Mueller Water Products Inc (MWA) 2014 Q1 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 session of today's conference. Also, today's 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. You may begin.

Thank you, Laurel and good morning, everyone. Welcome to Mueller Water Products' 2014 first-quarter conference call. We issued our press release reporting results of operations for the quarter ended December 31, 2013 yesterday afternoon. A copy of it is available on our website www.muellerwaterproducts.com. Mueller Water Products had 159 million shares outstanding at December 31, 2013. Discussing the first-quarter's results this morning are Greg Hyland, our Chairman, President, and CEO; and Evan Hart, 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 requirement. 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 GAAP and non-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, unless specified otherwise. 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 1-866-418-8386. 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 turn the call over to Greg.

Thank you, Martie, and thank you for joining us today as we discuss our results for the 2014 first quarter. I'll begin with a brief overview of the quarter, followed by Evan's detailed financial report, which covers key drivers affecting our businesses. I will then provide additional comments on the quarter's results and developments in our end markets, as well as our outlook for the 2014 second quarter and balance of the year. For Mueller Water Products as a whole, year-over-year net sales increased 5% and adjusted operating income grew 86% to $14.1 million in the quarter. Adjusted net income per diluted share improved to $0.01 from a loss of $0.02.

Our Mueller Company business unit increased net sales 9.2% in the first quarter with growth across most product lines, especially valves and brass products. This increase was achieved despite a decline in domestic hydrant unit volume of 13%, which was due to a number of our distributors and end-users delaying orders while they waited for further clarity regarding the applicability of the Reduction of Lead in Drinking Water Act for fire hydrants. In late December, legislation was passed specifically exempting fire hydrants from the Act. Consequently, we believe the decline in hydrant sales is only a timing issue, and we expect to see year-over-year domestic unit volume improve in subsequent quarters.

We are pleased with the year-over-year operating income improvement at Mueller Company, adjusted operating income approved 82%, adjusted operating margins improved 390 basis points to 9.7%. In addition, net sales of Mueller Company's Mueller technology products and services grew about 12% this quarter compared with last year. Although Anvil's net sales declined slightly, adjusted operating income improved 24% and adjusted operating margin improved 160 basis points. Overall, results for the quarter were about as we anticipated. We continue to believe 2014 will improve year-over-year, primarily due to expected growth in our key end markets and the benefits of stronger operating leverage. With that, I'll turn the call over to Evan for a detailed discussion of our financial results for the quarter.

Thanks, Greg, and good morning, everyone. I'll first review our first-quarter consolidated financial results and then discuss segment performance. Net sales for the 2014 first quarter are $257.4 million, increased $12.3 million or 5% from the 2013 first-quarter net sales of $245.1 million due to higher shipment volumes and higher prices at Mueller Company. Gross profit improved 17.5% to $67.1 million for the 2014 first quarter compared to $57.1 million for the 2013 first quarter. Gross profit margin of 26.1% in the 2014 first quarter improved 280 basis points from 23.3% in the 2013 first quarter. This improvement was driven primarily by higher sales prices and higher shipment volumes.

Selling, general and administrative expenses were 20.6% of net sales in the 2014 first quarter, compared to 20.2% of net sales in the 2013 first quarter. SG&A expenses for the 2014 first quarter were $53 million, as compared with $49.5 million in 2013. Adjusted operating income for the 2014 first quarter increased 86% to $14.1 million compared to adjusted operating income of $7.6 million for the 2013 first quarter. This increase was due primarily to higher shipment volumes and higher sales prices. Adjusted EBITDA for the 2014 first quarter increased to $28.8 million compared to $22.4 million for the 2013 first quarter, an improvement of 29% from last year.

Interest expense net for the 2014 first quarter declined $900,000 to $12.6 million compared to $13.5 million for the 2013 first quarter. This decrease was due to a lower level of total debt outstanding. During the 2014 first quarter, income tax expense was $300,000 on income before income taxes of $1.4 million, resulting in an effective income tax rate of 21.4%. Even if the tax rate for this quarter had been comparable to our previous guidance of 37% to 40% for the full year, our adjusted earnings per share for the quarter would still have been $0.01.

Adjusted net income for diluted share for the 2014 first quarter was $0.01, compared to an adjusted net loss per diluted share for the 2013 first quarter of $0.02. There was a weighted average of 161.7 million diluted shares of our common stock outstanding for the 2014 first quarter, compared to a weighted average of 159.2 million diluted shares outstanding for the 2013 first quarter.

