [million] water bond referendum on the November '12 ballot. These measures support our belief that a pickup in spending on our aging water infrastructure is a matter of when, not if.

Although we continue to feel that the long-term growth potential is promising, it is clear that municipalities remain constrained and cautious in their spending near term. For example, the American Water Works Association's annual state of the industry survey reports that on average utilities anticipate only a slight increase in capital spending in 2012, with infrastructure taking priority over other uses of capital, although we won't likely have additional visibility on an increase in spending for our products until we get closer to the construction [season].

On the non-residential construction front, forecasts we are seeing call for slight growth in calendar 2012. These forecasts range from 1% to 4% growth for calendar 2012.

Now turning to what we are seeing for the full 2012. I'll begin with Mueller Company and look at the core businesses, as well as our newer technology businesses. For the core business, which includes valves, hydrants, and brass service products, we do not expect any further deterioration in demand in 2012. But until we get closer to the construction season, we don't see whether there will be any signs of growth. We expect to see some carryover price improvement from last February's price increases.

For Mueller Systems and Echologics, we expect continued strong year-over-year net sales growth. For Mueller Systems, as we gain share, particularly with our two-way AMI system, we expect to see strong net sales growth, although we are starting from a relatively small base. Echologics continues to gain traction with recent wins, including a three-year agreement with United Wire and an extension of our contract with New Orleans. Echologics will provide leak detection and pipe condition assessment services for United Water.

We will increase our engineering and development expenditures to enhance our position to gain share in these higher growth segments. Therefore, we expect total SG&A to be higher than 2011. As mentioned previously, raw material costs are expected to continue to be a headwind, as we saw scrap costs increase steadily throughout last year. However, we expect pricing to offset any higher raw material costs. We also expect our cost savings initiative to more than offset any other inflationary cost increases.

I'll now turn to US Pipe. We saw pricing on ductile iron pipe improve steadily throughout 2011, and we expect this trend to continue in 2012. We expect our overall volume to increase year-over-year, as a result of increased export sales, while we expect domestic volumes to remain flat.

For 2012 operating results, we expect price increases to more than offset higher raw material costs. Production volumes are expected to be slightly higher than prior year, inline with shipment volumes, therefore, reducing per unit overhead cost. Our ongoing cost-saving initiatives are expected to also contribute positively to operating results. As a result of these factors, we expect year-over-year improvement in US Pipe's operating results.

Based on our current volume, pricing and raw material cost expectations, we believe EBITDA will be slightly positive for the year. Our expectation for pricing relative to raw material cost is the primary driver of this outlook.

Now I'll turn to Anvil. We expect to see slightly higher shipment volumes in 2012, primarily due to the continued strength in our addressed oil and gas and industrial markets. We also expect to benefit modestly from higher pricing. As a result of these factors, we anticipate the 2012 net sales will improve moderately over last year.

We expect pricing increases to offset higher raw material costs, and our ongoing manufacturing and other cost-savings programs to more than offset increases in production costs. We expect to see higher SG&A costs year-over-year, largely due to higher sales commissions. As a result of these factors, we expect a 2012 adjusted income from operations will be marginally above the prior year.

Other key variables for 2012, our corporate spending is estimated to be $30 million to $33 million, depreciation and amortization is estimated to be $82 million to $84 million, and interest expense is estimated to be $62 million to $64 million, which, as a reminder, includes $5 million of non-cash interest expense associated with the terminated swap contracts. Our effective income tax rate is expected to be between 36% and 40%. Capital expenditures are expected to be between $35 million and $40 million.

For the full year 2012, we expect free cash flow to be higher than 2011. We continue to improve our working capital efficiency. For example, inventory turn for the 12-months ended September 30th, improved about half a turn from the comparable prior year period. Additionally, for the last 12 months, average receivables, inventory, and accounts payables as a percentage of net sales at the end of the fourth quarter improved over 200 basis points from a year ago. We believe inventory turn will continue to improve in 2012, although most of our improved free cash flow generation is expected to come from better operating results.

On a consolidated basis, as we look to 2012, we expect to achieve higher net sales across all three businesses. In total, the growth in net sales is expected to be driven by higher pricing, an increase in export shipments from our US Pipe business, growth in Anvil's [addressed] oil and gas markets, and sales growth at Mueller Systems and Echologics. We expect pricing will more than offset higher raw material costs and manufacturing and other cost savings will more than offset other inflationary costs.

On a year-over-year basis, we expect to be negatively impacted by higher per unit overhead cost earlier in the year, but the comparison should ease considerably in the second half of the year. We expect operating income will grow across all three businesses, with the greatest improvement coming from US Pipe, primarily driven by higher sales pricing, greater production, and overall cost savings.

