Mueller Water Products Inc (MWA) 2013 Q2 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 this call is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Ms. Martie Zakas. Ma'am, you may begin.

Thank you and good morning, everyone. Welcome to Mueller Water Products 2013 second-quarter conference call. We issued our press release reporting results of operations for the quarter ended March 31, 2013 yesterday afternoon. A copy of it is available on our website, www.muellerwaterproducts.com. Mueller Water Products had 157.8 million shares outstanding at March 31, 2013. Discussing the second quarter's results is 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 are 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. 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 made on this call. 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 web cast 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 for questions.

I will now turn the call over to Greg.

Things, Martie. Thank you for joining us today, as we discuss our results for the 2013 second quarter. I will begin with a brief overview of the quarter, followed by Evan's detailed financial report which covers key drivers effecting our businesses. I will then provide additional comments on the quarter's results and developments in our end markets as well as our outlook for the third quarter and observations for the second half of the year. We are pleased with our strong second-quarter results having achieved net sales growth of 12.6% while our adjusted operating income more than doubled from a year ago. This quarter was our overall best second-quarter performance since 2008.

The quarter's results demonstrate the operating leverage of our Mueller Company business. Mueller Company achieved 21.7% net sales growth year-over-year and improved adjusted operating income margin by 670 basis points year-over-year, to 12.5%. In addition, Mueller Company, converted 43% of the incremental net sales to adjusted operating income due to higher volume and a favorable product mix. Mueller Company continued to see shipment volumes of its valves, hydrants and brass products increase. Additionally, net sales at Mueller Company's newer technology products and services again more than doubled in the quarter on the year-over-year basis demonstrating the traction we believe these products and services are gaining in the marketplace. Anvil's results came in as expected and we believe Anvil could see some growth in the second half of the year as conditions in its end markets are expected to improve.

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 second quarter of $283.1 million increased $31.6 million or 12.6% from the 2012 second quarter net sales of $251.5 million due mostly to higher shipment volumes from Mueller Company. Consolidated gross profit was $77.3 million for the 2013 second quarter compared to $62.1 million for the 2012 second quarter. Gross profit margin improved 260 basis points to 27.3% from 24.7%. This improvement was driven primarily by higher shipment volumes and higher sales prices.

Consolidated selling, general and administrative expenses as of the percent of net sales declined to 18.6% for the 2013 second quarter from 20.1% for the 2012 second quarter. Selling, general and administrative expenses were $52.6 million for the 2013 second quarter compared to $50.6 million for the 2013 second quarter. Adjusted operating income for the 2013 second quarter increased 115% to $24.7 million from adjusted operating income of $11.5 million for the 2012 second quarter. This increase was driven primarily by higher shipment volumes and higher sales prices. Adjusted EBITDA for the 2013 second quarter increased to $39.7 million from $26.7 million for the 2012 second quarter. Trailing 12 month adjusted EBITDA through March 31, 2013 was $141.6 million.

Interest expense net for the 2013 second quarter declined to $12.8 million from $14 Million for the 2012 second quarter excluding $1.6 million of non-cash costs for terminated interest rate swapped contracts for the 2012 second quarter. Interest expense net declined due to lower levels of total debt outstanding. We redeemed $22.5 million principal amount our 8.75% senior unsecured notes during the quarter for $23.2 million plus accrued and unpaid interest. The resulting loss on early extinguishment of debt of $1.4 million includes the premium paid and the deferred financing costs and original issue discount that were written off.

The 2013 second quarter income tax expense was $2.5 million on income before income taxes of $10.1 million or an effective income tax rate of 24.8%. The 2013 second quarter expense was reduced by $1.3 million for a deferred tax asset valuation allowance adjustment. Excluding this adjustment, the effective income tax rate for the 2013 second quarter would've been 37.6%. Net operating loss carry forwards remain available to offset future taxable earnings. Adjusted net income per diluted share for the 2013 second quarter was $0.05, compared to an adjusted net loss per diluted share for the 2012 second quarter of $0.01, an improvement of $0.06.

