Mueller Water Products Inc (MWA) 2012 Q1 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 call. It is now my pleasure to turn the call over to Ms. Martie Zakas. Ma'am, you may begin.

Very good. Thank you, Laurel and good morning, everyone. Welcome to Mueller Water Products fiscal 2012 first quarter conference call. We issued our press release reporting results of operations for the quarter ended December 31st, 2011, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Mueller Water Products had approximately 156,400,000 shares outstanding at December 31, 2011.

Discussing the first 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 web site, 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 requirement.

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 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 web site. Slide three is our Safe Harbor disclosure statement addressing forward-looking statements. This slide includes cautionary statements identifying important factors that could cause actual results to differ materially from those included in the forward-looking statements, as well as specific examples of forward-looking statements.

Please take note of the disclaimers provided on slide 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 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 web site. 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'll 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 2012 first quarter. I'll begin with a brief overview of the first quarter, followed by Evan's detailed financial report, which covers key drivers affecting our businesses. After that, I will follow with additional comments on our recent results, as well as our outlook for the second quarter. We will then open the call to questions.

Mueller Company's domestic valve and hybrid volume grew slightly in the first quarter, on a year-over-year basis. However, this growth was more than offset by reduced demand in Canada, and a drop-off in shipments of valves to the water treatment market. We also saw net sales growth in the first quarter from Mueller Systems and Echologics, the leak detection business that we acquired in December 2010.

Our investments in these businesses are negatively impacting Mueller Company's operating income in the short-term. However, we are bullish about their long-term potential with the traction we believe we are gaining in the marketplace. U.S. Pipe's net sales and volume, both increased in the first quarter year-over-year, contributing to their improved operating performance.

Once again, Anvil continues to deliver year-over-year growth, with adjusted income from operations increasing 20% on a net sales increase of 4.7%. Adjusted income from operations benefited from higher sales pricing, and productivity improvement. I'll now turn the call over to Evan, who will provide more details on the first quarter financial results.

Good morning, everyone. I'll first review the consolidated results and then discuss segment performance. Consolidated net sales for the 2012 first quarter of $311.5 million, increased 8.3% compared to net sales for the 2011 first quarter, of $287.6 million. Net sales increased due to higher prices of $16.2 million and higher shipment volumes of $7.9 million, partially offset by $200,000 of unfavorable Canadian currency exchange rates. Consolidated gross profit of $51.8 million, for the 2012 first quarter, improved from gross profit of $49.6 million for the 2011 first quarter.

Gross profit for the 2012 first quarter was positively impacted primarily by, higher sales prices of $16.2 million and net manufacturing and other cost savings of $6.7 million. These items were partially offset by higher raw material costs of $14.2 million, higher per-unit overhead cost due to lower production cost of $3.8 million, and lower shipment volumes of $1.3 million. Consolidated selling, general and administrative expenses of $53.4 million for the 2012 first quarter, compared to $52 million for the 2011 first quarter.

The year-over-year increase is due primarily to expenses associated with the further development of our Mueller Systems and leak detection businesses. Adjusted loss from operations for the 2012 first quarter, improved to $1.6 million from an adjusted loss from operations for the 2011 first quarter, of $2.4 million. Adjusted results for the quarter improved at both U.S. Pipe and Anvil.

The results were positively impacted by higher sales prices of $16.2 million and net manufacturing and other cost savings, of $6.7 million. These items were mostly offset by higher raw material costs of $14.2 million, higher per-unit overhead costs due to lower production of $3.8 million, higher selling, general and administrative expenses of $1.4 million and lower shipment volumes of $1.3 million.

Adjusted EBITDA margin for the 2012 first quarter was 5.7%, compared to 6.2% for the 2011 first quarter. Interest expense net for the 2012 first quarter was $15.7 million, which included $1.4 million of non-cash costs for terminated interest rate swap contracts. This compares to $15.9 million for the 2011 first quarter, which included $1.9 million for such contracts.

