Mueller Water Products Inc (MWA) 2012 Q3 法說會逐字稿

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

Very good. Thank you and good morning, everyone. Welcome to Mueller Water Products Fiscal 2012 Third Quarter Conference Call. We issued our press release reporting results of operations for the quarter ended June 30, 2012 yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com.

Mueller Water Products had approximately 156.8 million shares outstanding at June 30, 2012.

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 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 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 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 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 30, unless specified otherwise. As previously announced, we sold U.S. Pipe effective April 1, 2012. U.S. Pipe's operating results have been reclassified as discontinued operations and its assets and liabilities have been reclassified as held for sale for all periods presented.

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. I'll now turn the call over to Greg.

Thanks, Martie. We appreciate you joining us today as we discuss our results for the 2012 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 additional comments on our recent results and our end markets, as well as our outlook for the fourth quarter.

Third quarter results yielded increases in net sales, adjusted operating income and adjusted EBITDA on a year-over-year basis. The data on the residential construction market is trending positive, and we believe we saw some pockets of growth for this market segment during the third quarter.

At Mueller Company's base business in the third quarter net sales increased 6.9% and adjusted operating income grew 14%, driven by increased domestic shipments of valves, hydrants, and brass products. We also had a number of wins at both Mueller Systems and Echologics.

Mueller Systems announced a supply agreement with American Water, the largest publicly traded U.S. water and wastewater utility company for water meters and automated meter reading systems, and also a $6.6 million agreement for our meters and AMI system with Bentonville, Arkansas.

Echologics also recently extended its contract with the City of New Orleans, which is expected to generate approximately $5 million in revenue over the next two years. It is encouraging to see the traction both businesses are gaining in the marketplace.

Anvil, again, delivered solid results in the third quarter, but saw some softness in certain markets. While net sales were essentially flat, adjusted operating income increased year-over-year.

We continue to believe that we are well positioned for future profitable growth as end market demand improves and we are able to increase capacity utilization.

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

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

Consolidated net sales for the 2012 third quarter of $275.9 million increased $16.3 million or 6.3% from the 2011 third quarter net sales of $259.6 million. Net sales increased due to higher shipment volumes and higher prices.

Consolidated gross profit of $79.6 million for the 2012 third quarter improved from $73.1 million for the 2011 third quarter. Gross profit margin for the 2012 third quarter improved 70 basis points to 28.9% and was positively impacted primarily by higher sales prices at both Mueller Company and Anvil, as well as higher shipment volumes at Mueller Company.

Consolidated selling, general and administrative expenses of $53.2 million for the 2012 third quarter compared to $48.1 million for the 2011 third quarter. Selling, general and administrative expenses were higher, driven primarily by planned investments associated with newer systems in Echologics, higher sales commissions and other cost.

Adjusted operating income for the 2012 third quarter of $26.4 million improved from $25 million for the 2011 third quarter, primarily driven by higher shipment volumes and higher sales prices.

Adjusted EBITDA for the 2012 third quarter of $41.4 million improved from $40.7 million for the 2011 third quarter.

Interest expense, excluding terminated swap contracts, decreased $1.1 million in the third quarter year-over-year due primarily to lower levels of total debt outstanding. Interest expense meant for the 2012 third quarter was $14.9 million, which included $1.3 million of noncash cost for terminated interest rate swap contracts compared to $16.8 million for the 2011 third quarter, which included $2.1 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.

During the 2012 third quarter income tax expense was $3.4 million on income before taxes of $9.3 million or an effective income tax rate of 36.6%. Effective income tax rate for the 2011 third quarter was 12.7%, reflecting an adjustment to estimated tax rates for state and non-U.S. income taxes of pretax earnings of $7.9 million. Net operating loss carry forwards remain available to offset future taxable earnings.