I will now walk you through the after-tax adjustments for both the 2013 and 2012 second quarters. The 2013 second quarter adjusted after-tax results exclude the loss from discontinued operations of $1.4 million, the loss on early extinguishment of debt of $800,000, and restructuring expenses of $200,000, offset by the deferred tax asset valuation allowance adjustment benefit of $1.3 million. The 2012 second quarter adjusted after-tax results exclude the loss of discontinued operations of $100.9 million; a deferred tax valuation allowance expense against beginning of the year deferred taxes of $5.9 million; terminated interest rate swap contract cost of $1 million and restructuring expenses of $600,000. There was a weighted average of 160 million diluted shares of our common stock outstanding for the 2013 second quarter compared to a weighted average of 156.5 million diluted shares outstanding for the 2012 second quarter.

I will now move on to segment performance and begin with Mueller Company. All of Mueller Company's business units performed better in the 2013 second quarter compared to the prior year. Net sales for the 2013 second quarter increased 21.7% to $188.1 million from net sales of $154.5 million for the 2012 second quarter. This increase was due primarily to higher shipment volumes of all of Mueller Company's key products, especially metering systems, valves, hydrants and brass products. Domestic unit shipments of valves and hydrants were up 15% and 13%, respectively, with brass products about flat. Net sales of the newer technology products and services more than doubled this quarter compared to last year and accounted for more than one-third of the net sales growth in the 2013 second quarter. Gross profit margin for the 2013 second quarter improved to 26.8% compared to 21.7% for the prior year.

Adjusted operating income for the 2013 second quarter improved 161% to $23.5 million from adjusted operating income of $9 million for the 2012 second quarter. Adjusted operating margin for the 2013 second quarter improved 670 basis points to 12.5% from adjusted operating margins for the 2012 second quarter of 5.8%. Net sales of our newer technology products and services demonstrated strong growth this quarter, more than doubling our year-over-year basis. The contribution of these products and services improved meaningfully versus the prior year. Adjusted EBITDA for the 2013 second quarter grew to $34.9 million compared to adjusted EBITDA for the 2012 second quarter of $20.6 million.

I will now turn to Anvil. Net sales for the 2013 second quarter decline to $95 million compared to net sales of $97 million for the 2012 second quarter. The decrease resulted primarily from lower shipment volumes. Adjusted operating income for the 2013 second quarter was $9.2 million compared to adjusted operating income for the 2012 second quarter of $10 million. Anvil's adjusted operating margin was 9.7% compared to 10.3% for the 2012 second quarter. Adjusted EBITDA for the 2013 second quarter was $12.7 million compared to adjusted EBITDA for the 2012 second quarter of $13.5 million.

Turning now to a discussion of our liquidity. Free cash flow, which is cash flows from operating activities less capital expenditures, was negative $12.3 million for the 2013 second quarter compared to positive $1.8 million for the 2012 second quarter. The most significant differences between these quarters relates to income tax refunds received in the 2012 second quarter and the general timing differences of collection and disbursement activity. For the 2013 second quarter, trailing four quarter average accounts receivable, inventory and accounts payable, as a percentage of net sales, improved 180 basis points from the 2012 second quarter. At March 31, 2013, total debt was $600.9 million, down $91.6 million from a year ago. Total debt outstanding included $420 million of 7.375% senior subordinated notes due 2017, $177.8 million of 8.75% senior unsecured notes due 2020, and $3.1 million of other. Net debt leverage was four times at March 31, 2013. Using March 31, 2013 data, we had $156.3 million of excess availability under our asset base credit agreement.

I will now turn the call back to Greg.

Thanks, Evan. I will now elaborate on our 2013 second quarter performance and end markets and provide an outlook for our third quarter and observations for the second half of the year. I will begin with Mueller Company. We believe a number of factors contributed to Mueller Company's strong second-quarter performance. Certainly, we think our end markets continued to improve, especially new residential construction. We saw growth in our housing related valve and hydrant shipments across all sales regions with our strongest growth coming in the South and West, the two regions of the country that also experience the greatest growth in housing starts.