Now turning to what we are seeing for the 2012 first quarter. I'll begin with Mueller Company. Overall, we expect first quarter net sales to be roughly flat year-over-year, largely due to higher prices offset by continued weakness in the Canadian market. As Evan referenced, our production in the 2011 fourth quarter was down appreciably this year compared to last year, due largely to the pull forward of orders in advance of the July 2010 price increase. In addition, we also lowered production on a year-over-year basis, as we reduced inventory roughly $15 million during the 2011 fourth quarter, compared to $2.5 million during the 2010 fourth quarter. As a result, we should have slightly higher per unit cost as our fixed overhead is spread over a smaller production base which is expected to impact the first quarter.

We expect Mueller Company's higher sales pricing in the first quarter to offset any increase in raw material costs. Additionally, we continue to invest in our newer technology businesses through higher selling and R&D expenses.

Taking all these factors into account, Mueller Company's 2012 first quarter adjusted income from operations is expected to be below last year's first quarter results.

I'll now turn to US Pipe. As mentioned previously, pricing on ductile iron pipe improved in the 2011 fourth quarter both year-over-year and sequentially. As we look at pricing levels in our current backlog, we believe the 2012 first quarter pricing will also increase both year-over-year and sequentially. We expect that volume in our US Pipe business will be up in the 2012 first quarter year-over-year, as we believe we have recovered market share we lost associated with the closure of the North Birmingham facility.

Additionally, our exports are also expected to grow during the first quarter, with more than a third of the $37 million order to the Middle East shipping in the quarter. Overall, we believe net sales at US Pipe for the 2012 first quarter will be higher than last year, driven largely by increased volumes and higher pricing. We expect to see continued year-over-year improvement in our operating performance in the first quarter, largely due to volume growth. However, we expect to be negatively impacted by higher raw material costs in this quarter.

Now I'll turn to Anvil. We expect to see slightly higher shipment volumes in the 2012 first quarter year-over-year, primarily due to the continued strength in our direct oil and gas industrial markets. We also expect to benefit modestly from higher pricing. As a result of these factors, we anticipate 2012 first quarter net sales to improve modestly over last year. We expect pricing increases to just offset the higher raw material costs that we are experiencing. We expect that increases in production costs and higher per unit overhead costs due to lower production will only be partially offset by our ongoing manufacturing and other cost-saving initiatives.

In summary, we expect 2012 first quarter adjusted income from operations to be slightly below the first quarter last year.

For the company as a whole, we believe 2012 first quarter net sales will increase year-over-year, attributable primarily to volume increases at US Pipe and modestly higher pricing across all three businesses. We expect to see adjusted income from operations decline marginally year-over-year, largely due to higher raw material costs and higher per unit overhead cost. Additionally, we continue to increase our investments in Mueller Systems and Echologics.

Before opening the call for questions, I want to return to our conversation about strategic alternatives for US Pipe. On last quarter's call, I discussed our Board of Directors' decision to authorize the exploration of a variety of strategic alternatives for US Pipe. We are making progress in this process, working very closely with our financial advisor, Bank of America Merrill Lynch. We have been particularly focused on a potential sale of the business and are actively engaged in this process with interested parties. We are continuing to explore alternatives. And again, we must remind you that 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 as to the terms, conditions, or time table of any such transaction.

We appreciate your interest and know that you may have questions, but we do not currently intend to comment further on any specific discussions or any potential transactions unless and until we enter into a definitive agreement with respect to such a transaction.

With that, I'll open the call for your questions.

Thank you. (Operator Instructions) Our first question today comes from Kevin Maczka. Sir, your line is open, and please state your company name.

Good morning. BB&T Capital Markets.

Morning, Kevin.

Good morning.

Good morning. Greg, I guess, first, can you say a little bit more on these exports at US Pipe? That was a big driver in Q4. You're looking for more next year. Can you frame the size of the opportunity there? I didn't quite catch that.

Yes. Kevin, it's primarily one large order that we got in the Middle East, $37 million in total. And if you look at it, where we currently had scheduled, we shipped slightly less than a third of that in the fourth quarter, and the rest of it will ship in the first and second quarter of this year. It's a -- the margins on this are, if you look at it in total, are less than we typically would earn, but that's primarily because, as you would expect on an order of this size going to the Middle East, that transportation costs were a larger percentage of the overall dollar volume -- dollar value. Sorry. And we don't get a -- we don't get a markup on those transportation costs, given how competitive it was to win the order.