I'll now move on to segment performance and begin with Mueller Company. Net sales for the 2014 first quarter increased 9.2% to $165 million compared to $151.1 million for the 2013 first quarter. This increase was due primarily to higher shipment volumes across most product lines and higher prices. Adjusted operating income for the 2014 first quarter improved 82% to $16 million compared to $8.8 million for the 2013 first quarter. Adjusted operating margin for the 2014 first quarter improved 390 basis points to 9.7%, compared to 5.8% for the 2013 first quarter. Adjusted EBITDA for the 2014 first quarter grew 36% to $27.1 million compared with $20 million for 2013.

Mueller systems net sales for the 2014 first quarter increased by about 10% year-over-year. Sequentially, we reduced our operation loss due primarily to higher sales. Year-over-year, our operating loss expanded less than $1 million due in part to an inventory adjustment that impacted the first quarter year-over-year comparison. For the full year, the inventory adjustment impact is expected to be neutral. R&D expenses primarily related to development of our Fixed Leak Detection offering were also higher.

I'll now turn to Anvil. Net sales for the 2014 first quarter decreased 1.7% to $92.4 million compared to $94 million for the 2013 first quarter. The decrease resulted primarily from lower shipment volumes. Adjusted operating income for the 2014 first quarter improved 24% to $7.3 million compared to $5.9 million for the 2013 first quarter. Anvil's adjusted operating margin for the 2014 first quarter improved 160 basis points to 7.9% compared to 6.3% for the 2013 first. Adjusted EBITDA for the 2014 first quarter increased 15% to $10.8 million compared to $9.4 million for the 2013 first quarter.

Turning now to a discussion of our liquidity, pre cash flow which is cash flows from operating activities less capital expenditures was negative $11.3 million for the 2014 first quarter compared to negative $5.6 million for the 2013 first quarter. We continue to expect 2014 full-year free cash flow to be stronger than 2013 driven primarily by better operating results.

At December 31, 2013, total debt was $600.7 million and included $420 million of 7 3/8% senior subordinated notes due 2017, $178 million of 8 3/4% senior unsecured notes due 2020, and $2.7 million of other. Net debt leverage was 3 times at December 31, 2013. Using December 31, 2013 data, we had $138.5 million of excess availability under our asset base credit agreement. I'll now turn the call back over to Greg.

Thanks, Evan. I'll now elaborate on our 2014 first quarter and end-market and provide an outlook for the second quarter and comment on the balance of the year. I'll begin with Mueller Company. We continue to see strong growth and domestic demand for our Mueller Company core products. Domestic unit shipments for our iron gate valves were up 8% and brass products were up 13%. However, domestic unit shipments for hydrants declined 13% year-over-year as a number of our distributors and end users delayed orders where they sought clarity of the applicability of the Reduction of Lead in Drinking Water Act to fire hydrants. As I noted earlier, we believe the first-quarter decline was only a timing issue and expect to see year-over-year domestic hydrant sales volume improve in subsequent quarters.

We believe the market, as a whole, remains strong and the volume increase we saw in our iron gate valves and brass products was driven primarily by growth in residential construction, although we also saw some positive activity in municipal spending. Year-over-year sales of Metering products increased about 10% in the first quarter. Overall, Mueller Company net sales during the quarter grew 9% year-over-year. Net sales from our core domestic iron gate valve, hydrants, and brass products grew 13% year-over-year, even with the decline in hydrant sales.

Anvil's net sales declined slightly year-over-year. We saw a drop off in demand for our product from the oil and gas market as we approached the end of the calendar year. Shipments of our products to address non-residential construction market were mixed. We saw positive growth in activity from warehouse construction, but other types of construction declined. In total, our shipments driven by non-res construction were flat year-over-year. As Evan mentioned, in spite of the decline in net sales, Anvil was able to increase adjusted operating income year-over-year, primarily due to lower costs.

Turning now to our outlook for the 2014 second quarter, I'll start with Mueller Company. Overall, we believe that fundamentals in our market are stronger entering the second quarter of this year than they were last year. Demand for our product from residential construction and to a lesser extent municipal spending is up nicely. In addition, we believe inventories at some of Mueller Company's distributors are down as we enter the second quarter.

