Mueller Water Products Inc (MWA) 2012 Q4 法說會逐字稿

Welcome and thank you all for holding. I would like to remind all parties that your lines are on a listen-only mode until the question-and-answer segment of today's conference. Also, today's call is being recorded. If you have any objection, please disconnect at this time. I will now turn the call over to Mr. Gregory Hyland. Sir, you may begin.

Hi, good morning. This is Martie Zakas, and thank you all. Good morning, everyone, and welcome to Mueller Water Products 2013 Fourth Quarter Conference Call. We issued our press release reporting results of operations for the quarter ended September 20, 2012, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com.

Mueller Water Products had 156.8 million shares outstanding at September 30, 2012. 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 forward-looking statements and our non-GAAP disclosure requirement.

At this time, please refer to slide 2. This slide identifies certain non-GAAP financial measures that we reference in our press release, on our slides, and 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 3 addresses our forward-looking statements. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward-looking statements as well as specific examples of forward-looking statements, please take note of slide 2 and 3 in their entirety.

During this call, all references to a specific year or quarter refer to our fiscal year, which, as of September 30 unless specified otherwise. As previously announced, we sold US price effects of April 1, 2012. US price operating results have been reclassified in discontinued operations, and its assets and liabilities have been reclassified as held for sale for all prior periods.

A replay of this morning's call will be available later this morning at 1-800-839-2232 and will be accessible for 30 days. 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 will now turn the call over to Greg.

Thanks, Martie. Thank you for joining us today as we discuss our results for the 2012 fourth quarter. We appreciate that many of you are joining us this morning under challenging conditions. We thank you for the effort, and our thoughts and prayers are with everyone impacted by Hurricane Sandy.

I'll begin my remarks 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 2013 and the first quarter.

Our fourth quarter performance demonstrated a meaningful improvement year-over-year with growth in our net sales, adjusted operating income and adjusted EBITDA. Net sales increased 9.7% year-over-year. Adjusted EBITDA increased 30%. Our adjusted earnings per diluted share improved $0.06 to income of $0.03 from a loss of $0.03 a year ago, and we generated $45.3 million of free cash flow for the year.

Shipments of Mueller Company's valves, hydrants and brass products increased in the quarter year-over-year, which we believe reflects improvement in both municipal spending and demand from residential construction. Sales of Mueller Company's metering systems and leak detection products and services continue to increase this quarter demonstrating the traction these products and services are gaining in the marketplace. On a year-over-year basis, Mueller Company's adjusted operating income for the fourth quarter increased 64%.

At Anvil, despite slightly lower sales in the quarter due to softness in some of its end markets, operating income was essentially flat.

Finally, at September 30, 2012, our net debt leverage was 4.2 times, the result of both improved performance and a reduction of debt during the year.

Overall, we were pleased with the fourth quarter. I'll go into more detail on our outlook for 2013 after Evan's discussion of our financial results.

I'll now turn the call to Evan.

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

Consolidated net sales for the 2012 fourth quarter of $281.1 million increased $24.8 million for 9.7% from the 2011 fourth quarter net sales of $256.3 million due primarily to higher shipment volumes.

Consolidated gross profit of $76.6 million for the 2012 fourth quarter improved from $64.9 million for the 2011 fourth quarter and was positively impacted primarily by higher shipment volumes at Mueller Company.

Gross profit margin for the 2012 fourth quarter improved 200 basis points year-over-year, 27.3%.

Consolidated selling, general, and administrative expenses of $53.9 million for the 2012 fourth quarter compared to $51.5 million for the 2011 fourth quarter. Selling, general, and administrative expenses as a percent of net sales declined to 19.2% in the 2012 fourth quarter from 20.1% in the 2011 fourth quarter. Selling, general, and administrative expenses increased in the fourth quarter year-over-year driven primarily by higher employee-related expenses and higher professional fees. Corporate selling, general, and administrative expenses were $8.7 million compared to $9.6 million in the prior year.

Adjusted operating income for the 2012 fourth quarter increased 69.4% to $22.7 million from $13.4 million for the 2011 fourth quarter. This increase was driven primarily by higher sales volume, lower per-unit overhead costs due to higher production and higher sales prices partially offset by higher selling, general, and administrative expenses.

