Mueller Water Products, Inc. (MWA) Q4 2012 Earnings Report, Transcript and Summary

Welcome and thank you, all, for holding. [Operator Instructions]. Also, today's call is being recorded. If you have any objection, please disconnect at this time. I will now turn the call over to Mr. Gregory Hyland. Sir, you may begin.

Good morning, this is Martie Zakas. And thank you, all. Good morning, everyone, and welcome to Mueller Water Products 2012 Fourth Quarter Conference Call. We issued our press release reporting results of operations for the quarter ended September 30, 2012, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Mueller Water Products had 156.8 million shares outstanding at September 30, 2012. Discussing the fourth quarter's results this morning are Greg Hyland, our Chairman, President and CEO; and Evan Hart, our CFO. This morning's call is being recorded and webcast live on the Internet. We have also posted slides on our website, which are available to help illustrate the quarter's results, as well as to address forward-looking statements and our non-GAAP disclosure requirements. At this time, please refer to Slide 2. This slide identifies certain non-GAAP financial measures that we reference in our press release, on our slides, and on this call, and discloses the reasons why we believe that these measures provide useful information to investors. As required by Regulation G, reconciliations between non-GAAP and GAAP financial measures are included in the supplemental information within our press release and on our website. Slide 3 addresses our forward-looking statements. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward-looking statements, as well as specific examples of forward-looking statements. Please take note of 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. As previously announced, we sold U.S. Pipe effective April 1, 2012. U.S. Pipe's operating results have been reclassified as Discontinued Operations, and its assets and liabilities have been reclassified as held-for-sale for all prior periods. A replay of this morning's call will be available later this morning at 1(800) 839-2232 and will be accessible for 30 days. The archived webcast and the corresponding slides will be available for at least 90 days in the Investor Relations section of our website. In addition, we will furnish a copy of our prepared remarks on Form 8-K later this morning. After the prepared remarks, we will open the call to questions. I'll now turn the call over to Greg.

Thanks , Martie. Thank you for joining us today as we discuss our results for the 2012 fourth quarter. We appreciate that many of you are joining us this morning under challenging conditions. We thank you for the effort and our thoughts and prayers are with everyone impacted by Hurricane Sandy. I'll begin my remarks with a brief overview of the quarter, followed by Evan's detailed financial report, which covers key drivers affecting our businesses. After that, I will follow with additional comments on our recent results and our end markets, as well as our outlook for 2013 and the first quarter. Our fourth quarter performance demonstrated a meaningful improvement year-over-year, with growth in our net sales, adjusted operating income and adjusted EBITDA. Net sales increased 9.7% year-over-year. Adjusted EBITDA increased 30%. Our adjusted earnings per diluted share improved $0.06 to income of $0.03, from a loss of $0.03 1 year ago, and we generated $45.3 million of free cash flow for the year. Shipments of Mueller Co.'s valve, hydrants and brass products increased in the quarter year-over-year, which we believe reflects improvement in both municipals and -- municipal spending and demand from residential construction. Sales of Mueller Co.'s metering systems and leak detection products and services continue to increase this quarter, demonstrating the traction these products and services are gaining in the marketplace. On a year-over-year basis, Mueller Co.'s adjusted operating income for the fourth quarter increased 64%. At Anvil, despite slightly lower sales in the quarter due to softness in some of its end markets, operating income was essentially flat. Finally, at September 30, 2012, our net debt leverage was 4.2x, the result of both improved performance and a reduction of debt during the year. Overall, we were pleased with the fourth quarter. I'll go into more detail on our outlook for 2013 after Evan's discussion of our financial results. I'll now turn the call to Evan.