There are a number of items that are likely to effect the second to third quarter year-over-year comparisons relative to timing of shipments. First, as we previously discussed, distributors and end users delayed some hydrant orders in our first quarter as they sought further clarity regarding lead in fire hydrants. Second, in early January, we announced a price increase on iron gate valves in the hydrants to be effective on February 14. Three weeks later than it was last year.

Consequently, we will have three fewer weeks to ship the orders received before the price increase than we did last year and this could potentially have an even greater impact on year-over-year comparisons in the second and third quarter. More of the orders placed in advance of the effective date are expected to ship in the third quarter this year than they did last year. Third, with severe weather in the Northeast and Midwest this year has resulted in construction delays that could also impact the timing of shipments in the second quarter. Considering all these factors, we expect Mueller Company's net sales to increase in the mid single-digits in the second quarter.

We expect both Mueller Company's adjusted operating income to improve and adjusted operating margin to expand year-over-year for the 2014 second quarter, although at rates -- lower rates, than we experienced in the first quarter. We are in the midst of changing the manufacturing process for certain sizes of our iron gate valve. This change is expected to result in a write down of some of our existing equipment. But it's expected to deliver between $3 million and $3.5 million in cost savings on an annualized basis. We expect to take an associated $1.5 million non-cash charge during the second quarter. This expected charge is not included in the adjusted guidance I just gave.

At Anvil, while we expect the energy and nonresidential construction markets will improve, we think that these improvements will most likely be in the second half of the year. Consequently, we believe annual -- Anvil's second quarter net sales and adjusted operating income will be essentially flat year-over-year. For Mueller Water Products as a whole, we believe 2014 second-quarter net sales will increase in the mid single-digits year-over-year, driven by performance at Mueller Company. We expect solid increases in our 2014 second-quarter adjusted operating income and expansion in adjusted operating margin year-over-year.

I will now take a moment and talk about our expectations for full year 2014. As we said on our last call, overall for the Mueller Company base business, which excludes our Metering and Leak Detection products and services, we expect year-over-year net sales rate to be in the high single-digits. In 2013, net sales of our Metering products and services grew by approximately 50% year-over-year. We expect to continue to see nice growth in 2014 but expect the growth rate to be about half the 2013 growth rate based on the delivery schedule of our current backlog and anticipated timing of new projects.

In total, for Mueller Company, 2014 net sales should -- growth to be comparable to the 2013 growth rate based on our current outlook for residential construction, continued growth in municipal spending, and continued adoption of smart meter technologies. We expect Mueller Company's adjusted operating income and adjusted operating margin to improve over 2013. We also believe our Metering and Leak detection products and services will be profitable for 2014 with growth in net sales and adjusted operating income weighted towards the second half of the year.

For Anvil, year-over-year net sales are expected to grow in the low to mid single-digit range and adjusted operating margin should expand slightly based on our current expectations of increased demand in our oil and gas and nonresidential construction end markets in the second half of the year. Other 2014 key variables include: corporate spending is expected to be $34 million to $36 million; depreciation and amortization is expected to be $58 million to $60 million; and interest expense is expected to be about $51 million based on our current debt outstanding. Our adjusted effective income tax rate is expected to be 37% to 40%. Capital expenditures are expected to be $34 million to $36 million.

For 2014, we continue to expect free cash flow to be stronger than in 2013 driven primarily by better operating results. Additionally, we expect cash income taxes to be minimal in 2014 as we continue to benefit from utilization of net operating loss carry-forwards. We also expect to make only minimal cash contributions through our pension plans in 2014. In total for Mueller Water Products, our full-year outlook remains substantially the same as we provided on the last conference call. With that, I'll open this call for your questions.

(Operator Instructions) Your first question comes from Kevin. Your line is open. Please state your name and company name.

Good morning. Kevin Maczka, BB&T Capital Markets.

Good morning, Kevin.

Good morning.

Good morning. First, Greg, with the -- given the hydrant decline, the Mueller Co sales and EBIT increase I thought was pretty impressive. You mentioned how being a contributor, you also mentioned muni spend to a lesser extent. Can you just dive in a little deeper on that muni spend piece and talk about what you're seeing there? How much visibility do you have now that we're into a new year and a lot of these budgets are set?