Although these contracts were terminated prior to 2011, the related costs are being amortized over the original term of the swap contracts. The 2012 first quarter income tax benefit of $6.7 million resulted in an effective tax rate of 36%, compared to a benefit resulting in a 40% effective tax rate in the 2011first quarter. The higher rate in 2011 was the result of an additional benefit of about $1 million, primarily related to adjustments of uncertain tax positions. Adjusted net loss per share was $0.07 for the 2012 first quarter, compared to adjusted net loss per share of $0.06 for the 2011 first quarter.

The 2012 first quarter adjusted results exclude after-tax interest rate swap costs of $800,000 and after-tax restructuring charges of $800,000. The 2011 first quarter adjusted results exclude after-tax interest rate swap cost of $1.2 million and after-tax restructuring charges of $1.2 million. There was a weighted average of 156 million shares of our common stock outstanding for the 2012 first quarter, compared to a weighted average of 154.9 million shares outstanding for the 2011 first quarter.

I'll move onto segment performance and begin with Mueller Company. Mueller Company's net sales were $128.1 million for the 2012 first quarter, compared to net sales for the 2011 first quarter of $129.8 million. Shipment volumes at Mueller Company's base business decreased $6.7 million year-over-year primarily due to a falloff in Canadian sales, which were down $4.5 million. Mueller Company's base business excludes Mueller Systems and Echologics, our newer technology businesses. Shipment volumes for domestic valves and hydrants were up slightly year-over-year.

Additionally, sales at Mueller Company benefited from higher sales prices of $2.4 million. Adjusted income from operations for the 2012 first quarter was $5.1 million, with an adjusted operating margin of 4%, and adjusted EBITDA was $16.3 million, with an adjusted EBITDA margin of 12.7%. Prior-year adjusted income from operations was $8.8 million with an adjusted operating margin of 6.8%, and adjusted EBITDA was $20.5 million, with an adjusted EBITDA margin of 15.8%.

Adjusted income from operations at Mueller Company's base business was at $1.7 million, while adjusted loss from operations at Mueller Systems and Echologics increased by $2 million. In summary, $3.7 million decline in adjusted income from operations was primarily due to higher raw material costs of $3.5 million, higher selling, general and administrative expenses of $3 million, the majority of which is related to both investment in Echologics, acquired in December 2010, and ongoing investment in Mueller Systems, and lower shipment volumes of $2.8 million.

However, adjusted income from operations benefited from net manufacturing and other cost savings of $3.4 million and higher sales prices of $2.4 million. As we discussed last quarter, we continue to invest in our newer water technology businesses. Mueller Systems and Echologics results negatively impacted Mueller Company margins by over 400 basis points in the 2012 first quarter.

Turning to US Pipe, the 2012 first quarter represents the fifth consecutive quarter that year-over-year operating results improved. Net sales for U.S. Pipe for the 2012 first quarter of $96.1 million increased $21.7 million or 29.2%, from net sales for the 2011 first quarter of $74.4 million, largely due to higher shipment volumes of $15.1 million. 2012 first quarter net sales included about $8.1 million of exports to the Middle East. The 2012 first quarter net sales also benefited from higher pricing of $6.6 million, with pricing per ton for ductile iron pipe for the 2012 first quarter increasing both year-over-year and sequentially, by 11% and 9% respectively.

U.S. Pipe's adjusted loss from operations of $7.9 million and an adjusted EBITDA loss of $3.5 million for the 2012 first quarter, improved from an adjusted loss from operations of $9.4 million, and an adjusted EBITDA loss of $4.9 million for the 2011 first quarter. The 2012 first quarter benefited from higher sales prices of $6.6 million, higher shipment volumes of $1.9 million, lower per-unit overhead costs due to higher production of $900,000, and manufacturing and other cost savings of $700,000. These items were partially offset by higher raw material costs of $8.8 million.