Thanks, Greg, and good morning, everyone. I'll first review the consolidated results and then discuss segment performance. Consolidated net sales for the 2012 fourth quarter of $281.1 million increased $24.8 million or 9.7% from the 2011 fourth quarter net sales of $256.3 million, due primarily to higher shipment volumes. Consolidated gross profit of $76.6 million for the 2012 fourth quarter improved from $64.9 million for the 2011 fourth quarter, and was positively impacted primarily by higher shipment volumes at Mueller Co. Gross profit margins for the 2012 fourth quarter improved 200 basis points year-over-year, 27.3%. Consolidated selling, general and administrative expenses of $53.9 million for the 2012 fourth quarter compared to $51.5 million for the 2011 fourth quarter. Selling, general and administrative expenses as a percent of net sales declined to 19.2% in the 2012 fourth quarter from 20.1% in the 2011 fourth quarter. Selling, general and administrative expenses increased in the fourth quarter year-over-year, driven primarily by higher employee-related expenses and higher professional fees. Corporate selling, general and administrative expenses were $8.7 million compared to $9.6 million in the prior year. Adjusted operating income for the 2012 fourth quarter increased 69.4% to $22.7 million from $13.4 million for the 2011 fourth quarter. This increase was driven primarily by higher sales volumes, lower per-unit overhead cost due to higher production and higher sales prices, partially offset by higher selling, general and administrative expenses. Adjusted EBITDA for the 2012 fourth quarter increased 30% to $38.1 million from $29.3 million for the 2011 fourth quarter. Interest expense net, excluding terminated swap contracts, decreased $1.4 million in the 2012 fourth quarter year-over-year, due primarily to lower levels of total debt outstanding. Interest expense net for the 2012 fourth quarter was $13.9 million, which included $700,000 of non-cash costs for terminated interest rate swap contracts, compared to $16.6 million for the 2011 fourth quarter, which included $2 million for such contracts. These contracts were terminated prior to 2011. However, the related costs were amortized over the original term of the contracts, and all amortization is now complete. During the 2012 fourth quarter, income tax expense was $4.1 million on income before taxes of $8 million, or an effective income tax rate of 51.3%. Effective rate reflects an adjustment to state taxes and other nondeductible items. Net operating loss carryforwards remain available to offset future taxable earnings. Adjusted net income per diluted share for the 2012 fourth quarter of $0.03 compares to adjusted net loss per diluted share for the 2011 fourth quarter of $0.03, an improvement of $0.06. I'll now walk through the after-tax adjustments for both the 2012 and 2011 fourth quarters. The 2012 fourth quarter adjusted results exclude the after-tax income from discontinued operations of $100,000, after-tax restructuring expenses of $500,000, and after-tax interest rate swap cost of $400,000. The 2011 fourth quarter adjusted results exclude the after-tax loss from discontinued operations of $3.8 million, after-tax interest rate swap cost of $1.2 million and after-tax restructuring expenses of $700,000. There was a weighted average of 158.5 million diluted shares of our common stock outstanding for the 2012 fourth quarter compared to a weighted average of 155.6 million diluted shares outstanding for the 2011 fourth quarter. I'll now move onto segment performance and begin with Mueller Co. Net sales for the 2012 fourth quarter increased 16.3% to $187.2 million from the 2011 fourth quarter of $161 million. This increase was due to higher shipment volumes across most of Mueller Co.'s products. The increase in net sales at Mueller Co. was primarily due to higher shipments of valves, hydrants, brass products and metering systems. Domestic unit shipments of valves increased 14.3%, hydrants increased 10.7% and brass products increased 20% in the 2012 fourth quarter on a year-over-year basis. Adjusted operating income for the 2012 fourth quarter improved to $21.5 million from adjusted operating income for the 2011 fourth quarter of $13.1 million. Mueller Co.'s adjusted operating income margin for the 2012 fourth quarter improved 340 basis points to 11.5% from adjusted operating income margin for the 2011 fourth quarter of 8.1%. Excluding our newer technology products and services, which include Mueller Systems and Echologics, our adjusted operating income margin improved approximately 400 basis points to 14.7% for the 2012 fourth quarter. I'll now turn to Anvil. Net sales for the 2012 fourth quarter were $93.9 million compared to net sales for the 2011 fourth quarter of $95.3 million. Net sales decreased slightly due to lower shipment volumes, especially in Anvil's industrial markets. Anvil's net sales for the fire protection and oil and gas markets were up only slightly year-over-year. We saw strong expansion in the oil and gas market last year, making the year-over-year comparisons tougher. Adjusted operating income for the 2012 fourth quarter of $9.9 million compares to adjusted operating income for the 2011 fourth quarter of $10 million. Adjusted EBITDA for the 2012 fourth quarter of $13.5 million compares to adjusted EBITDA for the 2011 fourth quarter of $13.6 million. Turning now to a discussion of our liquidity. Free cash flow, which is cash flows from continuing operations, from operating activities, less capital expenditures, increased to $45.3 million for the 2012 full year from $12.7 million for the 2011 full year. We continue to focus on managing our working capital better, and for the 2012 full year average receivables, inventory and accounts payable as a percentage of net sales decreased 210 basis points from the 2011 full year. At September 30, 2012, total debt was $622.8 million, down $55.5 million from a year ago. Total debt outstanding included $420 million of 7 3/8% senior subordinated notes due 2017, $199.9 million of 8 3/4% senior unsecured notes due 2020 and $2.9 million of other. As of September 30, 2012, we had $140.6 million of excess availability under our asset-based credit agreement. I'll now turn the call back to Greg.