Adjusted EBITDA for the 2012 fourth quarter increased 30% to $38.1 million from $29.3 million for the 2011 fourth quarter.

Interest expense, net, excluding terminated swap contracts, decreased $1.4 million in the 2012 fourth quarter year-over-year due primarily to lower levels of total debt outstanding. Interest expense, net, for the 2012 fourth quarter was $13.9 million, which included $700,000 of noncash costs for terminated interest rate swap contracts compared to $16.6 million for the 2011 fourth quarter, which included $2 million for such contracts.

These contracts were terminated prior to 2011. However, the related costs were amortized over the original term of the contracts, and all amortization is now complete.

During the 2012 fourth quarter, income tax expense was $4.1 million on income before taxes of $8 million or an effective income tax rate of 51.3%. The effective rate reflects an adjustment to state taxes and other non-deductible items. Net operating loss carryforwards were made available to offset future taxable earnings.

Adjusted net income per diluted share for the 2012 fourth quarter of $0.03 compares to adjusted net loss per diluted share for the 2011 fourth quarter of $0.03, an improvement of $0.06.

I'll now walk through the after-tax adjustments for both the 2012 and 2011 fourth quarters. The 2012 fourth quarter adjusted results exclude the after-tax income from discontinued operations of $100,000; after-tax restructuring expenses of $500,000; and after-tax interest rate swap costs of $400,000.

The 2011 fourth quarter adjusted results exclude the after-tax loss from discontinued operations of $3.8 million; after-tax interest rate swap costs of $1.2 million; and after-tax restructuring expenses of $700,000.

There was a weighted average of 158.5 million diluted shares of our common stock outstanding for the 2012 fourth quarter compared to a weighted average of 155.6 million diluted shares outstanding for the 2011 fourth quarter.

I'll now move on to segment performance and begin with Mueller Company.

Net sales for the 2012 fourth quarter increased 16.3% to $187.2 million from the 2011 fourth quarter of $161 million. This increase was due to higher shipment volumes across most of Mueller Company's products. The increase in net sales at Mueller Company was primarily due to higher shipments of valves, hydrants, brass products, and metering systems.

Domestic unit shipments of valves increased 14.3%, hydrants increased 10.7%, and brass products increased 20% in the 2012 fourth quarter on a year-over-year basis.

Adjusted operating income for the 2012 fourth quarter improved to $21.5 million from adjusted operating income for the 2011 fourth quarter of $13.1 million.

Mueller Company's adjusted operating income margin for the 2012 fourth quarter improved 340 basis points to 11.5% from adjusted operating income margins for the 2011 fourth quarter of 8.1%.

Excluding our newer technology products and services, which include Mueller Systems and Echologics, our adjusted operating income margin improved approximately 400 basis points to 14.7% for the 2012 fourth quarter.

I'll now turn to Anvil.

Net sales for the 2012 fourth quarter were $93.9 million compared to net sales for the 2011 fourth quarter of $95.3 million. Net sales decreased slightly due to lower shipment volumes, especially in Anvil's industrial markets. Anvil's net sales to the fire protection and oil and gas markets were up only slightly year-over-year. We saw strong expansion in the oil and gas market last year making the year-over-year comparisons tougher.

Adjusted operating income for the 2012 fourth quarter of $9.9 million compares to adjusted operating income for the 2011 fourth quarter of $10 million. Adjusted EBITDA for the 2012 fourth quarter of $13.5 million compares to adjusted EBITDA for the 2011 fourth quarter of $13.6 million.

Turning now to a discussion of our liquidity. Free cash flow, which is cash flows from continuing operations from operating activity less capital expenditures increased to $45.3 million for the 2012 full year from $12.7 million for the 2011 full year.

We continue to focus on managing our working capital better and for the 2012 full year. Average receivables, inventory, and accounts payable as a percentage of net sales decreased 210 basis points from the 2011 full year.