Yes, you know, Kevin, I think when you look at the visibility on muni spending, that we generally believe, as I said in our prepared remarks, you see it up year over year, and a lot of that I think -- a lot of that is based on input that we get from our field salespeople. As you point out, have the opportunity -- they're talking with the municipalities on a day-to-day basis and they would say, generally, they're seeing budgets freeing up and expanded this year as compared to last year.

Now, we know that there's going to be variability during the year, so it's tough for us to say exactly what percentage growth, but I think as we said on our last call, we still think it's in the low single digit growth that we think that we'll see demand for our product coming from pure municipal spending, for repair, replacing, or upgrading existing systems.

And on the housing side, Greg, it doesn't sound like your view there has changed much, if at all, even though there's been, you know, we get some spotty data on the housing and non-res markets from time to time, including more recently.

Yes, you know, Kevin, at least what we're seeing now through our first quarter and, again, what we're getting from our field and our distributors is that we think that in most areas of the country, those excess lots that we have been talking about for several years have been absorbed. So we should see a growth rate more in lock step with overall growth and residential construction.

And so I think that when we feel a little more confident about the outlook from residential construction, primarily because we expect to see a pick-up in new lot development. And I think if we even look at some of the analysts that focus strictly on housing, I think that at least what we've seen recently, I'd say the overall opinion is demand for new land development or demand for land is still pretty strong.

Okay. And if I could just ask one more, Greg --

Sure.

-- Mueller Co margins, the hydrant sales were down and I think that's typically one of your higher-margin product lines, but we still saw this really impressive margin expansion overall in Mueller Co. Can you just dive into that in a little more detail? Is it all utilization? We haven't really had the new price increase yet. What was the -- what are the big moving parts there?

That's a good question, Kevin, and, you know, I would say we certainly benefited from the increase in iron gate valves and brass products. You know, when you look at those two, their unit volume was up nearly 13%.

Also, one of the benefits we had this quarter -- and you may remember our first quarter call last year where we talked about we had a very rough quarter at our Pratt business unit. Well, we experienced this quarter, some pretty nice operating income growth there, but it was as I said off an easier comparison in Q1 last year.

I think that also we benefited from higher sales prices, particularly as our shipments of our lead-free brass products have grown significantly on a year-over-year basis. And when we look at our brass product sales, by far, the vast majority of those now are no-lead. And we have higher prices associated with those products and higher margins.

You know, when we also look at Mueller Co in this quarter, we benefited from pricing during the first quarter, both from the January 2013 price increase on valve and hydrant and as I just said, higher pricing on lead-free brass products. We also had a little benefit and when we had this, you know, the issue that surface in the industry relative from going from leaded to no lead, we were able to make that change in a weekend.

And we start shipping to the marketplace and offering to the marketplace no-lead hydrants. At that time, we also put a price increase an immediate price increase on those hydrants. We probably saw a little benefit from that in this quarter, but probably not much.

All in all, when we look at it, on a year-over-year basis, on our 390 basis point improvement in margin, probably about -- we estimate about 270 of that, or 70% of the margin improvement probably came from pricing. One could argue that the lead-free brass products could be mixed, but in essence, when we look at the higher pricing and certainly the lead-free brass products being a much higher percent of our sales this year than they were last year, we think that those were the real drivers of our, of the margin and the conversion year over year.

I should note, because, you know, I talked pretty extensively about the positive impact of our no-lead brass products, that will, on a year-over-year basis, anniversary this coming quarter. Not so much -- I'm sorry. In the third quarter.

That we started in the second quarter last year but really in the third quarter, primarily only shipping no-lead brass products. That's a pretty long-winded answer. Hopefully I hit the point you wanted to have discussed.

Yes, that's great, Greg. Very helpful. Just one more point -- can you put a number on that lead-free mix, if that sounds to be one of the key issues here?

You know, Kevin, we think it's probably -- we think that probably just the higher pricing added about $2 million to $2.5 million to our revenue with a nice percentage of that dropping to the bottom line.

Okay, great. Thank you.

Our next question comes from Walter your line is open. State your name and company. Please check your mute.

Hi, thanks. Good morning. I wanted to ask a little bit about the -- Hi, can you hear me?

Yes. Now we can.

Okay, sorry about that. Yes, I wanted to ask you about the weather disruptions that you're experiencing and if you can quantify it in terms of days or revenue dollars or percent, something like that.