In addition, our January price increase on valves and hydrants was two weeks earlier this year than last year. As a result, with this additional time, in the second quarter this year we shipped more orders that were received in advance of our price increase than we did during the same period last year. It was encouraging that most of our distributors were willing to receive their entire order in the second quarter. We believe that, although this indicates increased optimism, we note that distributors generally entered the third quarter with higher inventories than last year.

Looking at base Mueller Company, which excludes our metering and leak detection produces and services, net sales grew 14% year-over-year. Our metering products continue to make good progress with net sales and bookings more than doubling year-over-year during the quarter. These products are clearly gaining traction as more than one-third of Mueller Company's net sales increase in the quarter came from our metering products. Before discussing our outlook for the third quarter, let me provide an overview of some of the macro drivers in our end markets.

While the macroeconomic data reported in the spring has been uneven, the macro factors that impact our markets appear to be holding their own but for the most part remain positive. The outlook for state and local governments continues to be mixed. Both state and local seasonally adjusted tax receipts continue to increase. Budgets in many areas remain [stressed]. On the municipal bond front, new money issuances are up 16% through the first three months of the year compared to last year. And the CPI for water and sewage rates increased by an annualized rate of 6.1% in March year-over-year.

The housing market continues to be one of the bright spot in the economy. March housing starts topped 1 million units for the first time since June 2008 and represented the fourth consecutive month of greater than 900,000 units on a seasonally adjusted annualized basis. According to a survey by Ivy Zelman and Associates, demand for land and lots hit a record high for their survey with the strongest activity especially in the West. It is also 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 and non-residential construction.

Turning now to our outlook for the third quarter. On a year-over-year basis for the third quarter, we expect Mueller Company's net sales to increase due primarily to volume growth and improved pricing in our core valve, hydrants and brass products. However, we believe the year-over-year net sales increase will be substantially less than what we realized in the second quarter on a year-over-year basis, due to the higher shipments in the second quarter that were driven by the timing of our price increase. While we expect to see nice growth of our meeting systems in the in the third quarter, the year-over-year comparisons will get tougher when we reach the one year anniversary of our supply agreement with American Water. As a general reminder, sales of these products can be lumpy due to their project oriented nature.

Overall, we expect Mueller Company's net sales to increase year-over-year. However, we believe the growth rate will be less in the third quarter than in the second. We expect adjusted operating income from Mueller Company to improve across all of its key product categories and for the adjusted operating margin to improve slightly over the prior year. At Anvil shipment volumes in the third quarter year-over-year should increase, as we expect to see slight improvement in demand from its end markets. We expect to see an increase in demand both in [addressed] commercial construction and oil and gas markets. We believe this increased volume will result in higher year-over-year adjusted operating income.

For the Company as a whole, we believe that 2013 third quarter net sales will increase year-over-year primarily attributable to volume increases at both Mueller Company and Anvil. We expect adjusted operating income to increase nicely and to see an improvement in our overall margin. We think the signs we are seeing in our water markets are mostly positive, reinforcing the previous outlook we provided for the full year. Raw material costs have remain relatively stable and have declined recently. We expect that average cost for all of 2013 will be comparable to cost for 2012, as we expect to benefit from lower raw material costs offset by higher costs of purchased components.

Other key variables for 2013 include corporate expenses are estimated to be $30 million to $32 million, depreciation and amortization is expected to be $59 million to $61 million, and interest expense is expected to be approximately $52 million. Our adjusted effective income tax rate should be around 40% for the full year. Capital expenditures should be between $30 million and $34 million. For the full year, we expect free cash flow to be stronger than 2012. Most of our improved free cash flow generation should come from improved income from operations. Additionally, we expect income tax payments and potential contributions to be minimal this year.

We are pleased with our second-quarter results, especially the operating leverage we achieved at Mueller Company. However, the rate of growth Mueller Company experiences in the second half of the year will depend on how quickly distributors turn the higher levels of inventory they enter the third quarter with and reorder as we move further into the construction season. Our metering and leak detection products and services continue to grow. Based on the sales funnel and anticipated timing, we continue to expect that newer technology products and services to be profitable for the full year based on second half performance. For Anvil we believe we could see modest improvement in the second half of the year as conditions in the [den] markets are expected to improve.