We should note that on a per-ton basis, the increase in sales pricing in the quarter was greater than an increase in purchase costs of raw materials during the quarter. Turning now to Anvil, where we reported our sixth consecutive year-over-year quarterly increase in adjusted operating income, which increased 20% in the first quarter year-over-year on a 4.7% increase in net sales.

Net sales for Anvil for the 2012 first quarter increased $3.9 million, to $87.3 million from net sales for the 2011 first quarter of $83.4 million. Net sales increased due primarily to higher prices of $7.2 million, which were partially offset by $3.2 million of over-shipment volumes. Adjusted income from operations for the 2012 first quarter of $7.8 million, increased from adjusted income from operations for the 2011 first quarter of $6.5 million. Higher sales prices of $7.2 million and manufacturing and other cost savings of $2.6 million were partially offset by higher per-unit overhead costs, due to lower production of $4.7 million and higher raw material costs of $1.9 million.

For the 2012 first quarter, Anvil improved both its adjusted EBITDA and adjusted EBITDA margin year-over-year. Adjusted EBITDA increased to $11.4 million or an adjusted EBITDA margin of 13.1% for the 2012 first quarter, compared to adjusted EBITDA of $10.2 million or an adjusted EBITDA margin of 12.2% for the 2011 first quarter. Turning now to a discussion of our liquidity.

Free cash flow, which is cash flows from operating activities less capital expenditures, was a negative $20.1 million for the 2012 first quarter, compared to a negative $1.2 million for the 2011 first quarter. The year-over-year decrease in free cash flow was primarily related to a planned inventory build this quarter in advance of the announced price increase at Mueller Company, and general timing of disbursements.

As of December 31st, 2011, total debt was $678.5 million and included $420 million of 7.375% senior subordinated notes due 2017, $221.8 million of 8.75% senior unsecured notes due 2020, $34 million drawn under our asset-based credit agreement and $2.7 million of other. Net debt, which is total debt less cash and cash equivalents, at the end of 2012 first quarter $638.9 million. As of December 31, we had $148.8 million of excess availability under our asset-based credit agreement. I'll now turn the call back to Greg.

Thanks, Evan. I'll now elaborate a little more on our first quarter performance and then provide an outlook for our second quarter. I'll begin with Mueller Company. During our first quarter, Mueller Company's domestic markets appear to be stabilizing. We saw an increase in bookings in the first quarter, on a year-over-year basis, for our valves and hydrants. So we are not sure this is entirely being driven by increased market demand. Timing and distributor orders could also be influencing the year-over-year growth.

We also estimate that distributor inventories are down approximately 30% this year, compared to the same time last year. Net sales in Canada were down approximately 28% or $4.5 million on a year-over-year basis. We believe spending is down because the Canadian stimulus program was completed in mid-2011 and residential construction in Canada continues to fall off. Both shipments and orders for valves used in water treatment facilities, which typically account for a little more than 10% of Mueller Company's net sales, were down year-over-year.

We believe that municipalities are delaying major treatment plant overhauls, and are only spending money for small upgrades and expansions. For example, the number of bids we submitted for water treatment facility projects increased 37% in the first quarter year-over-year.

However, the value of these bids was down 30%. Pro-forma net sales at Mueller Systems and Echologics grew 25% in the first quarter year-over-year, albeit, off a small base. While we expect these businesses to be profitable in the second half of the year, they will lose money in the first half. In the first quarter, their results reduced Mueller Company's adjusted operating margins by approximately 400 basis points, as we're still ramping up our investments in these businesses.

Turning to U.S. Pipe, we believe the duct, wire and pipe domestic market was fairly flat in the quarter on a year-over-year basis. However, U.S. Pipe's tonnage increased due to market share gains and export shipments. We experienced some share erosion last year, which we believe we have recovered. In addition, our orders and tons for the first quarter were up 24% year-over-year. U.S. Pipe benefited from higher pricing in the first quarter, which was up 11% year-over-year, and 9% sequentially. Sales price per ton in January bookings continue to show both year-over-year and sequential improvement.