At September 30, 2012, total debt was $622.8 million, down $55.5 million from a year ago. Total debt outstanding included $420 million of 7 3/8% senior subordinated notes due 2017; $199.9 million of 8.75% senior unsecured nets due 2020; and $2.9 million of other. As of September 30, 2012, we had $140.6 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 on our 2012 fourth quarter performance and end markets and provide an outlook for 2013 as well as our first quarter. I'll begin with Mueller Company.

We are pleased with the net sales growth at Mueller Company in the quarter where shipments of domestic valves, hydrants, and brass products in both dollars and units were up. As Evan mentioned, unit domestic shipments of valves were up 14%, hydrants were up 11%, and brass products were up 20%. We believe demand for our products benefited from increased spending by municipal water systems and that we saw some growth in demand from new residential construction projects.

Our dollar bookings activity in the fourth quarter from Mueller Company's valves, hydrants, and brass products increased 9%, 18%, and 30%, respectively, year-over-year. We also believe that distributor inventories at the end of the fourth quarter were up from both the previous quarter and year-over-year. Distributor inventory turns appear to have remained steady, which suggests they are more optimistic about the end markets.

We continue to make progress with our metering systems. Sales in the quarter were up almost 60% year-over-year. Total shipments during the fourth quarter were almost 50% of the total volume we shipped for all of 2011.

During the quarter, as a result of the increased activity we experienced, we were not as efficient in two of our manufacturing operations. At Mueller Systems, we produced volumes well in excess of what we had ever experienced before. We identified some weaknesses in our processes that we have corrected and which we believe will allow us to produce higher margins in the future.

At Mueller Company's brass products manufacturing plant, we dealt with both supply chain issues and excessive overtime due to a significant increase in demand coupled with our union contract negotiations, which were completed during the quarter. We estimate that operating income was negatively impacted by approximately $2.2 million in the quarter related to these two operations. We believe these issues are behind us and anticipate achieving higher margins at these operations in the future.

As Evan discussed, Anvil had another solid quarter. Anvil saw some softening in its industrial and commercial markets, which accounted for its decline in net sales over last year. The oil and gas market, which accounted for approximately 20% of Anvil sales remains relatively strong, although it was up only slightly year-over-year due to tougher comparisons. Anvil's fire protection market was also up.

Before I turn to our outlook for 2013 and the first 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 been missed, we believe our water infrastructure markets are healthier than they were a year ago.

The general municipal spending environment continues to show improvement as tax receipts have grown and the financing market remains favorable. State and local seasonally adjusted tax receipts grew at 3% year-over-year and reached a record high for the year ended June 2012.

On the municipal bond front, rates are still very attractive from a historical perspective. In calendar year-to-date issuance is up 44% compared to the prior year, although the bulk of the issuance is for refinancing.

The CPI for water and sewage maintenance rates increased by an annualized rate of 6.7% in September compared to the prior year exceeding that of other utilities and the CPI as a whole.

Finally, the housing market continues to be one of the few bright spots in the economy. Housing starts in September, 872,000 units, jumped to their highest level since July 2008. This represented a nice consecutive month of greater than 700,000 units on a seasonally adjusted annualized basis. Furthermore, September's single-family starts of 603,000 units were above 500,000 units for the sixth consecutive month and represented the strongest reading since August of 2000.

As a potential future indicator, September housing permits were close to 900,000 units and represented the highest reading since July 2008. Total permits grew 45% over last year while single-family permits reached their highest level since July 2008 and grew 27% over prior year.

Also, new and existing home inventory held for sale has declined from all-time highs during the financial crisis and is well within normal levels. Clearly, the housing recovery is gaining momentum, but we still expect to experience somewhat of a lag relative to the growth in housing starts as the industry continues to work through existing finished lot inventory.

We need to see not just growth and community counts from builders but development of raw land, which is still in the early phases of recovery. There is evidence of builders finding it increasingly difficult to locate and acquire A-quality finished lots, and therefore demand for raw land is increasing.

Therefore, we believe the lag period for the sale of our products into residential construction is now less than a year, although we are seeing some pockets of growth in certain regions.

It is also important to note that improving housing construction ultimately helps bolster the health of municipal markets 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 should see growth in calendar 2013.