Adjusted net income for diluted share for both the 2012 and 2011 third quarters was $0.05. The 2012 third quarter adjusted results exclude the after-tax gain from discontinued operations of $3.9 million, after-tax loss of early extinguishment of debt of $900,000, after-tax interest rate swap cost of $800,000, and after-tax restructuring expenses of $400,000. The 2011 third quarter adjusted results exclude the after-tax loss from discontinued operations of $9.6 million, after-tax interest rate swap cost of $1.3 million, and after-tax restructuring expenses of $200,000.

Discontinued operations for the 2012 third quarter was primarily related to refinement of the income tax valuation allowance recorded in the 2012 second quarter.

There was a weighted average of 158 million diluted shares of our common stock outstanding for the 2012 third quarter compared to a weighted average of 156.4 million diluted shares outstanding for the 2011 third quarter.

I'll now move on to segment performance and begin with Mueller Company. Mueller Company's net sales for the 2012 third quarter of $182.6 million increased 10.1% from the 2011 third quarter net sales of $165.8 million. Net sales grew due to higher shipment volumes across all three businesses and higher prices primarily in our base business, partially offset by unfavorable Canadian currency exchange rates. Shipment volumes increased for domestic valves, hydrants, and brass products, all part of Mueller Company's base business, which excludes Mueller Systems and Echologics. Domestic unit shipments of valves increased 11.5%, hydrants increased 3.5%, and brass products increased 12.7% in the third quarter on a year-over-year basis.

Adjusted operating income for the 2012 third quarter increased 7.9% to $24.6 million from $22.8 million for the 2011 third quarter. Base business adjusted operating income margin improved to 17.2% this quarter from 16.1% last year. Mueller Company total adjusted operating income margin declined slightly to 13.5% for the 2012 third quarter from 13.8% in the 2011 third quarter, which includes the impact of investments at Mueller Systems and Echologics.

I'll now turn to Anvil. Net sales for the 2012 third quarter were $93.3 million compared to $93.8 million for the 2011 third quarter. Net sales decreased slightly due to lower shipment volumes, primarily in Anvil's industrial market, which were mostly offset by higher prices. Anvil's sales to the oil and gas market were up only slightly year-over-year as we saw strong market expansion last year making the year-over-year comparisons tougher.

Adjusted operating income increased slightly to $9.9 million in the 2012 third quarter from $9.6 million in the 2011 third quarter. Adjusted operating margin for the 2012 third quarter was 10.6% compared to the 2011 third quarter adjusted operating margin of 10.2%.

For the 2012 third quarter Anvil improved both its adjusted EBITDA and adjusted EBITDA margin year-over-year. Adjusted EBITDA increased to $13.5 million or an adjusted EBITDA margin of 14.5% for the 2012 third quarter compared to adjusted EBITDA of $13.3 million or an adjusted EBITDA margin of 14.2% for the 2011 third quarter.

Discontinued operations for the 2012 third quarter included a pretax loss of $1.4 million from the sale of U.S. Pipe. During the 2012 third quarter discontinued operations included an income tax benefit of $4.3 million primarily related to refinement of the income tax valuation allowance recorded in the 2012 second quarter.

Turning now to a discussion of our liquidity, free cash flow, which is cash flows from continuing operations and operating activities less capital expenditures, was $5 million for the first nine months of 2012 versus a negative $16.1 million for the comparable period in 2011. The year-over-year increase in free cash flow was primarily related to the timing of cash collections and disbursement and the income tax refund we received in the 2012 second quarter.

At June 30th, 2012 total debt was $622.8 million and included $420 million of seven-and-three-eighths percent senior subordinated notes due 2017, $199.8 million of eight-and-three-quarter percent senior unsecured notes due 2020, and $3 million of other. Based on June 30th, 2012 data we had $141.3 million of excess availability under our asset based credit agreement.

During the 2012 third quarter the Company reduced its total debt outstanding by $69.7 million to $622.8 million. During the quarter interest expense declined $1.1 million on a year-over-year basis primarily due to our debt repayment.

I'll now turn the call back to Greg.

Thanks, Evan. I'll now elaborate a little more on our 2012 third quarter performance and end markets, and then provide an outlook for our fourth quarter.