Walt, we wish we could. It's very difficult. We're getting reports in from our distributors in the Northeast and Midwest that are telling us that their branches have been shut down a number of days where no one -- obviously where no one's getting to work so no one's answering the phones or shipping products. But on the other hand, there's probably no, there's no construction going on so it's very difficult. It's frustrating for us not to be able to come and say that, boy, we think it's you know, it's going to affect a specific dollar amount.

At this time, we just see and get the reports from the field that construction activity that was taken place last year had just been shut down this year. So we know it's going to be some time an impact but it really is difficult for us to put a dollar value on that.

Who knows? If the weather that most of you are getting in New York today, is that going to continue into March or are we going to suddenly Spring come early. But I know that when we look through the first five or six weeks of this quarter, clearly the reports we're getting from our field is that the weather is impacting construction activity.

Okay, okay, I think that's clear. You know, how should we think about this, though? Is this a temporary timing issue where you think that, you know, whatever happens, you know, in the first quarter gets made up, I mean in the March quarter gets made up in the June quarter?

We would certainly expect that would be the case, because it gets back to the macro drivers. We are bullish, still bullish about the housing market, as we talked about. As Kevin asked, we're seeing positive signs of municipal spending so we don't think that demand goes away.

Now, I would have to say that if we see such a significant cutback in construction work in the second quarter, when we look at our third and fourth quarter, we may get to a point where crews just aren't available to do all the work to catch up. I don't, we certainly don't know enough right now to say that could be the case so I think as we look at it, we think it may be a timing issue. And as we look at it today, we think for the full year it should wash out.

Okay, okay, that's a good point. And then just a last one would be a follow-up to that first question about the muni spending.

Do you track number of projects that you're seeing from your municipal customers and if you do, you know, how -- can you quantify those in terms of number of projects or dollar amounts?

You know, it -- Walt, it's difficult for us to, I would say, get a decimal point, accurate handle on that primarily because so as we said in the past, so much of what we have, of what we ship goes through our distributors and it can get lost.

But we do make direct quotations on public work on a number of public work projects. So if we look on that on a year-over-year basis, a number of our quotes are up, a number of our quotes are up 20%. So that's in the number of quotes we made to public projects, and if you look at that on a dollar volume, year over year, it's up almost 13%.

So, you know, our conclusion there is, obviously, maybe we're seeing more projects and in total, they may just be slightly smaller projects, because the dollar value of the quotes are not up as much as the absolute number. But all in all, we're looking at it as both very positive indicators.

Right, okay. Those are good data points. That's good visibility. Okay, thanks much.

Thank you, Walt.

Next question comes from Mike Wood. Your line is open. State your name and company name.

Hey, guys, this is Adam in for Mike, Macquarie. Question on Mueller systems, do you guys still expect that to be profitable for the year?

Adam, at this time, we do expect it to profitable for the year, and as we said in the prepared remarks, weighted towards the second half of the year. This is based on several factors as we're sitting here looking at it today, certainly based on the shipment schedule of our existing backlog, orders that are either in the quotation stage or about to be quoted on, we're about to issue quotations we expect to win.

Also, coupled with, we think, some benefits that we'll see in the second half of the year on cost reductions we've implemented. Certainly when we look at our backlog, we have a positive weighting to our AMI offerings, which will improve our mix.

On the cost side we expect to start shipping the second generation of our radio, which has both improved performance and are cost less to manufacture than our current design. I think it's also important when we look at the second half, a factor that contributes to our belief that we think that this business will break even is that we expect to start seeing lower deployment costs than what we're currently experiencing.

We developed an installation tool that now verifies the proper installation is done before the installer leaves the site. Before, if an installer made a mistake and left, it would cost us more to come back and fix the problem. Now we can do it while the installer is there.

Secondly, we've automated some of the processes that configure the network which will reduce our labor costs and error rates. So when we look at it, deployment costs can be -- the variability of deployment costs can be a big impact. And we think that in the second half of the year that our deployment cost will be reduced by about 50% from what we're currently experiencing.

So I think, Adam, when we look at it in total, I think given the volume that we expect to see in the second half of the year, and that's based on our current backlog and the orders we expect to win, we expect to see a greater mix of AMI and coupled with lower costs and deployment cost that we think that all these factors, as we view them today, will make this business profitable.