Now turning to what we are seeing for the full year 2013. I'll begin with Mueller Company and look at the base business as well as our newer technology products and services.

For the base business in 2013, we expect to see continued improvement and demand for valves, hydrants, and brass products, as we anticipate increased municipal spending over the prior year and increased demand from residential construction. We saw an increase in our water treatment plant quotation activities in the fourth quarter, and our backlog for Butterfly and plus valve products is up year-over-year. We expect to see sales growth for these products, which we offer under the Henry Pratt and Milliken brands.

For our metering systems and leak detection products and services, we expect continued strong year-over-year net sales growth. We also expect to continue to gain share particularly with our two-way AMI system. As a reminder, net sales for our metering systems can be lumpy among quarters depending on the timing of execution of new customer contracts.

On the production side, we expect to see the continued benefits of lean manufacturing and productivity improvements. In addition, with increased production, we should see positive year-over-year improvement in overhead cost per unit due to increased absorption of fixed costs.

Raw material costs have abated recently, however, we expect that average cost for 2013 will be similar to that of 2012. Based on what we are seeing today, we expect net sales growth in the high single digits from Mueller Company.

As a result of all these factors, we expect adjusted operating income to improve over the prior year. We also believe our Mueller Systems and Echologic products and services will be profitable for the full year weighted towards the second half of the year.

In total, we expect adjusted operating income margins at Mueller Company will reach double-digit margins.

Now I'll turn to Anvil. Anvil should see slightly higher shipment volumes in 2013. We expect the non-residential construction markets to be essentially flat with the possibility of higher spending in some segments. We believe spending in the oil and gas market will pick up in the second half of the year.

We anticipate our ongoing manufacturing and other cost-saving programs to at least offset inflationary increases in production costs. Overall, today, as we see it, Anvil margins are expected to be relatively stable year-over-year.

Other key variables for 2013 are as follows -- corporate spending is estimated to be $30 million to $32 million. Depreciation and amortization is estimated to be $60 million to $62 million, and interest expense is estimated to be $53 million to $55 million.

Our adjusted effective income tax rate is expected to be between 37% and 40% for the full year. Capital expenditures are expected to be between $30 million and $34 million. For the full year 2013, we expect free cash flow to be stronger than 2012. Most of our improved free cash flow generation is expected to come from better operating results.

Additionally, we expect cash income taxes to be minimal this year based on our net operating loss carryforward position. At this time we contemplate only making minimal cash contributions to our pension plan in fiscal 2013.

Turning now to our outlook for the first quarter. On a year-over-year basis for the first quarter, we expect Mueller Company's net sales to increase primarily due to volume growth. We expect to continue to see significantly higher net sales of our metering systems and leak detection products and services on a year-over-year basis driven primarily by new customers. The metering systems backlog is up over 65% at the end of September as compared to a year ago.

In total, we expect adjusted operating income from Mueller Company to be higher year-over-year with improved performance at our base business as well as Mueller Systems and Echologics.

As a reminder, our first quarter is negatively impacted by the seasonality of our business and lower production levels due to fewer production days.

At Anvil, we expect a slight increase in shipment volume in the 2013 first quarter year-over-year. However, as Anvil's production fell off in the second half of 2012 as certain markets softened, we experienced higher per-unit overhead costs and inventory, which will flow through the income statement this quarter. As we have discussed in the past, we use the FIFO method of inventory accounting. Therefore, we expect to see a decline in the Anvil's adjusted operating income.

For the Company as a whole, we believe that 2013 first quarter net sales will increase year-over-year attributable primarily to volume increases at Mueller Company. We expect adjusted income from operations to increase marginally year-over-year as improved performance at Mueller Company is expected to more than offset a modest decline at Anvil.

While it is obviously too early to assess any potential impact Hurricane Sandy may have on our first quarter results, we believe activity in the Northeast will slow down for at least the next several weeks for both our Mueller and Anvil products.

For example, many crews who have previously been scheduled to water infrastructure or other construction projects will most likely be involved in cleanup operations. Additionally, some projects may be delayed due to inaccessibility. However, we would expect to capture this work later in the year when conditions return to normal, and there may be additional need for our products and services based on the extent of storm damage.