But most of it is being driven by the one order that we received several months ago, and we're now in the early stages of shipping it.

And are you hopeful that that one order becomes multiple orders or is this kind of a one and done?

There will be -- there will be, on this particular project, this is the first phase of the project, and there will be several more phases. So, so far we believe that the customer has been pleased with our performance, so it should at least put us in a good position to be considered for the follow-on projects. But at this time, it'd be premature to be able to go into the detail as to what the potential size of those projects may be.

Got it. Shifting gears to the SG&A line. You mentioned that that was up $1 million. You mentioned some higher R&D spending on some of your new technologies. Can you just give some more color on any other initiatives for the core business that you have going into fiscal '12, in terms of reducing the total SG&A spend?

Yes. Yes. Clearly, the -- our year-over-year increase in SG&A is primarily driven, a year ago at this time, we did not have our leak detection business, and we acquired it in January. So obviously, we had a full quarter of SG&A expenses associated with that business and didn't have it a year ago. So that's what drove it.

Yes, we're looking -- we still have, we think, continued opportunity to bring down SG&A expenses at our US Pipe business. There is -- our management team there is working on some consolidation opportunity at corporate headquarters and so on, that we believe will yield year-over-year SG&A reductions.

When we look at our Anvil business that we think that given our expectations of a continued strong oil and gas market, that we think that we may see some increase in SG&A expenses there, primarily related to higher commissions, and that's an issue we enjoy having.

I would say on the Mueller business, that I would expect our core business SG&A to be pretty flat. We have -- I think that we can offset any inflationary costs. Our -- we have been pretty consistent all along on the selling, in spite -- on the selling efforts. In spite of this downturn in our market demand, we have kept our sales force intact, and we continue to do so. As we move along and our -- based on what may be done with the US Pipe business, we can certainly see certain scenarios and alternatives that we could implement on the pipe business that would give us an opportunity to further reduce SG&A expenses at the corporate level.

Okay. And just finally, how should we think about this incremental R&D spend on leak detection and Mueller Systems and other things in fiscal '12?

Yes. What that will do is, when we look at the -- when we look at our Mueller Systems and Echologics business, the R&D spending that we've been really pleased with the traction that we have -- that we have been able to generate in those business. Put it in perspective, all -- even though it's off a small base, that we expect Mueller, Mueller Systems' shipments will grow by 50% next year. We are finding that water utilities are very interested in two-way AMI. We've been in the market for the last 12 months with two-way AMI, with some pretty unique features. And I said it's gaining traction.

But when we look at combining our two-way AMI technology with our recently acquired acoustical leak detection technology, and you combine that with our infrastructure expertise, we have some very unique capabilities that we believe we can even make stronger. So on a year-over-year aggregate, we expect these businesses will have -- operating performance will improve year-over-year. But we think with the additional R&D expenses, that these businesses will still be in [a loss] position in 2012, because we just think that there's the potential for such a strong future and we believe that the opportunity to establish that position now. So when we look at [those] higher R&D expenses, we will see better operating performances than in aggregate from these technology businesses, but the R -- but our R&D expenditures will keep them from being -- from making a profit in 2012.

Okay. Got it. Thank you.

Thanks, Kevin.

Next we have Ryan Connors. Your line is open, and please state your company name.

Yes. It's Janney Montgomery Scott. I know this is a topic you've addressed in prior calls, Greg. But you did have some very positive commentary, probably the most positive I've heard from you in a while, on the opportunity presented by aging infrastructure replacement. So can you just re-set us on the rationale behind the decision to pursue a sale of US Pipe at the trough? Not talking about any of the transaction scenarios, but just the decision making to sell. I mean, this -- put simply, I mean, if you're long-term believers in aging infrastructure and you talk about water price increases and the opportunity there, and you're obviously financially solvent to weather the bad times, what is the decision criteria to pursue a sale now?

Thanks, Ryan, and good morning. Good question. Yes, I think when we look at the dynamics, and we were certainly talking about the long term, we do think that the aging water infrastructure is going to require a significant amount of investment. On the other hand, we think we can certainly draw a scenario that says that we're not going to see any significant growth in those expenditures for the next couple years, and we think that the pipe business certainly has dragged down our performance and hidden the overall, I think the performance of our other businesses.

So that's why we said that we've decided that it makes sense, given the fact that we could still see a couple years are pretty cloudy on the real spending on the growth and spending on addressing the aging water infrastructure, that we would look at alternatives for the pipe business. But at the same time, increase our investments and focus on the -- on what we're calling the newer technologies, on leak detection, on pipe condition assessment, and two-way AMI. And we see an opportunity to incorporate leak detection technology with the AMI technology that we think that we'll participate in the upside, certainly with our core Mueller products, and just change our overall portfolio in the next couple of years to be a bigger player in some of these higher technology areas, and so we said that it just not be -- it may not be worth the time maybe to wait the next couple years to see a significant improvement in the pipe side. So that's why we're looking at alternatives.