I'll begin with Mueller Company. We are pleased with the net sales growth in Mueller Company's base business where shipments of domestic valves, hydrants, and brass products in both dollars and units were up year-over-year. We believe demand for our products benefitted from spending by municipal water systems and we also believe we saw pockets of growth in demands from residential construction.

Our quotation activity in the third quarter for Mueller Company's base business was up more than 15% in the number of quotations and up more than 20% in dollars quoted year-over-year. We also believe the distributor inventories at the end of the third quarter were down from both the previous quarter and year-over-year. We believe this is positive because we expect that distributors will have to place additional orders to satisfy end market demand rather than solely shipping from their existing inventory.

Last quarter we said that we weren't certain as to the extent to which our increased volume of valves and hydrants was simply due to an earlier weather related start to the construction season. However, based on what we saw in the third quarter we are more comfortable that the volume increases in the second quarter were not solely a pull forward of construction activity due to weather, but also resulted from growth in our end markets.

We continue to make good progress at Mueller Systems, with net sales in the quarter up almost 60% year-over-year. As we mentioned, we were successful in winning several of our anticipated agreements although the timing was later than our original expectations.

We also continue to make nice progress in introducing our Echologics leak detection and pipe condition assessment technologies to the marketplace. For example, as mentioned earlier, we recently extended our agreement with the City of New Orleans based on the benefits we were able to achieve for the City. The interest in leak detection and pipe condition assessment services is growing as municipalities increasingly look for ways to help them prioritize their capital spending and more efficiently manage the challenges of addressing their aging water infrastructure.

As Evan discussed, Anvil had another solid quarter. Most of its addressed markets are relatively stable with the oil and gas market, which accounted for approximately 20% of Anvil sales, remaining strong, although it was up only slightly year-over-year due to tougher comparisons. Meanwhile, we saw softening in Anvil's addressed industrial markets.

Before I turn to our outlook for the fourth quarter I'll discuss what we are seeing with some of the macro drivers in our end markets. While most of the recent macroeconomic data has turned negative compared to earlier this year, we believe our water infrastructure markets have essentially hit bottom and have stabilized. The general municipal spending environment continues to remain stable, although budget pressures and economic uncertainty persists.

State tax receipts grew at 6.6% year-over-year and local tax receipts were up only slightly for the latest 12 months as of March 31st.

On the municipal bond front rates were still very attractive from a historical perspective and year-to-date issuance is up 65%, although the bulk of the issuance is for refinancing.

Finally, the housing market appears to have stabilized with some signs that a recovery is underway. Housing starts in June represented the sixth consecutive month of greater than 700,000 units on a seasonally adjusted annualized basis. June was the first time above 750,000 starts since October 2008. Furthermore, June's single family starts were above 500,000 units for the third consecutive month and the 539,000 unit reading was the strongest since April 2010. As a potential future indicator we saw housing permits above 700,000 for the fifth consecutive month. Both total and single family permits grew close to 20% on a year-over-year basis.

Again, it is important to note that an improving housing market also only helps bolster the municipal market as local governments benefit from increased property taxes, as well as connection fees and other ancillary fees associated with residential construction. Overall we think the signs we are seeing in our water markets are mostly positive, giving us more confidence that our markets have stabilized and we could see some continued growth.

Turning now to our outlook for the fourth quarter, on a year-over-year basis for the fourth quarter we expect Mueller Company's net sales to increase due to both volume growth and higher prices in our base business. For Mueller Systems and Echologics we expect to see significantly higher net sales on a year-over-year basis. For example, the backlog at Mueller Systems is up over 60% at the end of July as compared to the same date a year ago. Generally we expect raw material costs to be slightly lower year-over-year.

Mueller Company's base business is expected to benefit from greater capacity utilization in the second half of this year compared to the prior year and, therefore, achieve higher operating leverage. At Mueller Systems and Echologics we expect operating performance will improve both year-over-year and sequentially primarily driven by shipments associated with our recent win.

In total we expect adjusted operating income from Mueller Company to be significantly higher year-over-year with improved performance at both our base business, as well as Mueller Systems and Echologics. However, we expect that volume in our base business and consequently adjusted operating income will be less than what we experienced in the third quarter of this year.