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

Thank you.

(Operator Instructions)

Mike Wood, your line is open and please state your company name.

Macquarie Capital. Are you able to give us some more color in terms of how close the new technology products got the breakeven or what kind of drag they were in the quarter

Yes. From a drag standpoint, they reduced the Mueller Company's overall margins by about 280 basis points. As I said in my prepared remarks, that right now, as we look at our funnel of sales opportunities, and the growth track that we are on, that we think that these businesses could be profitable for the full year due to their second half performance. Now, I do ask to qualify that, as we have said, that I think in the meter business, certainly is a little more project oriented than our base valves and hydrants demand so demand can be lumpy. By that I mean that it would be very easy for an order that we expect to ship in the fourth quarter for our customer to push that three or four or five weeks or even 10 weeks and move it into the first quarter.

But as we look at how we stand today, again, as our -- as we look at our sales final, we think that if we ship the orders that we have in our backlog, on the timing that we expect, receive the orders that we expect to receive and ship those, that we do think that we will be profitable for the full year. And I do want to point out that we, in the last quarter, because of some future opportunities, that we are focused on, we have bumped up our R&D spending a bit. But again, if we get the timing of the orders as we expect and ship those as we expect, we think that that would offset even this higher R&D spending.

Great and are you able to quantify at all how you look at the pre-value versus last year? Maybe how fiscal second quarter was in terms of the expected full year sales you know in the products that were shipped into distribution?

Yes, yes, we can a little bit. And we do not think this is going to impact our full-year -- full-year demand. Certainly just maybe a little bit of timing between Q2 and Q3. But as we said in our prepared remarks, that we believe distributor inventory levels were generally higher in the third quarter this year than they were last. And, as we said, we think it was due to several factors, primarily the timing of our January price increase, as well as some I think weather-related impact and its impact on construction in some parts of the country. As we have said, we get a sense from our distributors that they are more optimistic this year about end market demand than they were at this time last year.

But all in all, that we think that we estimate that without these pull forward shipments our net sales at Mueller Company would've grown almost 18%, operating income would've still more than doubled, would have been up about 120%. And, instead of the 670 basis points improvement in margins, we estimate it would've been about 550 basis points, so again, a strong quarter. We -- the pull forward of shipments accentuated the growth in the second quarter, but I think when we look at the full year, we think it will be a wash, just could be a timing between second quarter and third quarter.

Very helpful. If I could just ask one more question, can you just talk about how long your lead time is in Anvil and what you are seeing today in orders in talking about the second half inflection?

Sure, Mike, the orders, shipments on Anvil, we work with a very, very short term backlog there. We measure it in just in a couple of weeks. If we look on a year over year basis, as we have said, that our bookings were a little mixed, shipments down a little bit, but our field reports that, when we look at the second half of the year, that we expect to see more commercial construction activity this year than we did a year ago. And that certainly -- that is what supports the comments that I made in the prepared remarks, that when we look at the third quarter, we do expect to see a slight increase in shipments in operating income at Anvil.

Thank you.

Walt Liptak.

I wonder if you could get a little bit more color on the pre-buy and just the timing of it. When -- what kind of -- what was the date of the price increase?

Yes, if you look at this year, our price increase was January 23. Last year I think February 9, so 17 days, probably about 14 working days, so it gave us two weeks -- two weeks. And as I said when I answered Mike's question, it gave us a little bit more shipments that last year we probably saw in the third quarter, but all in all, our growth in sales at Mueller Co was still up even if we subtracted 18%.

