Mueller Water Products Inc (MWA) 2013 Q1 法說會逐字稿

Good morning, and thank you all for standing by. This is the conference coordinator. All lines will be placed on listen-only until we are ready for the question-and-answer session of today's call. This call is also being recorded. If you have any objections, please disconnect at this time. I would now like to introduce your speaker, Ms. Martie Zakas. You may begin ma'am. Thank you.

Thank you, Lori, and good morning, everyone. Welcome to Mueller Water Products' 2013 first-quarter conference call. We issued our press release reporting results of operations for the quarter ended December 31, 2012, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Mueller Water Products had 157.5 million shares outstanding at December 31, 2012. 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 website to help illustrate the quarter's results as well as to address forward-looking statements and our non-GAAP disclosure requirements. At this time, please refer to slide 2. This slide identifies certain non-GAAP financial measures referenced 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 review slides 2 and 3 in their entirety.

During this call, all references to a specific year or quarter refer to our fiscal year, which ends on September 30. All operating results discussed in these prepared remarks are from continuing operations unless specified otherwise. A replay of this morning's call will be available for 30 days after the call at 1-866-470-7045. 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 2013 first quarter. I will 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 the second quarter.

Our consolidated performance improved again in the first quarter, as demonstrated by a 13.8% increase in net sales and a 20.6% increase in adjusted operating income. Shipments of Mueller's valves, hydrants and brass products increased in the quarter year-over-year, which we believe was due to continued improvement in both the municipal and residential construction markets. Net sales of Mueller Company's newer technology products and services more than doubled in the quarter on a year-over-year basis, demonstrating the traction we believe these products and services are gaining in the marketplace. In fact, over half of the $23 million net sales increased at Mueller Company was attributable to our metering products.

Although Mueller Company's newer technology products and services negatively impacted its adjusted operating income margin in the quarter, the incremental margin from increased net sales was encouraging. And we believe there is room for further improvement, especially as deployment of our AMI systems grow. Anvil's net sales were also up year-over-year. However, as we expected, adjusted operating income was negatively impacted by higher per-unit overhead costs, due to lower production during the second half of 2012. Overall, results for the quarter were about as we expected, and we look forward to our performance improving further over the remainder of the year as our end-markets are expected to continue to recover. I will now turn the call over to Evan.

Thanks, Greg, and good morning, everyone. I will first review the consolidated results, and then discuss segment performance. Consolidated net sales for the 2013 first quarter of $245.1 million increased $29.7 million, or 13.8%, from the 2012 first-quarter net sales of $215.4 million, due to higher shipment volumes, most of which came from Mueller Company. Consolidated gross profit was $57.1 million for the 2013 first quarter, compared to $52.8 million for the 2012 first quarter. This improvement was driven primarily by higher shipment volumes, higher sales prices, and lower raw material cost, partially offset by higher per-unit overhead cost.

Consolidated selling, general and administrative expenses as a percentage of net sales declined at 20.2% in the 2013 first quarter, from 21.6% in the 2012 first quarter. Selling, general and administrative expenses were $49.5 million for the 2013 first quarter, compared to $46.5 million for the 2012 first quarter. Adjusted operating income for the 2013 first quarter increased 20.6% to $7.6 million from adjusted operating income of $6.3 million for the 2012 first quarter. This increase was driven primarily by higher shipment volumes, higher sales prices and lower raw material costs. These improvements, primarily at Mueller Company, were partially offset by higher expected per unit overhead cost at Anvil.