Thanks, Evan. I'll now elaborate on our 2012 fourth quarter performance and end markets and provide an outlook for 2013 as well as our first quarter. I'll begin with Mueller Co. We are pleased with the net sales growth of Mueller Co. in the quarter, where shipments of domestic valves, hydrants and brass products in both dollars and units were up. As Evan mentioned, unit domestic shipments of valves were up 14%, hydrants were up 11%, and brass products were up 20%. We believe demand for our products benefited from increased spending by municipal water systems and that we saw some growth in demand from new residential construction projects. Our dollar bookings activity in the fourth quarter for Mueller Co.'s valves, hydrants and brass products increased 9%, 18% and 30%, respectively, year-over-year. We also believe that distributor inventory at the end of the fourth quarter were up from both the previous quarter and year-over-year. Distributor inventory turns appear to have remained steady, which suggests they are more optimistic about the end markets. We continue to make good progress with our metering systems. Sales in the quarter were up almost 60% year-over-year. Total shipments during the fourth quarter were almost 50% of the total volume we shipped for all of 2011. During the quarter, as a result of the increased activity we experienced, we were not as efficient in 2 of our manufacturing operations. At Mueller Systems, we produced volumes well in excess of what we had ever experienced before. We identified some weaknesses in our processes that we have corrected and which we believe will allow us to produce higher margins in the future. At Mueller Co.'s brass products manufacturing plant, we dealt with both supply chain issues and excessive overtime due to a significant increase in demand coupled with our union contract negotiations, which were completed during the quarter. We estimate that operating income was negatively impacted by approximately $2.2 million in the quarter, related to these 2 operations. We believe these issues are behind us and anticipate achieving higher margins at these operations in the future. As Evan discussed, Anvil had another solid quarter. Anvil saw some softening in its industrial and commercial markets, which accounted for its decline in net sales over last year. The oil and gas market, which accounted for approximately 20% of Anvil sales, remains relatively strong, although it was up only slightly year-over-year due to tougher comparisons. Anvil's fire protection market was also up. Before I turn to our outlook for 2013 and the first quarter, I'll discuss what we are seeing with some of the macro drivers in our end markets. While most of the recent macroeconomic data has been mixed, we believe our water infrastructure markets are healthier than they were a year ago. The general municipal spending environment continues to show improvement as tax receipts have grown and the financing market remains favorable. State and local seasonally-adjusted tax proceeds grew at 3% year-over-year and reached a record high for the year ended June 2012. On the municipal bond front, rates are still very attractive from a historical perspective, and calendar year-to-date, issuance is up 44% compared to the prior year, although the bulk of the issuance is for refinancing. The CPI for water and sewage maintenance rates increased by an annualized rate of 6.7% in September compared to the prior year, exceeding that of other utilities and the CPI as a whole. Finally, the housing market continues to be one of the few bright spots in the economy. Housing starts in September, 872,000 units, jumped to their highest level since July 2008. This represented the ninth consecutive month of greater than 700,000 units on a seasonally-adjusted, annualized basis. Furthermore, September's single-family starts of 603,000 units were above 500,000 units for the sixth consecutive month and represented the strongest reading since August 2000. As a potential future indicator, September housing permits were close to 900,000 units and represented the highest reading since July 2008. Total permits grew 45% over last year, while single-family permits reached their highest level since July 2008 and grew 27% over prior year. Also, new and existing home inventory held-for-sale has declined from all-time highs during the financial crisis and is well within normal levels. Clearly the housing recovery is gaining momentum, but we still expect to experience somewhat of a lag relative to the growth in housing starts as the industry continues to work through existing finished lots -- lot inventory. We need to see not just growth in community counts from builders, but development of raw land, which is still in the early phases of recovery. There is evidence of builders finding it increasingly difficult to locate and acquire A-quality finished lots and therefore demand for raw land is increasing. Therefore we believe the lag period for the sale of our products into residential construction is now less than 1 year, although we are seeing some pockets of growth in certain regions. It also important to note that improving housing construction ultimately helps bolster the health of municipal markets, as local governments benefit from increased property taxes as well as connection fees and other ancillary fees associated with residential construction. Overall, we think the signs we are seeing in our water markets are mostly positive, giving us more confidence that our markets have stabilized and we should see growth in calendar 2013. Now turning to what we are seeing for the full year 2013. I'll begin with Mueller Co. and look at the base business, as well as our newer technology products and services. For the base business in 2013, we expect to see continued