Okay. Could you tell that there was some sort of a little slow down or some kind of an impact after January 23? Or did the business remain strong through (multiple speakers)

Yes, it really followed our typical pattern. When we announced the price increase, that we allow our distributors to bring forward -- orders in forward of that price increase, and primarily we do this to protect any outstanding quotations they have or any orders that they have received. But when we look at -- it follows the normal pattern, and I would say that when you look at our overall bookings, our overall bookings for valves and hydrants, we are up on a year over year basis. In fact, if you look at our valves and hydrants, there were up anywhere between 9%, and 11% -- the bookings on a year over year basis. So we feel that increased bookings on a year over year basis.

Okay, after the price increase. And so the comments about moderation, in the revenue, is that based on conservatism or is that based on you know the way that you finished up the quarter and the way things are trending?

The moderation for revenues in the third quarter is really more dependent since the -- and I am talking on a year over year basis, since our distributors entered the quarter with more inventory than they did a year ago, they are going to be able to satisfy probably satisfy end-user demand or end market demand in the third quarter out of their existing inventory. So that we will start our shipments -- when they start reordering our shipments, we will start shipping those. And it's just a little bit of a question of how much of that will we see in the third quarter or how much of it will move into the fourth quarter. So the moderation is more aligned, more generated -- our -- let me put it this way. Our discussion of moderation is more generated from the fact that distributors have slightly greater inventory entering the third quarter this year than they did last year. Certainly as I've said -- as we have said in our prepared remarks, across the board, they are more optimistic this year about end market demand than they were last year.

Okay, and then if I could just ask one quick kind of follow-up on that, with the weather impact, I wonder if there is any way that you can quantify it, and do your -- in the third quarter, is there a catch up on any lost days because of the weather?

Yes, good question. Actually we do not think the weather -- well, we think that the weather had very little impact on our second-quarter performance. And, again, we think the timing of our January price increase may have masked the impact from weather. You know certainly while a good portion of the US experienced severe weather that limited construction, we believe our shipments did not suffer much since our distributors receive shipment of the orders that they placed earlier in the quarter. Relative to weather, we actually think that we could see maybe a little impact from weather in our -- in the third quarter, as weather could impact the timing of our distributor sales and re-orders. In fact, we think that weather impeded construction in April, and that could even still a little bit into early May. We know that in parts of the Northeast and the Midwest there are still load restrictions, on heavy construction equipment, and then there's flooding in other parts of the country. So really, I think the weather could impact how quickly distributors turn their inventory this quarter once the late projects are relieved. But, since we have these pull forward of orders, since we were able to ship them and our distributors were willing to take them, we probably did not have you know much of a weather impact in the second quarter.

Okay, got it, thank you. Great quarter.

Nick Prendergast.

Nick from BB&T capital markets. I just had a quick question regarding Mueller Co volumes. I understand absent this order pull forward, it sounds like you actually saw real demand closer to up 18% versus the 22% that you reported. Can you address maybe how much of that 18% gain was price versus volume? I understand it was probably majority volume, but I would like to get a handle on that.

Yes, the -- [penny spaces] we did get have positive -- we did have positive pricing, and I can give you that,

I guess on average, just how much were you -- when you did your price increase in January, how much was that on average across the board?

Yes, it was actually we would not realize, we would not realize much of that price increase on our shipments in this quarter, because, as I said, our distributors typically pull forward -- pull forward and we ship at the old price. So from that standpoint, we would we would not realize the pricing.

Understood so okay, it is almost 100% --

To your other question, it added about 12% to our year over year revenues.

Got it. Okay.

I think subtracting the distributor pull forward about 10% -- 10%, 9%,10% in total.

Okay, okay and I guess you kind of lead into my other question then. So the price increases are in effect. There was some order pull forward. How are the prices sticking so far? Or rather the price increase is sticking?

Right now, we typically expect to realize about 60%, 50% to 60% -- about 60% of the price increase, and I would say right now, we see nothing that would say that we will not realize that typical conversion.

Okay, all right. Thank you very much.

Next, Matt Vittorioso.

Barclays. Evan, I guess I was hoping you could comment on the capital structure. You have got the higher coupon 8.75% senior notes. How many if any more calls, the 10% at $103 calls do you have on that? And then what are your thoughts on the 7.375% subs that are callable? Is that something you are looking to address in the near term? Would you be looking to call those bonds currently, or are you content to wait and let the call price step down?