Adjusted EBITDA for the 2013 first quarter increased to $22.4 million from $21.3 million for the 2012 first quarter. Interest expense net decreased $2.1 million in the 2013 first quarter, due to $1.4 million of non-cash cost for terminated spot contracts in 2012, and $700,000 due primarily to lower levels of total debt outstanding in 2013. Subsequent to the end of the first quarter, we announced our intention to redeem an additional $22.5 million of our 8.75% notes. The redemption date is February 22, 2013. The 2013 first-quarter income tax benefit was $1.6 million on a pretax loss of $6.6 million, or an effective income tax rate of 24.2%. The 2013 first-quarter benefit was reduced by $800,000, related to a deferred tax asset valuation allowance adjustment. Excluding this adjustment, the effective tax rate for the 2013 first quarter would have been 36.4%. Net operating loss carry-forwards remain available to offset future taxable earnings. Adjusted net loss per diluted share for the 2013 first quarter was $0.02, compared to adjusted net loss per diluted share for the 2012 first quarter of $0.04, an improvement of $0.02.

I will now walk you through the after-tax adjustments for both the 2013 and 2012 first quarters. The 2013 first-quarter adjusted results exclude the income from discontinued operations of $12 million, the deferred tax valuation allowance of $800,000, and restructuring expenses of $400,000. The 2012 first-quarter adjusted results exclude the loss from discontinued operations of $5.4 million, terminated interest rate swap cost of $800,000, and restructuring expenses of $200,000. There is a weighted average of 159.2 million diluted shares of our common stock outstanding for the 2013 first quarter, compared to a weighted average of 156 million diluted shares outstanding for the 2012 first quarter.

I will now move on to segment performance, and begin with Mueller Company. Net sales for the 2013 first quarter increased 18% to $151.1 million from net sales of $128.1 million for the 2012 first quarter. This increase was due primarily to higher shipment volumes across most of Mueller Company's products, especially metering, valves, hydrants and brass products. Sales of the newer technology products and services more than doubled this quarter compared to last year, and accounted for more than half of the net sales growth in the 2013 first quarter. Adjusted operating income for the 2013 first quarter improved 72.5% to $8.8 million from adjusted operating income of $5.1 million for the 2012 first quarter. Adjusted operating income margin for the 2013 first quarter improved 180 basis points to 5.8% from adjusted operating income margin for the 2012 first quarter of 4%.

Net sales of our newer technology products and services demonstrated strong growth this quarter, more than doubling on a year-over-year basis. Additionally, the operating performance of these products and services improved meaningfully versus the prior year, and is approaching break-even. As a result, the negative margin impact at Mueller Company from these products and services was down substantially from previous quarters, to 190 basis points this quarter. The performance of base Mueller Company was mixed, with strong performance year-over-year for valves, hydrants, and brass service products, partially offset by weaker performance from Henry Pratt's water treatment plant valves.

I'll now turn to Anvil. Net sales for the 2013 first quarter increased 7.7% to $94 million, compared to net sales of $87.3 million for the 2012 first quarter. The increase resulted primarily from higher shipment volumes across most of Anvil's end-markets. Anvil's net sales to the fire protection and mechanical markets improved over last year, while net sales to the oil and gas market, which accounts for approximately 20% of Anvil's net sales, had minimal growth after exhibiting strong growth in 2012. Adjusted operating income for the 2013 first quarter was $5.9 million, compared to adjusted operating income for the 2012 first quarter of $7.8 million. As anticipated, adjusted operating income declined due to lower production levels in the 2012 second half. This caused higher per-unit overhead costs in inventory, which impacted operating results in this quarter. As reminder, we use the FIFO method of inventory accounting. Adjusted EBITDA for the 2013 first quarter was $9.4 million, compared to adjusted EBITDA for the 2012 first quarter of $11.4 million.

Turning now to our discussion of our liquidity. Free cash flow, which is cash flows from operating activities less capital expenditures, was negative $5.6 million for the 2013 first quarter, compared to a positive $6.6 million for the 2012 first quarter. We continue to focus on managing working capital, and for the 2013 first quarter, trailing four-quarter average receivables, inventory and accounts payable as a percentage of net sales improved 220 basis points from the 2012 first quarter. At December 31, 2012, total debt was $623 million, down $55.5 million from a year ago. Total debt outstanding included $420 million of 7.375% senior subordinated notes due 2017, $200 million of 8.75% senior unsecured notes due 2020, and $3 million of other. Net debt leverage was 4.3 times as of December 31, 2012. Using December 31, 2012, data, we had $122.1 million of excess availability under our asset-based credit agreement. I will now turn the call back to Greg.