improvement in demand for valves, hydrants and brass products, as we anticipate increased municipal spending over the prior year and increased demand from residential construction. We saw an increase in our water treatment plant quotation activities in the fourth quarter, and our backlog for butterfly and plug valve products is up year-over-year. We expect to see sales growth for these products, which we offer under the Henry Pratt and Milliken brands. For our metering systems and leak detection products and services, we expect continued strong year-over-year net sales growth. We also expect to continue to gain share, particularly with our 2-way AMI system. As a reminder, net sales for our metering systems can be lumpy among quarters depending on the timing of execution of new customer contracts. On the production side, we expect to see the continued benefits of Lean manufacturing and productivity improvements. In addition, with increased production, we should see positive year-over-year improvement in overhead cost per unit due to increased absorption of fixed costs. Raw material costs have abated recently, however, we expect that average costs for 2013 will be similar to that of 2012. Based on what we are seeing today, we expect net sales growth in the high single digits for Mueller Co. As a result of all these factors, we expect adjusted operating income to improve over the prior year. We also believe our Mueller Systems and Echologics products and services will be profitable for the full year, weighted towards the second half of the year. In total, we expect adjusted operating income margins at Mueller Co. will reach double-digit margins. Now I'll turn for Anvil. Anvil should see slightly higher shipment volumes in 2013. We expect the nonresidential construction markets to be essentially flat, with the possibility of higher spending in some segments. We believe spending in the oil and gas market will pick up in the second half of the year. We anticipate our ongoing manufacturing and other cost-saving programs will at least offset inflationary increases in production costs. Overall today, as we see it, Anvil margins are expected to be relatively stable year-over-year. Other key variables for 2013 are as follows: Corporate spending is estimated to be $30 million to $32 million; depreciation and amortization is estimated to be $60 million to $62 million; and interest expense is estimated to be $53 million to $55 million. Our adjusted effective income tax rate is expected to be between 37% and 40% for the full year. Capital expenditures are expected to be between $30 million and $34 million. For the full year 2013, we expect free cash flow to be stronger than 2012. Most of our improved free cash flow generation is expected to come from better operating results. Additionally, we expect cash income taxes to be minimal this year, based on our net operating loss carryforward position. At this time, we contemplate only making minimal cash contributions to our pension plan in fiscal 2013. Turning now to our outlook for the first quarter. On a year-over-year basis for the first quarter, we expect Mueller Co.'s net sales to increase primarily due to volume growth. We expect to continue to see significantly higher net sales of our metering systems and leak detection products and services on a year-over-year basis, driven primarily by new customers. The metering systems backlog is up over 65% at the end of September as compared to 1 year ago. In total, we expect adjusted operating income from Mueller Co. to be higher year-over-year, with improved performance at our base business, as well as Mueller Systems and Echologics. As a reminder, our first quarter is negatively impacted by the seasonality of our business and lower production levels due to fewer production days. At Anvil, we expect a slight increase in shipment volumes in the 2013 first quarter year-over-year. However, as Anvil's production fell off in the second half of 2012 as certain markets softened, we experienced higher per unit overhead costs in inventory, which will flow through the income statement this quarter. As we have discussed in the past, we used the FIFO method of inventory accounting. Therefore we expect to see a decline in Anvil's adjusted operating income. For the company as a whole, we believe that 2013 first quarter net sales will increase year-over-year, attributable primarily to volume increases at Mueller Co. We expect adjusted income from operations to increase marginally year-over-year, as improved performance at Mueller Co. is expected to more than offset a modest decline at Anvil. While it is obviously too early to assess any potential impact Hurricane Sandy may have on our first quarter results, we believe activity in the Northeast will slow down for at least the next several weeks for both our Mueller and Anvil products. For example, many crews who have previously been scheduled for water infrastructure or other construction projects will most likely be involved in clean-up operations. Additionally, some projects may be delayed due to inaccessibility. However, we would expect to capture this work later in the year, when conditions return to normal and there may be additional need for our products and services based on the extent of storm damage. In summary, looking ahead, we feel we are well positioned to benefit from a recovery in residential construction and municipal water spending, which we believe are both healthier today than they were a year ago. We also believe operating margins will continue to be positively impacted in the future by the efficiencies generated from our Lean manufacturing achievements and as we experience higher levels of capacity utilization. Additionally, we believe we'll 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.