I will ask Kevin to address that.

Yes.

Right, Matt. With the redemption that we did in the quarter, that was our final 10% call. So from a deleveraging standpoint at this point, we do have a restricted payment basket under our senior indentures for about $65 million with which we can repurchase the 7.375% sub notes, which became callable at 103.68 at June 1, 2012. And then the senior notes, the 8.75% notes are callable at $104.375, beginning September 1, 2015. We certainly continue a evaluate other debt repayment options in our capital structure, and certainly as we made announcements in the past, if we decide to take some action, we would announce that. But everything as we always do, is under continual evaluation. But certainly with the debt paid down that we made in the quarter, we have been able to reduce our overall net debt leverage to just about 4%.

And are there any I guess I would say abnormal restrictions that the 8.75% put on you addressing the 7.375%, or is that just order typical as long as your are refinancing and you keep it a sub note, you can do another refinancing is that correct?

It's just -- I would say it is just the standard the tendency in a senior indenture. I mean really the restricted payment basket governs the take out -- the redemption of those. But from any refinancing effort, it is really just a standard provision.

Fair enough and then just one last question on the cash flow, I appreciate the color that you expect to generate more cash this year than last. I guess the one sort of variable piece that would be helpful to have more color on what be the working capital. It looks like to support your growth, working capital has been a use of cash through to the first couple quarters of the fiscal year. I'm just curious if you can quantify or give us directional color on how much of that has my come back in the second half of the year.

You know, as we indicated free cash flow for 2013, will be stronger, or greater than what we saw in 2012. I think roughly 2012 free cash flow was $45 million, but we expect it to be greater. And the majority of the free cash flow generation which will occur in the second half of the year, this year, similar to last year, the majority of that will be in all based on operating income performance. There is a -- as the business grows, there is a natural use of working capital, but we do you know continue to focus on inventory turns as well as the management of working capital as a percentage of net sales, so that helps mitigate some of the natural use that you might see. So second half, cash flow generation would be more based upon what I will term as operating income generation.

Yes, Matt, and a little further still if you look at our inventory turns, certainly at Mueller Co they're -- Mueller Company they were up year over year. We were up -- second quarter of last year we were at 4.2 turns. We are at 4.6 turns. So, as Evan mentioned, we still focus certainly on what we can do, on the working capital side. And I think when you look at this quarter, this quarter typically is a very negative cash flow quarter for us, we do have a bit of an increase in demand because of our price increase. So we are bringing in raw material earlier in the quarter, and we are paying for that raw material within the quarter, but most of our shipments are a little backend loaded, so that they are still on the receivable side. So when we get to the third, and fourth quarter, especially on the collection side, that is when we start collecting a lot of our receivables. But as Evan said, that -- we are still confident in higher year over year cash flow, and another area that we have pointed out, in our prepared remarks, certainly, from cash taxes, we have the benefit of the NOLs, and we're still looking at minimal contribution payments this year.

Great, thanks for the color and great quarter.

Seth Weber.

RBC. I wanted to revisit the incremental margin topic. Obviously very good in the quarter. If the MS&E business is moving towards profitability, pricing is getting better, material costs I assume are going down. Is there any reason to assume why incremental margins could not actually be sustainable or better from these levels going forward?

Seth, a lot of it really depends on -- really will depend on our mix. And in this quarter, because we had a price increase on valves and hydrants, we had a very nice mix of shipments of valves and hydrants. And because this is obviously what the orders that our distributors -- the products that our distributors pulled forward orders for. But if we could -- we certainly could see this sustainable based on what happens in our valves and hydrants volume. We could also see it deteriorate somewhat, if valve and hydrants become a smaller percent of the overall mix,. I know that we have talked in the past that we think for total Mueller Co in the 35% -- we're comfortable with expecting it in about the 35% range. But as saw in this quarter, certainly, when we have a nice -- a slightly higher mix of valves and hydrants, we can get that above 40%.