But as we pointed out in our call when we talked more specifically last conference call, that we know that we are exposed, and this business today, given the project nature, is exposed to any slippage in a, in the project, in the installation. So if we go a couple months and it moves from our fourth quarter into the first quarter 2015, that could impact the profitability of our business. But as we look at it today, we expect these businesses to be profitable.

Okay, great. In your current backlog in that business, what's the mix of AMI versus the legacy AMR?

Our backlog is up about 22% year over year and that's about $5 million. I'm going to say that probably 50% to 60%, 70% of that is AMI.

Okay, great. Then just on Anvil, I'm not sure if in the past you've given the oil and gas versus non-res growth. Is there a mix benefit or sort of headwind from either of the two, or are they similar margin?

You know, the margins are close enough where I wouldn't characterize it as a headwind or tailwind for each. It's just -- I think the absolute growth rate that we're seeing in that market has -- not so much mix related.

Okay, great. Thanks.

Our next question comes from Brent Thielman. Your line is open. State your name and company name.

Yes D.A. Davidson, good morning.

Good morning.

Yes, Greg, have you seen some evidence of the hydrant orders returning here subsequent to December and into the second quarter?

Yes, we actually saw a nice pick-up in orders the last couple weeks in December. Now, I wouldn't say Brent that that's across the board from all of our distributors. But I think those who were concerned about their inventory levels, we did see a pickup in orders. We're sort of mixed on when we think those will ship. We think the majority of those will ship in the second quarter, but we think it's a possible, it's possible we'll see some of those even flip into the third quarter.

We know some distributors, and especially in that November timeframe, and there was a lot of uncertainty, were concerned about possibly getting stuck with leaded hydrants in their inventory, and they were pretty aggressive in discounting those, so we think some municipalities took that opportunity to bring them into their inventory. So all in all, we believe we saw orders picking up in late December that were probably, we would have normally expected to get in November if we didn't have this issue, and we expect the majority of those, I said, to ship in Q2 with some possibly going into Q3.

Okay, that's very helpful. On the price increases in Mueller Co, can you give us some degree of what those numbers are?

Yes. When we look at our iron gate valves it's a 7% price increase. When you look at our hydrants, between the price increase that we announced immediately put in effect in December from going to no-lead and the price increase that we announced here effective on February 14, that amounts to about 10%.

Okay. And then just lastly, the margin drag from the tech business, I'm not sure if you called that out in terms of Mueller Co.

We did, and when you look at Mueller Co in total, it was a little over -- 300 to 340 basis points this quarter.

Okay, great. Good luck. Thanks.

Thanks, Brent.

Next we have Jerry Revich. Your line is open Please state your name and company name.

Hi, good morning, it's Jerry Revich from Goldman Sachs.

Good morning, Jerry.

Can you talk about further opportunities you have for production, process optimization along the program that you mentioned for the select product lines at Mueller Co that will add $3 million. Is there any other similar opportunity that we should be thinking about and, you know, where are we in optimization process?

Yes, I think, Jerry when we look over the next 18 months, we think that beyond the project that we specifically referenced, we think that the productivity improvements and the cost savings in all will come just from the continued implementation of the lean initiative that I would say that we're between year three and year four. We continue to see, and it's contributing to our margin improvement, head count per unit go down.

And now, we're always looking, I think more on, is there a way to also bring in automation, but we weigh the benefits of bringing in automation versus where we are in our current manufacturing processes and how long it would -- how quickly the payback would be if it makes obsolete some of our current systems. Again, and I would say, our biggest contribution to the bottom line will be the increased utilization, especially on our foundries.

Foundries that we've discussed in the past have high fixed cost. If you look at our, in our Albertville foundry for our hydrants, a year ago in the first quarter, we were at about a 45% capacity utilization rate, this quarter we were at 50%. If you look at our Chattanooga facility, where we do our iron gate valve, we were in the, last year between 40% and 50%. This year in this quarter, we're between 50% and 60%.

So relative to improving our overall performance, I think our number one opportunity is the increased capacity utilization. We will continue to see, over the next 18 to 24 months, year-over-year and improvement just from the lean initiatives we have implemented. And we do think that we will have some opportunity on just changing the process together, as we pointed out here. But I think that when you look at it, I think I've ordered those in the order where I think that they will have the greatest impact for us.

Thank you.

And, Greg, you spoke about lead versus lead-free products for a couple of your product lines. Can you just take a step back and tell us if there are any other product lines that will be impacted and what the opportunities are for your business as there might be a sustainable shift here.