Thanks, Evan. I will now elaborate on our 2013 first-quarter performance in end-markets, and provide an outlook for our second quarter. I'll begin with Mueller Company. Mueller Company performed about as we expected this quarter, with stronger performance across all products and services, with the exception of our Henry Pratt product line. We are pleased with the net sales growth at Mueller Company in the quarter. Shipments of domestic valves, hydrants and brass products in both dollars and units were up. We believe demand for Mueller Company's products benefited from increased spending by municipal water systems, and that we saw some growth in demand from new residential construction projects. Our domestic unit booking activity in the first quarter from Mueller Company's valves, hydrants and brass products increased 8%, 10% and 15%, respectively, year-over-year. We also believe that distributor inventories at the end of the first quarter were flat from both the previous quarter and year-over-year.

Our meter reading products continue to make good progress, with net sales and bookings more than doubling year-over-year during the quarter. These products are certainly gaining traction, as more than 50% of Mueller Company's net sales increase in the quarter came from our meter products. During the quarter, year-over-year adjusted operating income margin at Mueller Company expanded by 180 basis points. Driven by the improved performance of our newer technology products, as well as the growth of our core valves, hydrants and brass products. As we look at the margins for the product manufacturers in our hydrant, valve and brass facilities, we note that they expanded about 200 basis points year-over-year.

The one product category that declined year-over-year is Henry Pratt valves. Henry Pratt accounts for approximately 15% of Mueller Company's net sales. This quarter was impacted to a greater extent primarily by the mix of products, as compared to the previous year. However, we believe we should see improved performance beginning in the second quarter, since both bookings and backlog increased during the quarter. As Evan discussed, Anvil performed as we expected. Anvil saw net sales growth in most of its end-markets. As we mentioned on our fourth quarter call, we expected Anvil's adjusted operating income to decline year-over-year. Anvil experienced higher per-unit overhead costs due to lower production in the second-half of 2012. This impacted first-quarter financials. Higher volumes and higher sales pricing offset a portion of those costs.

Before I turn to our outlook for the second quarter, I will discuss what we are seeing with some of the macro drivers in our end-markets. Most of the recent macroeconomic data has been positive, and we believe our water infrastructure markets continue to improve. The general municipal spending environment continues to show improvement as tax receipts have grown and the financing market remains favorable. According to the US Census Bureau, state and local seasonally adjusted tax receipts grew at 3.9% year-over-year for the period ending September 30, 2012, and were up to the June quarter. And on the municipal bond front, rates are still very attractive from a historical perspective. The CPI for water and sewage maintenance rates increased by an annualized rate of 6.7% in December compared to the prior year, exceeding that of all other utilities and the CPI as a whole.

Finally, the housing market continues to be a bright spot in the economy. December housing starts of 954,000 units was the highest level since June 2008. This represented the fourth consecutive month of greater than 800,000 units on a seasonally adjusted annualized basis. Furthermore, December's single-family starts of 616,000 units were above 500,000 units for the ninth consecutive month, and represents the strongest reading since June 2008. As a potential future indicator, December housing permits were above 900,000 units for the second consecutive month, and represented the highest readings since July 2008. Total permits grew 29% over last year, while single-family permits reached their highest level since June 2008, and grew 27% over last year. Also, new and existing home inventories held for sale have continued to decline from all-time highs during the financial crisis, and both well within historical normal levels. Household formation growth for the last 12 months has averaged $1.4 million, which is another positive sign for the housing market. To put this into perspective, household formation in 2009 and 2010 averaged 350,000, and the long-term average is 1.1 million.