In summary, looking ahead, we feel we are well positioned to benefit from a recovery in residential construction and municipal water spending, which we believe are both healthier today than they were a year ago. We also believe operating margins will continue to be positively impacted in the future by the efficiencies generated from our lean manufacturing achievements and as we experience higher levels of capacity utilization.

Additionally, we believe we will benefit from the investments we have made in our metering systems and our leak detection products and services as these markets continue to grow.

With that, I will open this call for your questions.

Thank you. (Operator Instructions) Seth Weber. Please state your company name.

Hi, good morning, it's RBC. Sorry, I'm trying to scramble a little bit here at home. The new business initiatives, I guess, can you just frame for us how much -- what percentage of MuellerCo revenue that represented in the quarter and maybe what percentage you think that represents next year?

Yes, Seth, good question. You know, we've been saying up to this point, up through the third quarter, that these new businesses accounted for less than 10% of total MuellerCo sales. In our fourth quarter, they were -- accounted for 12% of MuellerCo sales, and as we look at next year, we think that that will grow, and so I think that it's reasonable to expect that those businesses could approach 14%, 15% of Mueller Company sales in 2013.

Okay, that's helpful, thank you. And I guess in the third quarter you had talked about the margin headwind of about 400 basis points off of total MuellerCo. I'm sorry if I missed this in your comments, but did you give what the margin headwind was in the fourth quarter related to the new initiatives?

We talked about the base business for MuellerCo. I believe we said that the MuellerCo base business margins were about 400 basis points higher than total MuellerCo.

That's right, that's correct.

That's for the fourth quarter?

Yes, the fourth quarter.

Okay, great, thank you. And I guess just lastly, the two issues that you called out -- the $2.2 million operating income hit to the quarter. How quickly -- I mean -- is that already fixed or is that going to continue to -- ?

No, we believe it's already fixed. In Decatur, it was a real spike in demand for our brass products. They grew much higher than either our valves and the hydrants. And, as we said, Seth, coupled with our union negotiation contract at our Decatur plant, I think that that certainly had an impact where, towards the end of the quarter, we had a work-excess of overtime to meet our delivery commitments, which we fell behind a little bit on our brass products during the quarter. And we did have one supply chain issue that we believe was behind it. So, yes, we believe clearly that that one is behind us.

Mueller Systems, as I said, we had such a spike in demand in our fourth quarter and, as we pointed out, in our fourth quarter on our meter production, we produced almost as much as 50% of what we produced in all 2011. We found, obviously, when you see that kind of production jump, we found where our processes can be improved. We've made those changes, but we think that probably for the next couple of quarters there should be additional improvements also as we continue to ramp up production.

So -- I would say yes, for the most part, everything that we saw in the fourth quarter should be behind us and as we continue to go up, ascend the learning curve at Mueller Systems.

Okay, and do you have pretty good line of sight to profitability in these businesses for the back half of the year? I mean, is there anything that -- is that dependent on new awards coming through? Of do you feel like -- ?

Well, as we said, our backlog at Mueller Systems is up 50% year-over-year. So we're going into 2013 with a nice backlog condition. Certainly, we are counting on some new wins in 2013, but on the other hand we're seeing growth in demand for two-way AMI that we believe, as we're sitting here today, would support that kind of level.

I would say the only caveat that I would put on it, and we've seen that this year, is that on some of these projects is not unusual for utility to perhaps delay it two, three, or maybe even in some cases, four months. You know, if they have a little hiccup on their side, they may push it out.

So that goes back to our comments that we expect that this is going to be lumpy given where we are on building up this business from quarter to quarter based on those contract shipments and, if we find any of those contracts slipping out of 2013 into 2014, that could impact us. But, as we sit here today, we said we believe that these businesses should be profitable in 2013.

Matt Vittorioso. Please state your company name.