[Operator Instructions] Our first question today comes from Seth Weber.

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

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

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

Yes, when we talked about the base business for Mueller Co., I believe that we said that the Mueller Co. base business margins were about 400 basis points higher than total Mueller Co.

That's right, that's correct.

That's for the fourth quarter?

Yes, the fourth quarter.

That's right.

Okay, great. And I guess, just lastly, this -- the 2 issues that you called out, the $2.2 million operating income hit to the quarter. How quickly -- I mean, is that already fixed, I mean, or is that going to continue to interact...

We believe this is already fixed. In Decatur, it was a real spike in demand for our brass products. They grew much higher than either our valves and the hydrants. And as we've said, Seth, coupled with our union negotiation contract at our Decatur plant, I think that, that certainly had an impact, where towards the end of the quarter, we had to work excessive overtime to meet our delivery commitments, which we fell behind a little bit on our brass products during the quarter. And we did have 1 supply chain issue that we believe is behind us. So yes, we believe clearly that, that one is behind us. On Mueller Systems, as I said, that we had such a spike in demand in our fourth quarter. And as we've pointed out that -- at our fourth quarter -- at our meter production, we produced almost as much as 50% of what we produced in all 2011. We found -- obviously when you see that kind of production jump, we found where our processes can be improved. We've made those changes. But we think that probably, for the next couple of quarters, there should be additional improvements also, as we continue to ramp up production. So I would say, yes, for the most part, everything that we saw in the fourth quarter should be behind us. And as I -- we continue to go up, ascend the learning curve at Mueller Systems.

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

As we said, our backlog at Mueller Systems is up 60% year-over-year. So we're going into 2013 with a nice backlog condition. Certainly we are counting on some new wins in 2013. But on the other hand, we're seeing growth in demand for 2-way AMI that we believe, as we're sitting here today, would support that kind of level. I would say the only caveat that I would put on it, and we've seen that this year, is that on some of these projects, it's not unusual for a utility to perhaps delay it 2, 3 or maybe even some cases, 4 months. If they have a little hiccup on their side, they may push it out. So that goes back to our comment that we expect that this is going to be lumpy given where we are on building up this business from quarter-to-quarter to based on those contract shipments. And if we find any of those contracts shipping -- I mean, slipping out of 2013 into 2014, that could impact us. But as we sit here today, we said we believe that these businesses should be profitable in 2013.

Our next question comes from Matthew Vittorioso.

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

Well certainly debt production has been a key focus for us and that continues to be so. We reduced about $55.5 million year-over-year this year, which had an interest savings of around $3 million. We do have, with our 8 3/4% notes, another option to call $22.5 million at 103 between September this year and September next year, and then those are also callable at 105 on the schedule beginning September 2015. And as well, we have a restricted payment basket of about $65 million where we can repurchase our subordinated notes. So we continue to valuate these alternatives and we'll make any announcements if we decide to call the 8 3/4% notes. So that's some deleveraging that we have as we look out, and an opportunity to continue to lower that net debt-to-EBITDA ratio.

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

You know, Matt, we all resort [indiscernible] the share buyback. From time to time we analyze that with the board and from our -- nothing planned as we sit here today, but as I've said, we analyze that off and on. From an acquisition standpoint, I think that if we saw something that there was only -- we'll, say, a once in -- a transformational opportunity or a product line that we realized we would only have one bite at the apple, we may take a look at that. But again, as Evan said, our priority is still on debt reduction and growing our cash balance. But I would not rule out that if we saw, hey, this was a once -- a very limited opportunity that gave us either nice synergy or was able to bolster our newer technology businesses, I think we would look seriously at it.

And maybe just lastly, any sort of net leverage target that you guys are trying to get over the next year or 2?