We do think on the upside, we've always said that we think the pipe business will have lower margins than what we will see on the valve and hydrant side -- on the hydrant side. And I would say we're very encouraged with the reception of our technology on the two-way AMI. And again, I know I'm repeating myself. But the acceptance of our acoustical leak detection and moving that, combining that with the AMI technology, that I think that we believe that we would be better focused looking more in that direction, rather than, perhaps, waiting for the capacity utilization to improve on the pipe side. We think the industry is utilizing, in spite of all the capacity that's come out in the last three years, still utilizing 50% of its capacity. So it's going to be a rocky road for the next couple years, particularly in that market, and that's why we decided to look at alternatives.

Understood. And then a separate issue. You've obviously had some very nice competitive successes in the Mueller Systems business and you talked about those. But in light of the fact that you're making some more significant investments there, what's the latest thinking on the dividend policy, given that there are -- now you've got compelling and competing sources of -- or uses of cash to devote to investments in those sides of the business.

We look at -- our Board, with the Management Team, we look at it every quarter, whether or not to continue with our dividend policy. We have, obviously, as you can tell, we've elected to continue with our dividend policy in the past. And we're confident in the cash that we will generate. And I think it still is -- it enables us to give some return back to our shareholders. And certainly, we know there are some investors that, by their charter, cannot invest in a company that doesn't pay a dividend.

So but clearly, that's something that we look at at every quarter. And based on our comfort with the cash that we can generate and also keeping in mind investment opportunities, that's when we decide whether or not to declare a dividend. But right now we're pretty comfortable with the dividend policy we've been following.

Okay. Great. Thanks for your time.

Thanks, Ryan.

Next we have Seth Weber. Your line is open, and please state your company name.

Hey, good morning. It's RBC.

Good morning.

Morning, Seth.

I guess not to split hairs. But I think we had been talking about the pipe business being EBITDA positive in the fourth quarter.

Yes.

Can you maybe just talk through what was weaker than expected there during the quarter?

Yes, we sure will, Seth. We generated an EBITDA loss of $2.1 million [at] the pipe business. And we came really close to our expectations on the revenue side. But we did have somewhat of a different mix than what we expected going into the quarter. We had some shipments delayed due to the storms in the northeast. And we actually made up that shipping revenue by exporting more of the order that I referenced a little earlier, to the Middle East. But that has a significantly lower margin than some of the projects that we have in our backlog, primarily due to the issue I discussed that we don't get a markup on shipping costs, and the shipping costs are a lot higher on a project going to the Middle East, naturally.

So, while that had a negative impact relative to our expectations in the fourth quarter, it does leave us with higher margin -- some higher margins in our backlog.

Overall, I would say that in the last 12 months, but even in particularly the last six months, we've seen more shifting of project schedules than what we normally see. And our conclusion is that water systems are more focused than they have been in the past, as to when project expenses hit their budget. So I think we saw in the fourth quarter, in addition to the project delays that we were not able to ship to the northeast, we saw some other higher margin projects move out of the quarter. So I'd say all-in-all, volume came in pretty much like we expected, but we were really impacted by the mix relative to our expectation. But these are orders that weren't canceled and will ship a little later. So the biggest driver was the shift in our revenue mix.

Okay. That's helpful. Thanks, Greg. And I guess I didn't really -- is it possible to put some -- to -- I didn't hear you talk about 2012 price increases. Is there anything that's out there or anything that you've kind of put out there recently or that you're -- is there a number that we should think about for 2012?

For pipe, the pipe business that -- we have been implementing price increases all along. So it's -- relative to the pipe, it's -- we approach that a little differently. Anvil the same - we have been increasing prices all along at Anvil, as our raw material costs have been increasing. Mueller is a little different, as you know, in that we have had a price increase in either the January-February time frame, 19 out of the last 20 years.

Right.

We have not made a decision or an announcement at this time. And we usually don't make that announcement until about two, three, four weeks before we implement that price increase. But certainly I would say it's something that we take a very, very close look at and something we take very, very seriously, and that I would expect that by the next conference call, that we will have something more definitive to say about pricing more specifically at Mueller.

Okay. Great. Thanks very much for your time.

Thanks, Seth.

(Operator Instructions) Our next question comes from Brent Thielman. Your line is open, and please state your company name?