Jerry, as we sit here today, we don't see any imminent change, but I will tell you in September, we didn't expect there to be any disruption on the hydrant market either, but if we look relative to the lead-no lead issue, the Act that we were referring to actually was introduced in January 2011, the industry had til January 2014 to change the named product from that that contain lead to no lead.

And for us the biggest impact is in our brass products for those who are curb stocked and a number of smaller products. We made the change in the hydrants quite frankly from a lead standpoint, I think that we've made all the changes that there are to be made and we don't see anything really changing in the base material for our valves or our hydrants. So I think most of changes that we can think of are now in effect.

(Technical Difficulties)

I'm sorry, Jerry. I didn't hear your call there. You broke up a bit. Your question.

(technical difficulties) -- press release.

Jerry, we're not able to hear you at this point in time. I think you're breaking up.

We'll go on to the next question, Sir. Next question comes from David Rose. Your line is open. Please state your name and company.

David Rose, Wedbush Securities. Most of the questions have been answered but made a couple of quick follow-ups.

On the Anvil side in particular, you commented on the non-residential construction. You had given some broad color, but maybe you can give a little more color in terms of specific end markets that are a little bit stronger and some regional context, as well. I think you did that in the last call, if I'm not mistaken.

Actually, we saw, if we look at our different product lines in the market, our fire protection, our products going to fire protection were up year over year, almost at 7%. And, as we said in our prepared remarks, we think that was -- the big driver was, we did saw an uptick in warehouse construction and as you would expect, warehouse construction, fire protection is very, very important.

So when we look at our others on the industrial side, we look at the industrial, when we look at -- even we were seeing a couple quarters ago we were talking about we saw a nice uptick in hospitality construction. We didn't see that this quarter.

We also, I think on the institutional side, continue to see that slide, that flat or maybe just down very, very slightly. So when we look out of our, to our Q2, as we said, that we see, overall, we think that Anvil's probably going to be flat year over year, and think that's probably both our energy markets as well as our nonresidential construction being flat.

We do think that we'll see the second half of the year pick up but that's based on -- we had a number of months in 2013 where the architectural billing index was moving in the right direction that was, you know, that would certainly indicate that construction would follow. And we would expect construction to follow in 2014. So I would say that all in all, we were a little disappointed in what we saw out of the non-res construction market in the quarter, because we had had a couple quarters where we saw some year-over-year growth.

This one was spotty, as I said with the growth in warehouse construction and flat or down slightly in some of the other sectors. In this quarter, I don't think we necessarily saw any one particular region strengthen like we did out of the southwest in last quarter.

Okay, thank you. And then on the water side, was there any particular benefit from year end spending on the municipal side? You know, where you had to use up your budgets, any sort of anomalies on the volume side that you might want to call out, aside from the fire hydrant side?

You know, nothing that we saw. As I said, we think most of our growth came from residential construction, but on the municipal side, we saw, we think, a stronger first quarter this year than what we did a year ago.

Okay, and then lastly, just to be clear on the impact of the fire hydrant sales on the margin side, just run through 40% contribution roughly, a little higher on 13% of sales? Is that the way we should be thinking about it as it --

Yes. I think that when we look at the fire hydrants, we feel very comfortable that we should at least see a 40% conversion margin.

Okay, great. Thank you very much.

Yes, thank you.

Next we have Seth Weber. Your line is open Please state your name and company.

Good morning, it's RBC.

Good morning, Seth.

Your comment about dealer inventories being down, over the last of couple years, it feels like the dealers have been willing to run at lower inventory levels, run more just in time. Do you feel like there's some restocking that's happening now or is that just a seasonal uptick that you're starting to see here?

You know, we think that we will see a restocking. Not sure that have been in the -- certainly begun to see the restocking yet with the weather. I do think that we'll see a restocking as a result of our price increase. As we have, as we have said many times, that when we announce our price increase, that we allow our distributors to give us orders ahead of the price increase so they can protect their price, and so they do the pull-forward. We'll ship those to the, you know, more towards the end of the second quarter.

That will certainly help on the restocking because they place larger orders ahead of the price increase. But I did mention that, you know, when you look on a year-over-year basis the timing of our price increase this year being three weeks late gives us three weeks, obviously, three weeks less time for shipping. And we're estimating that we believe that that probably on a year-over-year basis means a $6 million to $7 million of shipments of orders that were placed before the effective date of the price increase will ship in the third quarter.