Although the housing recovery appears to be continuing to gain momentum, 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. As we have mentioned before, we need to see not just growth in community counts from builders, but development of raw land, which is still in the early stages of recovery. According to Ivy Zelman & Associates, there is evidence of mothballed communities, primarily in A and B locations, coming back on line in areas such as California, Florida and Phoenix.

There is also some evidence of builders' demand for raw land increasing, and development activity also increasing, particularly in areas such as Washington DC, San Francisco, Houston, San Diego and Phoenix. We believe that we are still seeing a lag period for the sale of certain of our products into residential construction. But the lag period continues to decline, and we are seeing some pockets of growth. It is important to note that improving housing construction ultimately helps bolster the health of municipalities as local governments benefit from increased property taxes, as well as connection fees and other ancillary fees associated with residential construction.

Turning now to our outlook for the second quarter. On a year-over-year basis for the second quarter, we expect Mueller Company's net sales to increase, primarily due to volume growth in our core valves, hydrants and brass products, and significantly higher net sales of our metering products. The metering backlog was up over 70% at the end of December as compared to a year ago. In total, we expect adjusted operating income from Mueller Co to nearly double year-over-year, with improved performance across all of our product categories. At Anvil, we expect a slight decrease in shipment volumes in the second quarter year-over-year, as we face some softness in our end-markets, primarily the oil and gas markets. We believe this reduced volume will result in lower year-over-year operating income. Additionally, we expect the remainder of a higher per-unit overhead cost in inventory, related to second-half production last year, to flow through the income statement this quarter. Therefore, we expect to see a year-over-year decline in Anvil's adjusted operating income.

For the Company as a whole, we believe that 2012 second-quarter net sales will increase year-over-year, attributable to volume increases at Mueller Company. We expect adjusted income from operations to increase substantially year-over-year. Overall, we think the signs we are seeing in our water markets are mostly positive, reinforcing the outlook we provided last quarter. Raw material costs remain relatively stable, and we expect that average costs for 2012 could be slightly below those -- I'm sorry, that average costs for 2013 could be slightly below those of 2012. 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 $51 million to $53 million.

Our adjusted affective 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 improved operating results. Additionally, we expect cash income taxes to be minimal this year, based on our net operating loss carry-forward position. At this time, we contemplate only making minimal cash contributions to our pension plan in 2013.

In summary, we feel we are well-positioned to benefit from a recovery in residential construction and municipal water spending, both of which we believe are 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 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)

Kevin Maczka. Please state your company name.

BB&T Capital Markets. Greg, first question. So, a lot of talk about the housing upturn, of course. And now that you are clearly seeing that and you've got the business reconfigured as a two-segment business, I think you said in 2012, fiscal '12, that was about 5% of your total revenues. So about $50 million. So if starts do double or even triple and get to the $1.1 million, $1.5 million type of range -- and I understand there is a leg there but -- should we be thinking about your business, your housing business moving in lock step with that? Or is there something that would allow that to grow much faster maybe than the underlying market?

Kevin, good question. I think that we do -- you know, as we have said, it is difficult for us to exactly know on the lag on what time period. I think we are very comfortable right now saying that inventory lots have been absorbed. And we think that our estimate now is the lag -- that the lag is now less than 12 months. But that's a good question, and I think we would have to wait and see. I think that we would be comfortable in saying that when we get through this lag period, that we would grow in lock step. I think whether or not we would grow at a faster rate, I think would depend on how quickly developers go in and develop raw land. And I think we saw in the past cycle during the boom period, I think that they were very aggressive in going out and developing raw land. I would expect this time around, initially, they would be more cautious. But I think that as the rebound continues to gain traction, I think we could see even a little greater pent-up demand. Because then we could see them perhaps developing raw land at a faster rate. But I think where we sit here today, I think we would be more comfortable thinking of it in terms that we will probably be in lock step.