Good morning, Matt from Barclay's. Good job in getting leverage down. You're now at 4 times -- 4.2 times net. You're building cash; you expect to generate cash in 2013. Can you just give us an idea of what you expect to do with that cash? I mean, there's not very much prepayable debt remaining on your balance sheet. What do you expect to do with the cash that you generate?

Well, certainly, debt reduction has been a key focus for us, and that continues to be so. We reduce about $55.5 million year-over-year this year, which had an interest savings around $3 million.

We do have, with our 8.75% notes another option to call $22.5 million at 103 between September this year and September next year, and then those are also callable at 105 on the schedule beginning September 2015. And, as well, we have a restricted payment basket of about $65 million where we can repurchase our subordinated notes. So we continue to evaluate these alternatives, and would make any announcements if we decide to call the 8.75% notes.

So -- that's some deleveraging that we have as we look out -- an opportunity to continue to lower that net debt to EBITDA ratio.

And would you anticipate any sort of acquisition activity or share buybacks in 2013 as you sit here today?

You know, Matt, we always, relative to share buyback, from time to time we analyze that with the Board. And from a -- you know, nothing planned as we sit here today, but, as I said, we analyze that off and on.

From an acquisition standpoint, I think that if we saw something that there was only, we'll say, a once-in-a -- a transformational opportunity or a product line that we realize we would only have one bite at the apple, we may take a look at that. But, again, I think, as Evan said, our priority is still on debt reduction and building our cash balance. But I would not rule out that if we saw, hey, this was a once in a very limited opportunity that gave us either nice synergy or was able to bolster our newer technology businesses, I think we would look seriously at it.

Very helpful. And maybe, just lastly, any sort of net leverage target that you guys are trying to get to over the next year or two?

Yes, Matt, I think we've always been consistent in saying that we would like to see our net leverage under 3. That I think once we get under 3, and we could keep it under 3, I think we might broaden our perspective on acquisition opportunities at that time. But I think that we have been consistent that we would like to see that leverage under 3.

Todd Vencil. Please state your company name.

Hey, good morning, Sterne Agee, how are you?

Good morning, Todd.

On the residential recovery and demand that you guys are seeing, can you talk about -- just -- just -- you're given some good color on that. Can you dig a little deeper on regions of the country or which of your products are particularly going in there and how much new community and raw land development you are seeing?

Yes, that's a great question. And as we said in our comments, that we did see an increase in demand, but I think we also followed that up with a better description. I think there are pockets of growth.

When we look -- that we can say specifically we're seeing growth in Texas, northern Virginia, we've seen some in Florida, and even, surprisingly, some out West in Phoenix, Southern California, and to a lesser extent, the Tacoma area.

Relative to our product -- we have a few products, a very small percentage of Mueller Company's overall sales that are primarily installed when a house is constructed as opposed to when a housing development is put in place. And looking at this products -- and, again, I've got to remind, they're very small percentages of overall MuellerCo sales. On a year-over-year basis, these units grew anywhere from 3% to 19%. So, clearly, we did see some nice growth in those products.

Back to your point, we are hearing that builders have essentially run out of A location lots in a number of areas and are looking to purchase new land. And once they do sell, demand for our products will follow. So I will say that we're having a little more difficult time getting a good handle on any forecasts of land purchases by developers.

We have also -- back to your point, we've also heard some talk that builders, this go-around, if they only develop several streets at a time rather than going in the entire development all at once and, certainly, that makes sense. I would expect until they really are comfortable that the housing recovery is truly sustainable. So if this occurs, demand for our products will be spread out over a longer period of time.

So -- you know, as we said in our prepared remarks, we believe that demand for our products will add growth in housing starts, and right now we're estimating by about 12 months. We really have no scientific way to calculate this lag, but we do believe that it has come down over the last year.

If you look, on average, housing starts are forecasted to grow almost 30% in 2013, but I think where we are for demand for our products in the cycle, that we don't expect we'll see growth in demand for our products anywhere near that rate in the next year. So we do expect to see some growth.

Got it, thanks for that, that's great. And then extending that over to the municipal side, I caught your comment that, obviously, to some extent, muni budgets are going to follow the health of the housing market. Is the strength among municipalities that you're seeing geographically -- is that going to follow those pockets of strength that you mentioned on the residential side?