Now I'll turn to Anvil, we expect to see essentially flat shipment volume in the 2012 fourth quarter year-over-year as energy and fire protection markets remain stable, while we expect the industrial markets to remain soft. In total we expect to see a slight decline in Anvil's adjusted operating income since we will be negatively impacted by slightly higher per unit cost due to lower production in the third quarter of this year versus a year ago.

I'll now discuss some other key variables for 2012. Our corporate expenses are estimated to be approximately $30 million. Depreciation and amortization is estimated to be about $61 million, and interest expense is estimated to be approximately $60 million which includes $5 million of noncash interest expense associated with the terminated swap contract. Capital expenditures are estimated to be between $28 million and $30 million. Our effective income tax rate for the fourth quarter of 2012 is expected to be between 43% and 45%. We expect 2012 free cash flow from continuing operation to be slightly greater than $30 million.

We continue to improve our working capital efficiencies. For example, inventory turns for the 12 months ended June 30th, 2012 improved about half a turn from the comparable prior year period. Furthermore, for the latest 12 months average receivables, inventory, and accounts payable as a percentage of net sales decreased about 180 basis points from a year ago.

In summary, the data on the residential construction market is trending positive and we believe we saw some pockets of growth from this market segment during the third quarter. We continue to believe that we are well positioned for future profitable growth as end market demand improves and we are able to increase capacity utilization. We are also encouraged by the sales growth we are seeing in both Mueller Systems and Echologics.

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

Thank you. (Operator Instructions)

Our first question today comes from Todd Vencill. Your line is open and please state your company name, sir?

Hi, it's Sterne Agee. Good morning.

Good morning, Todd.

You mentioned the pockets of strength in residential demand and we've talked about that sort of developing in the past. I'm wondering if you can just update us on where those pockets are and what you're seeing there? A little more color, please?

Yes, yes, Todd. It's hard for us to put an exact dollar number on that, but as we looked in the third quarter and the information we get back from our distributors and our field sales force actually it was in different parts of the country. Arizona and California, surprisingly, we saw some increased activity there. Then Northern Virginia, which is not quite surprising because the Washington, D.C. area never has any fall-off, but then also Texas and Florida. So, as I said, it was -- as we look, those five states where I think we saw a nice uptick in activity.

That's great. Thanks a lot for that. And then in terms of the industrial markets, can you give a little more color on that, as well? I mean how much of the industrial market or I should say how much of Anvil is represented by these industrial markets that you're seeing softening? And is there any geographic or sort of industry concentration to what you're seeing?

Good question. And it varies and what percent of Anvil sales it may be at any given time. I think when you look at one of our strengths of the Anvil business is the diversification of its addressed markets in the nonresidential or commercial construction markets. One year ago we were seeing a very nice increase in spending on upgrading and expansions in the industrial market segment. This would include manufacturing, facilities, warehouses associated with the industrial markets. We believe actually what we were seeing was some pent-up demand since I think a lot of work had been delayed.

As we said, spending in this segment has slowed down. I think they certainly caught up, and while we are seeing some improvement in other segments of the nonindustrial or the nonresidential market they haven't yet rebounded to the level to offset the growth we saw a year ago in the industrial segment.

So I think when we look at it we just think it's a, you know, it could be a couple quarters of year-over-year timing because at any given -- I said at any given time we can see one of our market segments in the nonresidential construction being a little better. And if you look at I think those segments other than industrial they're improving, but still haven't got to the point where demand was at the level that we were seeing in industrial markets a year ago.

Got it. And without trying to pin you down, I mean is this industrial as much as half of Anvil or is it --

No, no, no, but when you look at where a year ago, you know, we -- the commercial construction, non-res construction is 75% of our total, but in any given quarter or a couple of quarters one of those segments can account for a larger percentage and that's what we were seeing a year ago. We were seeing the industrial markets rebounding very, very nicely while the rest of the -- I think the rest of the non-res construction market was flat, now we're seeing, as I said, some upturn in those other segments but they're still not back to the point, I'd say year-over-year growth that we were seeing in the industrial markets.