Got it. And then, Greg, on the margin side. I know we probably shouldn't get too bogged down in any given quarter on incrementals, because there can be issues with absorption and things like that, that we had in Q1. But can you just refresh us now that, again, that you are into the recovery, you have done a lot of restructuring, that's in the past, mostly. You have ongoing lean and productivity initiatives all the time. On the incremental margin side, as we are into the recovery, should we still be thinking about 35% in Mueller Co and 25% in Anvil? Or maybe are those better than that as we really get into it?

I would think on average that would be the overall improvement, Kevin, that we would expect. It could be adjusted if our valve and hydrant business start growing faster. I think that incremental margin rate would be a -- could be a little better. But I think if you look at it on this quarter, that when you look at the incremental improvement we saw, as we mentioned in our prepared remarks, over half of our sales growth came from our newer technology. In the Mueller Company segment, over half of our sales growth came from the newer technology products, which currently have negative margins. However, when you look at that on a conversion, for instance, our Mueller Systems operating income improved about $2.7 million. So it will depend on the mix. But as we made comment in our prepared remarks, in the first quarter, our valve and hydrant and brass product manufacturing facilities' operating margins improved 200 basis points over the prior-year. And we only utilized 40% -- about 48% of our capacity at those facilities. Albeit that's up from about 40%, 42% in the first quarter a year ago. So as we go up the capacity utilization curve later as our -- as we go through our seasonal period where we see some increased demand, we would again think that the conversion rate could be higher than that 35%, 40% range. But for an annual -- from an annual conversion rate, I think we're still comfortable that that is the range.

Okay, but in Anvil, it sounds like near-term. Maybe we are still left in that because you've still got some of this high cost inventory running through in Q2.

Yes, I think in Q2, that should be -- that will flow through in Q2. And then we will be back to what we see in market demand. And as we said, I think when we look at Q2 for Anvil, we do expect to see a little softer demand, primarily from the oil and gas markets. But I want to point out that in 2012, that group -- that we saw some very nice year-over-year growth rates in 2012. But what we're seeing is really a slowdown of growth from what was a nice spike in 2012. And as we look at it today, we think towards the second half of our fiscal year, that we should start seeing some increased spending in the oil and gas market. So I think that as we look at it now, we think that is more a one-quarter issue for Anvil. And we expect to see the third and fourth quarter, if the oil and gas market improves as I think the analysts are now expecting, that we should see that pick up in the second half of the year.

And just finally for me, Greg, what would trigger that in the second half? What would, for your business, not oil and gas per [annum], but for your oil and gas business, what would trigger that, that would make second-half so much better than first?

Increased production. And so certainly we follow the what's happening to the rig count. And the expectation of the rig count growing, which is increased production. Our products go on tank farms, different tanks, and so that the storage equipment, that will typically grow as production grows.

Okay, thank you.

Ryan Connors. Please state your company name.

Thank you, it's Janney Montgomery. First off, Greg, if you could just clarify your Mueller Co top-line guidance commentary. You mentioned up, but was that a -- is that a year-over-year sequential comment?

Yes, the comments were really on year-over-year. And we would naturally, on the seasonality of the business, we would expect to see an increase in the second quarter. We did have on January 23 a price increase on our valves and hydrants, as we had in most previous years. So what we typically see, Ryan, is distributors pulling orders forward, ahead of that price increase, and that is probably the biggest contributor to our up-tick sequentially in second-quarter versus first-quarter. But my comments in the prepared section were on a year-over-year basis.

Okay. And then I just want to talk a little bit structurally about the Mueller Co business lines. And obviously you made a decision to exit pipe. And my perception of that was it was, in part at least, due to a conclusion that the industry supply and demand dynamics were not to your liking there. So can you talk at all about -- I mean, you talk about being at 48% capacity utilization today on the valve and hydrant side. Do you have a feel for where the broader industry is today? Whether it is at or below where you all are? And how you feel about the general capacity situation of that industry right now, and kind of dovetailing into the prior question on incremental margin opportunity?