And our capacity -- certainly capacity utilization continues to be positive. If you look at a total Mueller Co this time last year, and it obviously varies by our different plans, but we were in the low 50% capacity utilization. And in this quarter, we were in the mid-60%s, so very nice -- nice increase, and that certainly contributed to the conversion margin.

Right, I think what I heard what I thought I heard you say earlier, though, was the pricing really didn't hit this quarter, so the pricing the -- pricing increase should actually still be on the [com].

Right.

But which I assume all drops -- pricing basically drops the bottom line, right?

I'm sorry, if I -- I may have misspoke. We did not get any realization of the January price increase, but we did get year over year pricing, because in the first quarter of last year, we did not get any benefit from that quarters price increase. We got benefit this year from that price increase.

Okay, that is helpful. Thank you. Are you sensing that your customers are more willing to take price increases this year, or is it kind of always been at this whatever 65% take rate or so. Do you think there's opportunity to drive that number higher as the environment gets better?

You know, that is a good question, and certainly our discipline is to be the price leader. So certainly if we have an opportunity to do so, that would be an area that we would concentrate on. I think as where we sit here today, I am more comfortable saying that we will probably convert at the historical rate, but always looking for opportunities.

Okay. Maybe just going back to that MS&E business, by my math, it looks like you are doing something in the min $30 million revenue range quarterly, something like that plus or minus. I mean is that an adequate number? Do you need that number to go hire to absorb costs, or -- I am trying to understand what sort of break even run rate for revenue would be.

Yes, if you look at it, last year -- meter system -- our metering system Mueller Systems Echologics were about 8% of Mueller sales. This quarter, they were 14%. A nice increase, probably not quite to the level that you would calculated, but reasonably close. I think what we need is certainly a little more volume, but what will be the bigger impact is the mix. And, when I say the mix, it is certainly that when we made the decision to improve or increase our penetration of the meter market, we have really focused on the AMI technology. AMI technology has higher margins than our AMR and certainly significantly higher than margins in our mechanical read. So as AMI becomes a bigger percentage of our revenues, that is when we will see a bigger impact on our bottom line. So it is a little more volume, but certainly a mix greater to AMI will have the biggest impact on our profitability.

And what is the mix today?

Today the mix is it is by far, and I am going to give you it varies by -- it certainly varies by quarter, but I would say we're still at 75%, 80% in the AMR and manual read versus AMI, but that can shift by quarter.

Okay, terrific, thanks very much.

Brent Thielman.

DA Davidson. I apologize, I did get on the call late, but I had a question on Anvil. Was you oil and gas business up this quarter there, and then does your outlook for the second half embed an expectation for that particular area?

Yes. Our oil and gas was pretty flat, on a year over year. We do expect to see a slight increase in the second half of the year. But our outlook for greater shipments for Anvil in the third quarter and second half are driven a little more by actually commercial construction.

Sure, okay, and then on the metering business, and expectations of reaching profitability in the second half, I'm presuming margins will still be sort of sub the legacy Mueller Co products. But could you provide any color on, I guess, margins you are anticipating out of that business in the second half and how quickly you think they can ramp up to get to the levels of the traditional Mueller Co segment?

Brent, we have said several times that we think it will take probably at least three years for that business, and we do think you can get into the Mueller Co margins. And the biggest driver that will really be a much greater percentage rate of our revenues in AMI. Because, as we have talked in the past, that not only with AMI do we generate revenue when we deploy the system, but then we generate ongoing revenue with software licensing fees. So AMI we would expect will have a much higher margin, and when we get two, three years out, we would expect AMI to be a much bigger percentage of our overall revenues of this business. And when we get to that point, that is what we think that this business can generate margins similar to the existing Mueller Co.

Okay, I was just checking to see if that three outlook would change, but congratulations on a great quarter.

Thanks, Brent

[Shawn Wandrak]

This is Shawn Wandrak on for Felipe Bresaola at Deutsche Bank. Great quarter and congratulations on reaching a [four handle] in your leverage.

Thanks.