I would say that we're seeing that municipality spending -- a little more diversified. And I think a lot of it is -- certainly, I think probably the growth in housing is -- housing construction -- is probably too soon to start working its way down to those municipalities, though you would expect that benefit would come in the next year.

I think what we saw this year, our municipal spending, was that they cut back so much in 2011, they cut it back too far, and we are just -- you know, we saw work that they absolutely had to do. I think, as we look at 2013, though, that, as we said, that we think that their overall budgets will be in a -- you know, should be in a better position, which should contribute to what we believe right now is more municipal spending for water infrastructure in 2013 versus 2012.

Michael Gaugler. Please state your company name.

Brean Capital. Greg, I just kind of wanted to see if I could get a little more color on your comments holistically on Mueller Systems. Backlog is up nice. It looks like maybe you had a couple of bottlenecks in production. I'm wondering where you are there in terms of capacity? Are you near maxed out? Or do you have a little room left?

You know, Michael, that our constraint on capacity is not machine-related. It would be headcount-related. So as we ramp up, we'll have to hire more -- have to bring more people into our manufacturing operations, but we'll naturally have, I think, a learning curve from a training standpoint. So we could see some capacity constraint as we're going up that learning curve.

But relative to machine capacity, we have, I'd say we have enough capacity to see -- to take even much greater growth in demand.

Jerry Revich. Please state your company name.

Hi, it's actually Matt Ryback stepping in for Jerry Revich. A couple of quick questions for you, and I appreciate you taking my call. First, I was wondering if you could maybe just talk a little bit more about booking activity in the fourth quarter by business? Maybe break that down a little bit for us.

Sure. We saw, I think we mentioned, we saw the booking activity, if you look at our Mueller business, our base business, we saw, for valves and hydrants -- valves, hydrants and brass products -- booking activity anywhere up from 9% to 30% on a unit basis. And that's domestically. So our international business is lumpy.

On the Anvil bookings, actually, on a year-over-year basis, were pretty flat to down slightly, and I think that that's the slowdown that we've been seeing in non-res construction spending that, really, that slowdown began probably in March/April, I think, when the overall economy slowed down.

Again, when we look at our Mueller Systems, our bookings were up 50% to 60% on a year-over-year basis but then, again, that's a smaller number. So bookings that we saw -- bookings activity was very strong in the fourth quarter, and I think that that was a combination of both end market demand. But we also said in our prepared remarks that our distributors have built some inventory during the quarter, so I think that also contributed to our bookings demand.

And with regards to Mueller Systems, any commentary you can provide on the earnings improvement? I know you talked about bookings a little bit, but anything on the earnings improvement year-over-year?

Yes, earnings improvement, actually, on a year-over-year basis in 2012 we are -- our loss was a little greater than the previous year at Mueller Systems. And that would again -- most of that was related to R&D spending for products that we, right now, expect to introduce to the market in 2013 for testing, as well as additional depreciation coming through the P&L on software development. As we develop software, that's capitalized -- or a portion of that's capitalized, and then it's appreciated over a three-year period. So we're hitting that period where we're having the software development depreciation hitting on our operating income, but our leasing revenues have not caught up to offset that expense.

We expect those leasing revenues, obviously, are going to get better in 2013 and then beyond we think that it becomes a real contributor to margins. So, as I said, we think that this is the year, especially based on the American Water Wind that we announced in May. So we really, all you had the benefit of maybe about three or four months of that contract. We expect to have the benefit of full year with that contract in 2013, and just the overall growth in volumes to absorb those fixed costs. That's why we think that we have hit bottom, and we'll see the improvement in 2013.

Got you, thank you. And then one last quick question -- if you just talk a little bit more about the drivers of your operating profit pull-through in Mueller Company, and then maybe a little bit about the impact of pricing net of material costs for new business.

Sure. If we look at the fourth quarter on pricing material, pricing was -- for total Mueller Company was both a positive as was raw material costs. So on a year-over-year basis, both of those contributed to positive growth in our operating income.