Yes. I would think that they were all probably about the same capacity utilization rates. And when I say 48%, it's important to point out, that was in the first quarter. And certainly because this is in the first quarter, our down season, if you look at last year, we were about -- on the valves and hydrant plant, we were about 40% capacity utilization. And we're pretty close to 60% capacity utilization for the full year. So as we go through the year, we will expect to see that capacity utilization increase. And based on our outlook today, which is consistent with the outlook that we provided in the first quarter, we do expect to see greater demand in 2013. So we would expect on an annual basis to certainly be above that 60% capacity utilization. I do think that, given today's level of demand, there is some excess capacity. That being said, I think that we're operating -- we would expect in 2013 to be operating at significantly higher capacity rates than we did in 2009 and 2011.

So as we go up that capacity, I think it goes back to Kevin's earlier question. When we see growth in demand for our products in lock step with residential construction, we think we can clearly see getting to 70%, 75% capacity utilization. And again, we think as we increase our capacity utilization, that we will convert that and see margin growth, when we look again. And I mentioned this earlier at our first quarter, at our plants we manufacturer our valves, hydrants and brass products on a year-over-year basis, we were up 200 basis points of margin. Certainly what helped that margin improvement was some increased capacity utilization, as well as higher pricing and lower raw material costs. But yes, I think that we expect to see our overall capacity utilization be above the 60% -- on an annual basis, above the 60% rate that we were in 2012. And as that capacity utilization increases, obviously we expect to see that lower per-unit overhead cost, which will improve our margins.

Okay, great. And then one other question on the systems side. Congratulations there on the success you have been having. It's pretty impressive. I mean, can you talk about the levers that you are having success in pulling in order to grow that side of the business? Particularly on the metering side. I mean, obviously that's a fairly mature market. So can you just discuss your marketing strategy, and how you're managing to make headway against some of the larger incumbent players that obviously have pretty good relationships and install bases, and pretty decent offerings in their own right?

Yes. And there is no question that the -- I think the leading meter manufacturers in this market are very strong, and have very good product and very good customer relations. Where we are seeing our growth is certainly -- our concept, our AMI technology on the two-way mesh technology, there are certain applications where the two-way mesh technology is a much better selection than some of the alternative choices. I think that certainly helps us. Even where we are selling AMR, the utilities that we are talking to like our AMI, and like that we can offer them the ability to start with AMR, and then to eventually convert to our AMI system. That is certainly number one. Number two, we are finding some municipalities and utilities that like our composite meter, and like the fact that we have metal threads on the composite meter. And that is a patented design. Number three, as we talked to some utilities, they like the fact that we are working on trying to incorporate leak detection into the AMI system.

That was one of the drivers several years ago for our acquiring the leak detection. One, there is a market for leak detection. But I think all of us that are in the market today are in the early stages of developing demand for leak detection. But two, what we saw was an opportunity to merge the leak detection technology into our AMI system. And while we are still in the development phase, we have been able to expose some of our ideas to some of our customers and some of the end-users, and they find that future potential to be very attractive. So I think that -- and then I think, Ryan, probably the fourth contributor is that, I think we're solving some or providing some solutions to end-users, especially when I'm talking about AMI systems, by being able to incorporate our existing products into the solution. We've talked to several -- about 18 months ago, we introduced putting the receiver for an AMI system in a hydrant. So these are assets that the end-user already owns. And then we believe that there is other future functionality by having that receiver in the hydrant that that end-user will be able to benefit from.

As I said, I don't want to -- we certainly have a long way to go. But I believe that our end-users are positively responding to some of the technology we have. But also I think that some of the technology that we are working on developing that can be incorporated in that meter system in the future, even though we are taking a hit on the bottom line with those investments. And we have pointed those out in previous calls, on product development, and so on. So that was a very long-winded answer, and hopefully I addressed your question.