As I look at the business, and I'm sorry to be a dead horse here, but when you look at margins in Mueller Co, do you think you could just give in order of magnitude basically the difference between pricing and volume during the quarter? I realize you've been on it a lot.

If you look at our -- at an operating -- if you look at Mueller Co from an operating income standpoint, of our 670 basis point year over year improvement, about 150 basis points came from pricing.

Okay. Thank you. And then as I look of the business in your end markets, I know you guys had lost a lot of your exposure to residential construction through the downturn, I think something roughly it went down to almost 5%, from 40%. Could you just give an update on where you are at now between res, non-res, and municipal R&R in terms of your end market?

You know, Shawn, I would say that as we've said in the past, as most of our sales go through distributors, that we have to go through a fair number of machinations to come up with -- to settle on a percent break down by end markets. So right now, I would say we just do not have all that data to be able to give you with any confidence where we think those are on a percentage basis. But clearly in our Mueller business, we are seeing that becoming a bigger percent of their sales than what it had been, and as a result, you know it is becoming a bigger percent of our overall sales. So at this point, difficult for me to give an exact number, but certainly again, we can say with confidence, it is a bigger percent today than it was a year ago.

Okay, thank you. Just in terms of R&R versus any new construction, with your large install base out there, are seeing R&R pickup at all?

We are seeing -- as we said, we are seeing it spotty on municipal spending, but all in all, we do think we are seeing some growth from municipal spending. It's a -- I think that probably you hit it pretty well there. I would say that we are certainly seeing our growth coming from maintenance and repair spending rather than what I will say ought -- CapEx, probably coming from OpEx. And where we are seeing this, is a greater percentage of our demand this year is coming from distribution pipeline projects rather than the larger transmission project. Generally I think you put the larger transmission projects in the CapEx category. You put the smaller distribution lines in the OpEx. So we are seeing some I think mix across the country, but we think we are seeing some uptick, some growth in repair and maintenance segment.

And do you think that this is being driven by just terrible state of water infrastructure in this country, that these municipalities are just that a point where they absolutely have to spend on it? And that is why maybe you're seeing that happen?

Yes, that certainly is our theory. We said in 2011 -- we saw a drop, and it surprised us. We saw come back in 2012 just because we do not think they could delay anymore. And I think what we are seeing in 2013, is the same. I would not necessarily say that we are seeing utilities going on a preventative maintenance -- any preventative maintenance campaigns, but I do think that what we are seeing is just pure necessity.

Okay, thank you for that. And then just quickly, I heard a lot about AMI and the metering side of the business, can you talk a little bit about Echologics and what is been going on with that -- how demand has been?

Yes, Echologics is still a very, very small percent of our sales. But we are seeing a nice growth on small numbers. That probably the -- that we announced you know several years ago, we got the biggest contract we had from the city of New Orleans. They have continued to renew that the last couple of years, recently renewed it for an additional year. And some of the pilots that we have had for the last couple of years, are starting to turn into orders. So in a way, we are out there, as missionaries, talking about the benefits of acoustical leak detection, and that takes some development time. But even though it is still small numbers, we are seeing some nice growth in that business and hope to be able to announce some contracts soon.

Okay, great, and then last question, and then I will hop off. But you mentioned capacity utilization at Mueller Co Can you give us where you are at Anvil this quarter versus last year?

Anvil is still probably flat, year over year, around the 60% range.

60%. And do you think that could increase meaningfully as you go on through the year? Or do you think it would just pick up with a few percentage points?

I think that it will just pick up slightly. We do not really foresee, when you look at the analyst forecasts, certainly some of the indicators have been very positive -- returning positive on non-res construction. I do not think a lot of that has turned into actual fieldwork, but certainly it looks like the foundation is there. I would think that looking at the current forecast for non-res -- an increase in non-res construction we would see that more in our 2014 and maybe only a little uptick in 2013.

Okay, great. Thanks a lot, guys and good luck next quarter.

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

Again, we certainly appreciate your interest in the Company and the participation of this morning's call. We look forward to seeing many of you in person, and we will be talking with you again next quarter.

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