And again on a year-over-year comparison basis, if our price increase this year would have been the same time as last year, those $6 million to $7 million worth of shipments would have occurred in the second quarter. So I do think we will start seeing inventory, they'll start restocking, and I think that we'll see that really when we start shipping the orders that came, that are being placed ahead of the price increase.

That's actually very helpful. Thanks. On the systems and echologics business, do the revenues for the quarter include the Jackson, Mississippi, contract, or is that still a part of what you're expecting for the second half?

When we look at the Jackson contract, it is, it's on schedule. We've actually begun shipping in the first quarter, shipping the commercial and industrial meters.

We've also begun installing some of the AMI infrastructure so we estimate, to look into the project, the total order, we shipped about 15% of it in the first quarter, so that was in our revenues. At this time, we estimate by the end of FY14 that we will ship about 90% of that order with 10% sliding into FY15. So we still see 75% of that order being shipped between the second, third and fourth quarter.

Okay. Earlier in the call you kind of framed your quote or your inquiry levels for the quarter Mueller business. Could you do a similar exercise for the systems and echologics business? Frame for us what's your project pipeline or your inquiries pipeline looks like for that business?

Yes, you know, we're up year over year, and I will say it's a little more difficult for us because we know a number of those quotations are for budgetary purposes and they may not yet be real projects if that -- so it's

Sure.

-- we're seeing it up nicely in the 50%, 60% rate, but we're not sure how many of those are yet ready to be real projects or if it's in the very early stage for a municipality to start determining what do we have to budget a year or two from now. But we're pretty confident, as we said, as I said earlier, that we're seeing more and more utilities interested in AMI.

Great. That's very helpful. Thank you, guys.

Yes, thank you, Seth.

Your next question is from Joseph Giordano Your line is open. State your name and company name.

Hi, it's Joe Giordano from Cowen. How are you guys doing?

Fine, Joe, how are you?

Just a quick -- I think you said this earlier and I just couldn't pick it up. What was the Mueller systems margin drag on overall Mueller Co, and how does that compare to the margin drag in the first quarter of last year?

When you look, margin drag about 340 basis points.

Okay.

If you look at our fourth quarter it was a 400. So we're seeing sequential improvement but the factors that Evan mentioned in the quarter a year ago, it was about 200 basis points. So we had that inventory write down, as well as some higher R&D costs that should be associated with future revenues that impacted this quarter, and it was about 340 basis points.

Okay. Similarly, you said you're still expected to break even on the year, which you had previously said. Are you tracking on that as if -- are you tracking now where you thought you'd be maybe a quarter ago, or has that assumption become even more back-weighted?

No, I would say that right now, we haven't seen any real slippage in the schedule of our backlog. That will have the biggest factor. As I just mentioned, if a project moves from fourth quarter into first quarter, given where we are and currently the size of this business, that could have an impact.

Right now, we haven't seen any real slippage. Best question relative to Jackson, as I just answered, it's on schedule so -- and based on the quotations that we have outstanding, you know, if they convert the orders as we expect and ship when we expect, that supports our belief that we will, this business will still break even. Those are the factors, and we haven't seen much change since our last call.

Okay. How much of Yonkers do you expect to have this year?

The Yonkers -- we began shipping that, and I would say that the vast majority of that will also will go this year so I think that at least we think 80%, 85%.

Okay, great. The rest of my questions have been answered so thanks a lot.

We do have one more question. Jerry was breaking up, Jerry Revich of Goldman Sachs and he was able to e-mail his question. His question is, when do you expect to deliver the hydrant shipments that were delayed in the December quarter?

We estimate, we try to determine how many orders were delayed, and the best proxy we had was using the growth rate we saw year over year on our small diameter, small-diameter valves. Quite often, our small-diameter valves are installed at the same time a hydrant is installed.

So using that as a proxy -- it's not always exactly the same, but as I said, it gives a ballpark estimate, we estimate it was probably $4 million to $5 million of hydrants that we would have expected to book and ship in the first quarter, based on the growth rate that we saw large-diameter, on small-diameter valves I referenced. Of that $4 million to $5 million, we expect probably a majority of that will ship into second quarter with some of it going in the third quarter.

Well, with that, if there are no questions, again, we thank you for your interest and thank you for your questions and see you all soon.

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