Long-winded but very informative. Thanks for your time, Greg.

Jerry Revich. Please state your company name.

Good morning, its Goldman Sachs. Greg or Evan, you mentioned you expect raw materials to be neutral this year. Can you just talk about how much pricing was up in the first quarter in each of the businesses? And just give us an update on the typical Mueller Co price increase, which I think generally kicks in January 1?

Yes, Jerry. We said that we -- it actually looks now, we think, on a full-year basis, that we think our raw materials will be down slightly for the year. And we did have a benefit in both Mueller and Anvil from lower raw material costs year-over-year. We also, in both businesses, did see positive pricing on a year-over-year basis. So it was the -- as you recall last year, especially on valves and hydrants, we had a price increase in early February. So we are getting on a year-over-year basis the benefit of that price increase that we implemented in February last year. I just mentioned that we had another price increase on January 23 on valves and hydrants. And we won't see any benefit in the second quarter from that price increase, or very little if any, because of the pull-forward that our distributors -- to beat that price increase, gave us orders in advance of that price increase. But when we ship those in the second quarter and early third quarter, we think we will start seeing the benefits of this price increase in the third and fourth quarter. So on a year-over-year basis, both businesses, we continue to see a positive contribution from pricing, in addition to a slightly lower raw material cost.

Thanks for the color, Greg. And the extent of the price increases on the weighted average across the portfolio? Can you help us get a sense?

Yes, we had -- if you look at the Mueller business, we had about a 7% price increase on about 50% of our volume.

That's perfect. And Evan, I'm wondering if you could just --

Jerry, and I do want to point out -- and I know we've discussed this many times in the past, that that seven -- you know, we typically expect to realize, I would say 50% to 60% of that price increase.

Okay, great. And just a clarification, Evan, on the prior comments on Mueller Systems profitability. Or Mueller Co profitability on the base business. So your total Mueller Co EBIT was up $2.7 million. And I guess if Mueller Co legacy business had 200 basis points, better margins, that accounts for all of the $2.7 million profit improvement, which I think implies Mueller Systems losses were about equal in the first quarter of this year to the first quarter of last year, on more than double the sales level. So I'm wondering if you could just calibrate that for us, or just clarify the --

Jerry, this is Greg. Let me take that for you. When we talked about the 200 basis points improving the margin, that was on our, I would say, our core valve, hydrant and brass products, the products that come out of those manufacturing facilities. We did mention that the performance at our Henry Pratt product line, that roll up under Mueller, negatively impacted results, due largely to the mix of products sold this quarter as compared to the first quarter of 2012. Our butterfly valve -- primarily it's the butterfly valves and plug valves under the Henry Pratt brand name. They generally account for about 15% of Mueller Company's revenue. Our operating income on those products were down about $2.5 million year-over-year, I would say on relatively similar sales. This is a product line where we would expect to realize operating income margins anywhere between 11% and 13%. And we just barely broke even this quarter on these group of products. We had a few contributing items due to the performance. First, as we mentioned, a weak mix of products. There is a margin difference between our large-diameter butterfly valve installed in transmission pipelines versus our small-diameter butterfly valve, which are installed in distribution pipelines. Our mix this quarter was heavily skewed to smaller-diameter butterfly valves.

So in addition, we had a concentration of events that happened to fall in this quarter that also impacted operating income. For instance, we allowed a distributor to return some valves. We replaced some valves that were installed. Several other items. I would say that these are normal business items, but I think, usually concentrated in one quarter. All in all, these events -- you know, I would not call these events significant. But given that our first quarter of Mueller Company can be the weakest seasonally, the impact is a little more pronounced. So Pratt's performance this quarter, I think, masks the expansion in the rest of Mueller Company. So we did have an expansion on our valve, hydrants and brass products. We did have an expansion of our Mueller Systems. We had a $2.5 million negative hit on a year-over-year basis from our Pratt business. But however, when we look at the Pratt products, we are still confident that for the full year, we will have margins in the 11% to 13% range. So, sorry if there was any confusion on those components. The valves and hydrants up 200 basis points year-over-year. Mueller Systems, for instance, $2.7 million up year-over-year. That $2.7 million was essentially offset by the $2.5 million erosion on a year-over-year basis that we saw in our Pratt butterfly valves.