During the first quarter, the increase in sales price per ton was greater than the increase in per-ton purchase price for scrap steel. Anvil had another quarter with net sales and operating income growth. Most of our aggressed markets are relatively stable, with the oil and gas markets, which would account for slightly less than 20% of Anvil sales, remaining strong.

Looking now to our outlook for the second quarter. As we mentioned, we believe Mueller Company's domestic markets are stabilizing. As a result, we expect to see a slight increase in net sales with base Mueller Company roughly flat year-over-year and continued net sales growth at Mueller Systems and Echologics. As a reminder, these two businesses combined currently account for just under 10% of total Mueller Company net sales.

At Mueller Company for the second quarter, while we expect higher raw material costs, we expect higher sales prices to at least offset this increase. Additionally, we continue to ramp up our investment in our newer technology businesses, which is primarily reflected in higher selling, general and administrative expenses. As I mentioned earlier, while we expect these businesses to be profitable in the second half of the year, they will lose money in the first half of the year, negatively impacting Mueller Company's results. On January 6, we announced a 7% price increase on Mueller Company's valves and hydrants, effective February 9.

We expect that we will see a similar pull-forward of orders that we saw last year, as distributors buy ahead of the price increase. Therefore, we don't expect to see any real benefit from this price increase until third and fourth quarter shipments. On a year-over-year basis, we expect second quarter net sales and operating income from our base business to be comparable with 2011. However, given the impact of our investments in Mueller Systems and Echologics, we expect this total adjusted operating income at Mueller Company will be down slightly from a year ago. I'll now turn to U.S. Pipe.

As mentioned previously, pricing on ductile iron pipe improved in the 2012 first quarter, both year-over-year for the sixth consecutive quarter and sequentially. As we look at pricing levels in our current backlog, we believe that the 2012 second quarter pricing will continue this trend. We expect net sales in our U.S. Pipe business will again be up significantly in the 2012 second quarter year-over-year, driven primarily by our planned export sales and higher sales pricing. We expect higher sales pricing to more than offset higher raw material costs in the quarter, which should lead to a marked year-over-year improvement in the adjusted operating loss. Now I'll turn to Anvil.

We expect to see slightly higher shipment volumes in the 2012 second quarter year-over-year, primarily due to the continued strength in our aggressed oil and gas markets. We also expect to benefit from higher pricing. As a result of these factors, we anticipate 2012 second quarter net sales will improve modestly over last year. We expect higher sales prices will more than offset higher raw material costs. We expect that increases in production costs and higher per-unit overhead costs, due to low production, will only be partially offset by our ongoing manufacturing and other cost-saving initiatives.

We also expect to benefit some from volume increases. In summary for Anvil, we expect 2012 second quarter adjusted income from operations to continue to grow year-over-year. For the Company as a whole, we believe 2012 second quarter net sales will increase year-over-year, attributable primarily to price and volume increases at U.S. Pipe and price increases at Anvil.

We expect to see adjusted income from operations improve marginally year-over-year. We expect price increases to more than offset higher raw material costs and cost savings to offset inflation. Additionally, we continue to ramp up our investments in Mueller Systems and Echologics. In total, we expect second quarter operating income to improve year-over-year, and be slightly better than break even.

As we said in our last call, and based on our first quarter results, we believe our water infrastructure markets have essentially hit bottom. However, we don't know if we'll see year-over-year growth until the construction season begins, which coincides with our third quarter. The variable for full-year 2012, our corporate spending is estimated to be $30 million to $32 million. Depreciation and amortization is estimated to be $79 million to $81 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 estimated to be between $35 million and $40 million. For the full-year 2012, we expect free cash flow to be higher than 2011, due primarily to improved operating results.