Got it. That's great. Thanks a lot.

Thanks.

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

Hi, good morning. it's Goldman Sachs.

Good morning, Jerry.

Good morning.

Can you please talk about what was the impact of pricing and material cost in each of the businesses in the quarter? And it sounds like it's going to be a pretty meaningful tailwind for Mueller going into the fourth quarter, I'm wondering if you could just flesh that out for us?

Yes, Jerry, yes, in each of our businesses our price increases more than offset the higher raw material costs. And I think that that is going to continue in the -- you know, we'll see some of that in the fourth quarter, too. Though, I think the -- on the Anvil business we may not see it as much as we did in the third quarter, but I think that's the result a little bit of product mix that could impact pricing. And, but when we look at certainly at the Mueller Company we still expect to see a very positive relationship between price and raw material costs.

Okay, and in terms of the Mueller Systems and Echologics business can you just talk about what was the impact on the Mueller Co. segment in terms of sales and operating margin, as you've framed for us in the past?

Yes, when you look at our -- you look at our base business, and I think we've said this at our -- in the release and in our prepared remarks -- margins in our Mueller Co. base business were a little over 17% for the quarter, but you can see is the result of the Mueller -- the Echologics and Mueller Systems that reduced the overall margin to a little over 13%. So certainly it had a negative impact on the margin side.

If you look at our sales growth in our base business certainly the growth in Mueller Systems and Echologics contribute to a higher year-over-year sales growth, but if you look at our Mueller base business sales on a year-over-year basis grew slightly under 7%. So it's certainly -- it did help boost the overall year-over-year growth on revenue and did have a negative impact on margins. We saw nice growth in Mueller base business margins from a little over 16% a year ago to a little over 17% this quarter.

That's great color. And, lastly, can you talk about how bookings activity came in for the quarter and, if you could, just touch on how demand ebbed and flowed over the course of the quarter? We heard it from a couple of construction material and rental companies that demand really slowed into June and into July, and I'm wondering if you saw any of that as the quarter shook out?

Yes, you know, actually we didn't. In fact, if you look at our Mueller business -- now when I talk about it, I'll discuss that in terms of Mueller and I'll discuss at Anvil. Anvil did see I think exactly the situation that you described, and I think that we entered the third quarter with our bookings in April remained at a nice pace. We did see them slow down in May and June. So, yes, we did see that trend there.

Actually on the Mueller System it was pretty stable and pretty solid throughout the quarter. In fact, when you look at our backlogs at Mueller at the end of July and it's important for me to point out I think backlog certainly is an indicator I think of activity but on the other hand most of our products at the Mueller business we have two to three-week delivery, so backlogs will tend to be small because it turns, they turn quickly but at the end of July, though, they do vary by product line. If you look at our core valve, hydrant, and brass products, that group, backlog is up about 18%. If I look at total Mueller Company it's up about 14%.

So, all in all, I would say that, no, we saw a continued steady flow of bookings throughout the third quarter and in July for Mueller, but we did see the slow-down at Anvil, similar to the scenario you described.

Thank you so much for the color.

Thank you.

The next question comes from Ryan Connors. Your line is open and please state your company name?

Hi, this is actually [Tim Curran] from Janney Montgomery Scott filling in for Ryan. My first question just deals with the municipal market. We've done a little bit of work there in the past few months just by taking a look at some of the budgets for the larger municipalities that operate on June fiscal years. Do you think there could be some up side there going into next year? I was just curious to get your take, if you think some municipalities are increasing their water budgets and what the affect could be on demand over the next 12 months?

Yes, Tim, good question. I can certainly answer that perspective of what we're seeing now. And then how we think that may evolve. We do believe we are seeing a little growth in municipal spending. We think we've seen it the last couple of quarters. I think a good example is the growth in spending that we are seeing this year, for instance, for large transmission lines. Some of that spending is driven by regulation and some of it because we just think that they can no longer delay.