Okay, thank you for the color, that's helpful.

Philip Volpicelli. Please state your company name.

Good morning, its Deutsche Bank. I was just wondering if you guys could comment a little bit on the capital structure. I know that you have an ability to take out another 10% of your 8.75% notes at 103 in 2013, and your 7.375% are callable now, but the call price drops in June. Would you guys consider redoing the majority of the cap structure, considering how strong the bank debt market is? Or what are you're thoughts with regard to that?

Yes, we did just announce redemption for that 10% feature, the $22.5 million of the 8.75% senior notes, and that is effective February 22. And that will give us about another $2 million in annualized interest savings. As well, you are correct, we have a $65 million restricted payment basket for the subordinated notes, which we can repurchase at $103.68 beginning June 1 of this year. And I would say that we continue to evaluate other de-leveraging opportunities as well as the capital structure, and look at various scenarios in terms of refinancing. And certainly as we look at that, there are many factors that come into play in the analysis. And we would certainly communicate that if we were going to make any changes in the long-term capital structure. But certainly we evaluate rates and other factors in terms of looking at the tranches and debt.

That's great. And then with regard to acquisitions, clearly the housing market seems to be a tailwind for you guys. And the rig count I guess is plateauing, but there are still some opportunities out there. Have you guys looked at any acquisitions? Is that something that is core to the business with the free cash flow you will generate in '13?

You know, I think that -- thanks for that question. It certainly does look like versus where we have been for the last several years. Our markets could become a tailwind rather than a headwind. Our focus has been -- and I think we will still continue to be reducing our leverage. We are down to -- our leverage in the first quarter was 4.3 times. Probably by a lot of measurements, still high. But for those of you that have been following us for quite some time know that that's been a significant reduction. If we see a good strategic fit, I think we would evaluate it. Certainly interested in expanding in water infrastructure, and particularly interested in emerging technologies within the water infrastructure. So if there's anything that made sense to enhance our technology, our market position on Mueller Systems, which is our metering business, or leak our detection, I think we would look at that. We have also long expressed our interest in expanding internationally. But I would say, overall, we are still focused on improving our leverage. We think that that should come down pretty nicely over the next 12, 18 months. So we would consider acquisitions. We believe they are value-enhancing. But I would not say that we are on the acquisition trail. Our focus still remains bringing down our leverage.

Understood, thank you very much, good luck.

Brent Thielman. Please state your company name.

DA Davidson, good morning. Yes, I guess most of my questions have been asked. But on the municipal and market activity you are seeing. How much -- and I know it's difficult, given where you are between distributors. But how much will you see in a new projects, which a municipality might be developing via pipelines, cement plants, versus sort of the normal repair, replacing projects for existing infrastructure in place?

Yes, Brent, that is a good question. It is tough for us. I would say that still the majority of the -- of what we are seeing is still replacing existing. Though we are seeing -- we saw last year, actually, a little bit of a pick-up in our gate valve demand going into new transmission lines. And that should -- this year we should see then -- we should see the demand follow-on for putting in new distribution lines off those new transmission lines. So I think that right now that we are seeing probably still the majority of our business repair -- I would say replace existing. But I think we're also seeing signs that new projects could be picking up momentum. But right now, it would be really hard for us to quantify that.

Okay, thanks, good luck.

Well, hearing there are no more questions, that concludes today's call. And we want to thank you all for your continued interest in Mueller Water Products, and for joining us this morning.

Thank you, Lori.

Thank you. That does conclude today's conference call. Thank you all for joining. You may disconnect at this time.