We continue to improve our working capital efficiency, for example, inventory turns for the 12 months ended December 31, improved about a half a turn from the comparable period, prior-year period. Additionally, we believe inventory turns will continue to improve in 2012. Furthermore, for the latest 12 months, average receivables, inventories and accounts payables as a percentage of net sales, improved about 200 basis points from a year ago. There have been some positive maco-indicators that give us encouragement that our markets may be closer to an affection point. We believe that state and municipal budgets are in better shape than the last couple of years.

State and local tax receipts grew for the sixth consecutive quarter and the annual amount as of September 30, exceeded the pre-recession peak for the second quarter in a row. In addition, the Center of Budget and Policy Priorities reported in January, the state's budget deficits are anticipated to be lower in 2012 than 2011. Analysts are currently projecting increased municipal bond issuance in 2012, primarily based on municipal bond yields being at their lowest levels since 1967. While municipal bond issuances may increase, it is uncertain how much, if any, of it will be spent on water infrastructure. However, we believe it is a more attractive market for issuance than what we saw in 2011.

Finally, there are some encouraging signs in the housing market. Housing starts in December represented the fourth consecutive month of greater than 600,000 units on a seasonally adjusted annualized basis. December was the first time there have been four consecutive months of higher than 600,000 starts, since April 2010. Furthermore, December single-family starts are also at their highest levels since April 2010.

As a potential future indicator, November and December housing permits were the two strongest months since October 2008. In summary, any improvement with these variables is unlikely to have a near-term impact on our business. Nevertheless, they are the most positive movements we have seen in the last couple of years, although it is still too early to predict if these movements are sustainable.

Before opening the call for questions, I want to update to our evaluation of alternatives for U.S. Pipe. We are pleased with the progress we are making in this process, working very closely with our financial adviser, Bank of America/Merrill Lynch. We continue to be particularly focused on a potential sale of the business and are actively engaged in this process. We must remind you that no decision has been made to enter into any transaction and there can be no assurance that there will be a transaction or as to the terms, conditions or timetables of any such transactions.

We appreciate your interest and know that you have questions, but we will not comment further on any specific discussion or potential transactions, unless or until we enter into a definitive agreement with respect to such a transaction. With that, I will open this call for your questions.

(Operator Instructions). Our first question today comes from TongTong Xu, Goldman Sachs. Your line is open.

Good morning, this is TongTong Xu from Goldman Sachs on behalf of Jerry Revich. Greg, can you give us an update on backlog or book-to-bill on Mueller Company and U.S. Pipe? Also, can you comment on [designed]?

Sure. When we look at total backlog in dollars for Mueller, we're up and we ended the December month. Year-over-year we're up about 10% for total Mueller. But I think it's important to dig down a little deeper there. When you look at our Mueller valves and hydrants and our brass products, that backlog is up about 25%. In order to put it in perspective, that we ship typically in two to three weeks these products, so backlog for those products is less than $25 million. But, nonetheless, up 25% year-over-year. If you look at our Mueller Systems business, our backlog is up about 80% on a year-over-year basis. So as I said, that all comes to about a 10% per total Mueller.

Our water treatment -- our backlog for our water treatment valves are down year-over-year, consistent with what we saw in the first quarter, but total Mueller is up about 10%. When I look at the backlog at U.S. Pipe, and I think it's more appropriate to look at it in terms of tonnage. Our backlog is up about 68%. It's important to note that we have contributing to that certainly is the export order -- the large export order that we received in spring of 2011. To date we've shipped about 50% of that order, so the rest of it will ship in the second quarter. So at least looking at our backlogs at those two businesses, so we're seeing a positive trend. Though as I want to be quick to point out, when we look at the Mueller valves and hydrants, that backlog is still slightly under the $25 million.

Okay. Thank you. You got nice pricing out of material costs this quarter and you gave us great detail in 2Q expectations. Can you step us through whether you continue to expect positive contribution over the second half of the year, and if you can touch on that by segment?