For instance, we're seeing large transmissions, so our larger gate valves, going into transmission lines that are being installed, driven by [EPH] and set degrees to treat combined water and sewage storm runoff, but we're also seeing spending on larger transmission lines driven by increased failure rates. And I think this is another example of what -- I think we've seen municipalities a year ago cutting back spending and they got to a point where they just could not continue to hold-off any spending. So we're actually seeing some spending on transmission lines that are driven by the need to go to new water sources that are a result of droughts of several years ago.

So I think, Tim, all in all we think that we are seeing slight growth and I think that we're comfortable in concluding that at least the market is very stable. Certainly, from where this was this time a year ago, and we think it's reasonable just out of pure need that we could continue to see a little bit of growth in municipal spending going forward.

Great. And then just to follow-up on that, I think you guys a couple of quarters ago talked about some larger projects, you know, both for you and just in general in the industry kind of being pushed out further. Do you see some of those projects now, the larger items kind of coming to the point where they can't be pushed off anymore and --

Yes, I think that that's our conclusion. And, in fact, in our second quarter call we referenced that we were getting some orders and seeing new quotation activity on projects that had been around for several years. So, in fact, I think we specifically commented last quarter that we were starting to see some of those come to fruition.

Right.

And I think it exactly falls into that category that they can only be pushed off for so long and then we're going to have to see -- and then I think municipalities are just going to have to spend. And, yes, I think we are seeing some of that.

Okay, that's great, guys. Congrats on a great quarter, and thanks for taking my question.

Thank you.

Thank you.

Next we have Michael Gaugler. Your line is open and please state your company name?

Good morning, Martie and Greg. Good morning, everyone.

Good morning, Michael.

Good morning.

Congrats on the nice quarter.

Thank you.

I'd like to focus a little bit on the metering business, briefly. As you mentioned earlier, you've had nice wins there recently, and I'm wondering where you go with that longer term? Do you push out into maybe the gas and electric markets, where you have some exposure in some of your other business lines? And do you push out internationally?

Mike, great question. And our focus is really I think, we think there's a lot of up side in the water segment as more and more water systems migrate from AMR to two-way AMI, and we think -- we like our technology. Certainly, if you look at the investments that we've made those costs are flowing through and hitting the income statement, which includes software development, engineering, R&D, sales. These expenses are fixed and semi-fixed in nature, but we've made the investment to be able to support a much bigger business, and I think that we believe that we can leverage our position with our traditional products to move from what I will say smart metering that we define as two-way AMI into smart water infrastructure.

So we believe that it's still in the very early stages. It's just a very, very small percentage of water, municipalities' water systems has made the switch to two-way AMI, and we think there's a lot of growth there, and we think that the technology that we've invested in and continue to invest in, coupled to what we're doing with leak detection, that we think all comes together in a nice package to just improve the overall intelligence of water systems. So that's where our focus will be. I don't know if that answered your question or not?

Okay, it does a little bit, but again just wondering, I mean it seems like if I'm hearing you correctly you're going to stay on the water side of the business for quite a bit?

Yes, yes, water as compared to electric. We really have nothing going into the electric. Let me put it this way, right now we participate in the electric meter market, when a system is operating both water and electric systems, and we have an arrangement with Landis+Gyr that we source our electric meters from Landis+Gyr when we have the opportunity to provide our systems and the water meter. So I think that will continue to be a focus for us.

So, sorry, but I don't suspect that -- I mean I believe that our R&D investment will still be on certainly the water side and anything that we can do to enhance our system in the water application, so I do expect that we will continue to go after those water systems or those municipalities that operate both electric and water systems and when they want to put in one system to handle both.

Got it. Thanks, Greg.

Thanks, Michael.

Next question comes from Seth Weber. Your line is open, and please state your company name?

Hey, good morning. It's RBC.

Good morning, Seth.

Good morning. Greg, a couple times you mentioned capacity utilization on the call and how things are getting better. Can you give us an idea of where you're at in capacity utilization and what you think incremental margins or pull through should be as we go into next year?