Yes. DA Davidson. Good morning.

Morning, Brent.

Good morning, Brent.

Yes. Greg, in US Pipe, you mentioned seeing some market share gains. Do you kind of see yourself back to sort of the normal levels that you had been sort of traditionally for that business?

Yes, Brent. I think that if you look at where we were two years ago, I think we're pretty confident that we're within the range of where we had been.

Okay. And then just on Anvil, I was just curious what sort of percentage of the mix is kind of oil and gas markets. And are there any capacity constraints to sort of increasing your exposure to that market?

Great question. That market is approaching almost 20% of total Anvil revenues. And that's up from several years ago where it would have been 14%, historically 13%, 14%, maybe 15%. So that that's a combination of obviously the growth that we've seen in oil and gas markets, as well as maybe some stagnation in the non-residential commercial side. We have been -- we have been struggling with some, I'd say our capacity for that market, maybe not so much from a machine availability, but more so from availability -- labor availability. We manufacture down in Texas, and it's been a -- from time-to-time, it's been a real battle at making sure that we can be fully staffed on the manufacturing side. We don't see any real constraints from machine capability. But from time-to-time, we are seeing maybe some constraints from labor availability.

Okay. That's helpful. Thank you.

Yes. Thank you, Brent.

Next we have Matt [Gambrane]. Your line is open, and please state your company name.

Wells Fargo. Good morning, gentlemen.

Morning, Matt.

Good morning.

I just have a quick question about your outlook 2012, for the muni bonds at the utilities. You think that's going to increase year-over-year? And how close are we to kind of baseline repair/replace?

Matt, that's a great question. And we will not -- we will -- we're very far from claiming that we're experts in this area. In fact, we try to look to the experts to give us guidance. We know that this year municipal bond issuance is down pretty significantly, I think somewhere between the 30%, 40%, if you look in total dollars, through nine months of the calendar year-over-year. We know that that can be somewhat misleading, because last year was the last year of the Build America Bonds. And I do think that there was a real rush on municipal -- by municipalities to be able to take advantage of the components or the terms of the Build America Bonds.

The only thing I think that we can point to is that if you look on a year-over-year basis, the falloff in the first six months of the year was greater than what we've seen the last three months. Now, I don't think that we can certainly hang our hats on saying that it's turning around. So Matt, I'm afraid that I can't give any more clarity. We don't think we'll see any more deterioration and we think it's possible we may see a growth year-over-year in the issuance of municipal bonds. But our crystal ball is not any clearer, I think, than anyone else's.

I guess when I think about your presentation and the pie chart for sources of capital for repair and replace infrastructure, I think the bonds are something on the order of 24% of that. I mean, I guess with operational budgets, how low can that percent go of the pie? Is there -- I mean, they still have to fix everything just on a baseline level, right?

Yes, that's a -- that is a good question. And we do believe, as we've said, we think that our level of order activity leads us to believe that it's at the bottom and it has stabilized. So when we look at what we've said for -- the data that we received that said that -- that we reference on our pie chart that [says] between bonds and other loans, that for 2011, it was about 30%.

I think if you look historically, it's probably been pretty close to this same range when you look at loans and bonds. Sometimes it can shift between -- from one year to one year. I think what we've seen in the last several years, that the municipalities or utilities are counting a lot more on funding coming from operational savings, but -- and I can only give you my opinion that I think that that percentage, it would be reasonable to expect that that percentage would stay pretty constant.

But I must say that we have not seen the specific data published by the AWWA, relative to their expectations for 2012. But we do feel pretty comfortable that the activity that we are seeing for our products, demand for our products, has stabilized and is pretty much what we would think would be the bottom.

Got it. Thank you very much.

Thank you.

And we have no further questions.

Well, again, thank you. Thank you very much for your interest. As I said throughout our call, that I think our markets for the last six months especially, have been challenging given the cutback in municipal spending and the focus a municipality has -- currently are under on preserving their capital.

I think that we have demonstrated that we're able to manage through these unprecedented volume declines, that we maintain our market share position, our market leadership position. We're continuing to invest in new technologies that we think will grow at a greater rate over the next couple years. We think those newer technologies give us the opportunity to leverage our brand leadership, as well as our sales infrastructure, and meet the evolving needs of the water infrastructure industry.

So we continue to move our business in a direction that we believe will allow us to grow further as municipalities emerge from their current budget restraints. And while I think we look at -- we don't see signs where we expect to see significant growth or any growth coming from the residential construction side, that that recovery still presents an opportunity for us in the future.

So again, thanks very much for your interest, and look forward to seeing you in the near future.

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