Yes. Well, we look at the -- I don't know if I can get into the second half of the year yet. When we look at the second quarter, we do think that at a consolidated basis, that price will more than exceed higher raw material costs. Probably in our -- that we will see the most significant, I think, benefit in our U.S. Pipe business, as we've commented throughout the -- our prepared comments, that we have seen continued price increases at our U.S. Pipe business. I think in the second quarter, we expect to see prices be much higher on a year-over-year basis than raw material costs.

On Mueller, I think there probably will be pretty even in the second quarter to raw material costs. Anvil, we expect to more than cover raw material costs. But we are, as I said in our prepared remarks, as we look at the second half of the year, we did announce the set-for-set price increase on our valves and hydrants, that will be effective February 9. Certainly that we think that this will contribute to the second half of the year. We would expect, unless we see some significant movement in raw materials, that we will be able to continue to offset higher raw material costs as we have traditionally been able to do so with the Mueller business.

Okay. Thank you. Just one last quick one. Evan, can you say more about the restructuring charges you took this quarter, and what's the pay back period you expect, and if there are any additional restructuring actions that you're planning for this year?

Yes. These are primarily headcount related. As we look to the balance of fiscal 2012, I think we might see just some general restructuring activities like we've seen the last few quarters, but nothing is planned of a significant nature.

Thank you very much.

Our next question comes from Matt Vittorioso, from Barclays Capital. Your line is open.

Good morning. Not to get too specific, but as it pertains to any potential asset sale, would Mueller Water be looking to pay down debt with those proceeds or might you look to reinvest some proceeds into some of your newer business lines?

Matt, you know, as we've said, certainly bringing down the debt always remains one of our priorities. We've said that we think for our goal for our business to have our leverage down below three times. When I look at our -- the businesses -- our newer technology businesses that we're investing in, I think right now that we're confident that out of the cash flow that we generate, that that should be sufficient, give us sufficient liquidity to make those investments.

Great. Just leading into that free cash flow that you talked about for the full year, can you talk about your discussions with distributors? You talked about their inventories being down, roughly 30%. Does that give you any concern over the course of the year that that may require you to carry more inventory? Does that put your free cash flow guidance at risk, or are you pretty comfortable that you'll be able to continue to improve turns, et cetera? Thanks.

Yes, Matt that's a good question. We look over the last 18 months, 24 months, we think that clearly our distributors have been bringing down their level of inventory. I think when we look at those levels today, that we don't believe that they can take those down much further. So I think that, when we get more into the construction season, we'll expect to see those inventories come back up. Certainly I think compared to a couple of years ago, we're probably carrying more inventory to be able to meet shorter lead time requirements than, as I said, we did two years ago. I think if we look to the rest of this year, I don't think it's going to be any different than what we've seen for the last 12 to 18 months.

Great. Thank you.

Our next question comes from Yilma Abebe, from JPMorgan. Your line is open.

Thank you. Good morning. My first question is in terms of debt paydown this year, away from assets sale but from free cash flow. Any expectations or guidance around that?

We've not provided any specific guidance around, you know, debt paydown as you can see over the past several years, that has been a primary focus for us and we'll continue to look at lowering our leverage ratio as we go forward. That's something that we always consider and always look at.

Okay. Then my final question is, a bit of a financial policy, the big picture on with regards to leverage. You said that you want to be around three times or below. Can you give us a sense for the bridge to that level? I asked that in the context of, you know you have debt maturing in five years and I imagine you're going to have something to start thinking about that the next two, three years. How are you managing refinancing risks as you look at the business and as you head towards the three times target?

Yes. I will say that right now that we don't believe that we have any refinancing risks, as you pointed out. While our ABL will be due in 2015, but we think that that should readily be able to be negotiable. When we look at 2017 and 2020, in fact, we feel that we have a long runway here that we fully expect that our markets will have rebounded before that period. If you look at -- we've said in the last 18 months that, for instance, on housing starts, we believe that when the housing starts get to $1.1 million to $1.2 million, we'll be able to earn the same kind of margins that we did at $1.5 million, $1.6 million.