Yes, sure, Seth. When you look at, if you look at our Mueller business, especially, our production levels are up about 15% in the third and fourth quarter. So we've bumped up our capacity utilization I think in -- across that business segment up into in some cases in the third quarter we were around 69% at our valve plant, a little less in some of our other plants. So I would say that if you look at there, where we're up from say maybe 55%, 60% a year ago to 65% and maybe up a little more in some other plants. Anvil production was down a little bit, but their overall capacity utilization is up.

Our conversion margins are going to vary by product lines, but I think we feel very, you know, that as capacity utilization increases, and we've said in the past we look at our valve and hydrant business, that we -- that that should be over 50%. And some of the other products will be at a lower rate, but I think on average for a Mueller business of 40% I think that we would feel comfortable based on the mix and it would be a little less than that at the Anvil business.

Okay, that's perfect. Thank you. And then on the new initiative, you know, the service and Echologics business can you -- I'm sorry if I missed this, but can you frame for us what revenue number you were thinking about would get you to breakeven there or when we could expect that to be kind of a breakevenish number or profitable next year?

Yes, and it will certainly depend on mix, but we feel when we look at these businesses and Mueller Systems, in particular, that we do expect to be profitable in 2013. And when I say mix, you know, let me give you a great -- a good example here in mix and timing. We sell both meters and software now and software maintenance services, at this point in our development we've incurred much greater costs relative to the development of software without really accompanying revenue -- 60%, 70% of our deployment, our customer will elect to pay us a licensing fee and then an annual licensing fee, and in some cases a hosting fee. And we'll collect those annually over a number of years, so while we're in the stage of getting those deployments, getting those installed, we've incurred the costs, developed the software, but really not collecting the revenue.

So I think that that answer is as our overall volume increases that we will start -- these businesses will start being profitable, and as we -- as I've said, that we expect that they'll be profitable in 2013. Obviously, the exact timing would depend on our ongoing wins and shipments to existing customers, and there will be seasonality in these businesses. When we get to December, January, February there's going to be fewer meters installed and maybe less field work done on leak detection, but all in all we think that when we look at fiscal year 2013 we expect it to be profitable.

Okay, well, thank you very much for the color.

Thank you.

Thanks.

Our final question today comes from Brent Thielman. Your line is open, and please state your company name?

Yes, hi. D.A. Davidson. Good morning.

Good morning.

Good morning, Brent.

Yes, Greg, I was just hoping to get a little more commentary on -- obviously, the market seems to be a little better for you, particularly in Mueller Co., where are the opportunities around price increases there?

Well, you know, Brent, we -- relative to price increases we really focused on -- when you think that 19 out of the last 20 years we've had a price increase in the January and February timeframe. We did again this year. And I would expect that any short-term or immediate term price increases would be driven more on what we see happening around material costs. And I would say right now I think that those look stable.

So when we put our quotations in we look at it on a quotation-by-quotation basis, and obviously look to what we can achieve on pricing. But I would say right now we're in a pretty stable cost environment when we look at it from a raw material cost. So I would say relative to it, that probably would have the biggest influence on what we do with list pricing, anything we do with our list price in the short term.

Okay, and then and not to pick on this, but I guess with regard to kind of the tech divisions and you mentioned looking for profitability in 2013. I mean do you think this is achievable in the first half or you think more second half?

Right now I think that it's going to depend on timing of shipments and when some of our backlog is released by our customers. Certainly, as I mentioned, our backlog is up 60% year-over-year, so we're going into 2013, our next fiscal year, in a much stronger position than we did last year.

But there is seasonality, and so relative to the first half of the year I think it would depend on how much is released in the October, November timeframe because I do expect that the market will slow-down in the December, January, February timeframe. So I would, you know, right now I would say that there are probably a little too many variables for us to be able to pinpoint exactly what quarter next year.

Okay. Thank you.

Thank you, Brent.

And that does --

That concludes today's call, so again thank you for joining us this morning.

Thank you, all, for joining. That does conclude our presentation. You may now disconnect.