And we also saw contribution due to our volume increase of lower per-unit overhead fixed cost, and I think that as Evan mentioned, or we mentioned that if we look at our base business, we converted in fourth quarter almost at a 50% rate.

Brent Thielman. Please state your company name.

Yes, D.A. Davidson, good morning. Yes, Greg, just some questions around, I guess, the technology divisions in MuellerCo. You mentioned that you think you're going to get the profitability sometime in the second half of the year. As you get these businesses to that level, do you expect the margins will be above, below, or sort of comparable to the core business for MuellerCo?

Yes, Matt -- and I think we've been pretty consistent that we think in about three years that they will be comparable. With our Mueller Systems business, that now we are not only selling the hardware and meters but also the software.

And when the two-way AMI becomes a greater percentage of our overall Mueller Systems revenue, those have -- we expect those to have some very nice margins. So we're in the building stage but, again, when we look at where they're positioned and the growth that we're expecting, that we think by 2015 that these businesses will have comparable margins to the Mueller base business.

Okay, and then just trying to get a feel for sort of the ramp here in fiscal 2013, I mean, should we expect to sort of see less of a margin drag in the segment, Q1 and Q2, as a stretch towards that second half?

Depending how our contracts ship. And, again, as I said, that we can see, from time to time, that we can see some projects being delayed from one quarter to the next quarter because it's, right now, it's truly a project business that we would still think, even though the businesses could be at a loss in the first half of the year, on the year-over-year basis, we would expect that these businesses would contribute to operating income in 2013 versus 2012.

So in other words, that we think that as our volume grows that we will -- that the loss will lessen, and it will be a positive contribution on a year-over-year basis in the first half of the year.

Okay, thanks for that. And then just on the -- I guess, just the municipal side of things -- could you talk a little bit more just, sort of, the types of work you're seeing out there? Is it more replacement demand driving improvement or something else out there?

You know, it's a real -- it goes across the board. We have been seeing -- actually, what we have been seeing a spike this year of more transmission work. And transmission work is when they need to put in new lines either to tap into new sources or they're just absolutely the existing line is no longer operable. So that when we see that kind of spike in distribution work as we saw this year, we would think that we would see follow-on distribution work in the following year.

So it's really been a combination, as I said, that I think we were somewhat surprised by the amount of distribution work we saw this year. So it truly is a combination of going in and replacing existing products as well as putting in new transmission lines.

Okay, thanks for that. And then just lastly, the acquisition you announced for Anvil. It looked relatively small. But any sort of color on the opportunity of that?

Yes, it's a very, very small opportunity -- I mean, very, very small acquisition, and the opportunity is that we will have -- we'll be able to consolidate manufacturing operations, and it does give us one new product, an installation product.

So we have not come out and said specifically what it will add to the bottom line or what it adds to revenue, but it is a very nice acquisition because we have -- it allows us to consolidate manufacturing opportunities. And whenever you can have those kind of opportunities, especially in a product where we're the market share leader, then you can get the benefit pretty quickly.

Nick Prendergast. Please state your company name.

Hi, good morning, it's Nick from BB&T. You know, perhaps you could give us an update on your revenue breakdown by end market? I know our last update, I guess, 70% of the revenue was going to muni repair and replace; about 25% to non-res; and about 5% to res. Is it still holding like that, or are you beginning to see shifts?

You know, Nick, that's a good question. I think we've seen a slight shift in 2012 when you look at our overall revenue for Mueller Water Products. And I've got to remind everyone that, again, we don't have a scientific way to get these numbers. We're based on input from our distributors, our field salesforce and so on. So we don't try to get these to a decimal point, and we round them to the best that -- the best of our estimate.

But we think that muni spending went from about 50% to 55% of our total revenue. We don't think, though, we saw a pickup in residential spending -- we don't think enough to significantly move the needle. So we're still putting that about 5% of our revenues in 2012. Oil and gas remained about 10%, and we think non-res came down from about 35% to 30%.

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

Well, again, we appreciate the effort many of you made to be able to join us today. We appreciate your interest in Mueller Water Products, and certainly we wish those in the Northeast a speedy recovery from Hurricane Sandy. Thank you very much.

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