Again, that -- and today most of the analysts' forecasts that we have seen and I know that the housing market has been a very difficult one to predict the last several years. I'd say right now, there seems to be a consensus that by the time we get to 2015, that housing starts will be over $1.2 million, could be in fact, approaching the $1.5 million. I think that we look at more in terms of -- that we are comfortable, that we have the runway before our maturities are due. That we will come off the -- I would say, an unprecedented bottom that we've seen for the last 12 and 18 months in our businesses, that will more than give us comfort with the EBITDA and the earnings that we expect the business will generate.

Thank you. That's all I had.

Okay. Thank you.

Our next question comes from Brent Thielman, D.A. Davidson. Your line is open.

Hi. Good morning.

Hi, Brent. Good morning.

Yes. Greg, I guess the lower volumes in Anvil for the quarter, just was a little surprised, given that market indicators seem to be perking up here. Was there something isolated in quarter?

Yes, Brett, there was isolated. Maybe about a year ago, it was a year ago, we ended relationships with one of our larger distributors of our products that go into fire protection. So when we have a comparison on a year-over-year basis, we have some of that lost volume hit us this quarter. Over the last -- since that time period, we've added additional distributors. In fact, we think it will go the other way from a comparison purposes in the second quarter. So, yes, we do think it was isolated and I think it was the right move that we made a year ago. Our Anvil sales team were able to add the right distributors that, in fact, we think that will turn on a year-over-year basis in the second quarter.

Okay. The lower volumes in Canada, when do you expect to see easier comparisons, I guess with respect to the stimulus rolling off?

Yes. We'll start seeing that probably in the middle of our third quarter, and our fourth quarter for sure. If you recall, we referenced that in our fourth quarter of our fiscal year, last year. We would start getting hit on the year-over-year comparisons on Canada. So we have, I think, at least one more quarter of those comparisons. It will ease somewhat in Q3 and then it will behind us when we get to Q4.

Okay. Lastly, I know you've said in the past this export order is sort of a -- I guess special situation, but obviously it's a big help here. Just wondering if there's anything new on the international front that you may be pursuing that?

That is on a project by project basis. There's still, I think, what you would said good activity in the Middle East. Certainly that I believe, that I think with this order that we had the Middle East. That puts us in a good position to grow upon that. So nothing is specific that I can say, but again it's an active market there and we're certainly investing the resources to pursue the opportunities there.

Okay. Sorry, one more. Just on that order, I know you've said in the past as well that pricing or margin profile on this is a little bit below what you might see in the normal course of your business. Is that -- are you still able to cover your sort of raw material costs on that project as you think about Q2?

Yes. I think clearly we're getting a variable contribution margin. We can -- covering all of our variable costs on that.

Okay. Thanks, Greg.

That does conclude the Q&A session of today's conference.

Well, thank you for your interest. One area that we had some questions about our Mueller systems. I think it's important for us to point out that as we've said in our prepared remarks, that we expect that business to be profitable, the second half of the year.

We're in the ramp-up phase, adding some expenses for actually what we think will be a much bigger business. These are expenses related to the pursuit of orders that we expect to receive. They're expenses related to orders that we have received, that have not shipped. As I mentioned a little earlier, we're entering the second quarter with our backlog at Mueller Systems up 80% on a year-over-year. We expect that most of this backlog will ship the second half of the year.

We, in fact, just received the largest AMI order that we had ever received, now that we're two years in this business. We received an order in January from Charlotte County, Florida, for about 50,000 units, and that's not in the backlog number I just gave you. The orders that we are receiving are mostly project work, smaller percentage of our overall base business is distributor business. On average these are three to four months, or a little longer, from the time we receive it and ship it.

Again we're in the period where we are ramping up the business needed to support the growth in our backlog, as well as the growth in orders we expect to receive in the near future. While it's a negative impact on Mueller Company margins this quarter, and will be next quarter, we're confident that this is going to be a very good story for us. With that I want to again thank you for your interest and look forward to seeing you all soon.

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