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

Our next question comes from Todd Vencil. L. Todd Vencil - Sterne Agee & Leach Inc., Research Division: Sterne Agee. On the residential recovery and demand that you guys are seeing, could you talk about just -- I mean, you've given some good color on that, but can you dig a little deeper on regions of the country or which of your products are particularly going in there and how much, sort of, new community and raw-land development you are seeing?

Yes, that's a great question. And as we said in our comments, that we did see an increase in demand. But I think we also followed that up with a better description. I think there are pockets of growth. When we look -- we can say specifically we're seeing growth in Texas, Northern Virginia, we're seeing some in Florida, and even surprisingly, some out west, in Phoenix, Southern California and, to a lesser extent, the Tacoma area. Relative to our product, we have a few products, a very small percentage of Mueller Co.'s overall sales, that are primarily installed when a house is constructed, as opposed to when a housing development is put in place. And if we look at -- looking at those products -- and again, I've got to remind you, they're a very small percent of overall Mueller Co.'s sales. On a year-over-year basis, these units grew anywhere from 3% to 19%. So clearly, we did see some nice growth in those products. Back to your point, we are hearing that builders have essentially run out of A-location lots in a number of areas and are looking to purchase new land. And once they do so, demand for our products will follow. So I will say that we're having a little more difficult time getting a good handle on any forecast of land purchases by developers. We've also -- back to your point, we've also heard some talk that builders, this go around, may only develop several streets at a time rather than going in the entire development all at once. And certainly that makes sense, I would expect until they really are comfortable, that the housing recovery is truly sustainable. So if this occurs, demand for our products would be spread out over a longer period of time. So as we said in our prepared remarks, we believe that demand for our products will lag growth in housing starts. And right now, we're estimating by about 12 months. We really have no scientific way to calculate this lag, but we do believe that it has come down over the last year. I mean, if you look on average, housing starts are forecasted to grow almost 30% in 2013, but I think where we are for demand for our products in this cycle, that we don't expect we'll see growth in demand for our products anywhere near that rate in the next year, though we do expect to see some growth. L. Todd Vencil - Sterne Agee & Leach Inc., Research Division: Got it. That's great. And then just extending that over to the municipal side, I caught your comment that obviously, to some extent, muni budgets are going to follow the health of the housing market. Is the strength among municipalities that you're seeing geographically, does that kind of follow those pockets of strength that you mentioned on the residential side?

I would say that we're seeing the municipality spending a little more diversified. And I think a lot of it is certainly, I think, probably the growth in housing is too -- housing construction is probably too soon to start working its way down to those municipalities. Though you would expect that, that benefit would come in the next year. I think what we saw this year on the municipal spending was that they cut back so much in 2011, they cut it back too far and we are just -- we saw work that they absolutely had to do. I think as we look to 2013 though, that as we've said, that we think their overall budgets would be -- should be in a better position which should contribute to what we believe right now is more municipal spending for water infrastructure in '13 versus '12.

Our next question comes from Michael Gaugler. Michael E. Gaugler - Brean Murray, Carret & Co., LLC, Research Division: Brean Capital. Greg, just kind of want to see if I can get a little more color on your comments holistically on Mueller Systems. Backlog is up nice, looks like maybe you had a couple of bottlenecks in production. Wondering where you are there in terms of capacity? Are you near maxed out or do you have a little room left?

That's a -- you know, Michael, that our constraint in capacity is not machine-related. It would be headcount-related. So as we ramp up, that we'll have to hire more, have to bring more people into our manufacturing operations. So we'll naturally have, I think, a learning curve as on -- from a training standpoint. But we could see some capacity constraints as we're going up that learning curve. But relative to machine capacity, we have, I'd say, we have enough capacity to take much greater growth in demand.

We'll go on to Jerry Revich.

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

Sure. We saw -- as I think we mentioned, we saw in the booking activity, if you look at our Mueller business, our base business, we saw for valves and hydrants -- valves, hydrants and brass products, booking activity anywhere up from 9% to 30% on a unit basis, and that's domestically. So -- our international business is lumpy. On the Anvil bookings actually, on a year-over-year basis, we're pretty flat to down slightly. And I think that, that's the slowdown that we've been seeing in nonres construction spending. That really, that slowdown began probably at March, April, I think, when the overall economy slowed down. Again, when we look at our Mueller Systems, our bookings were up 50% to 60% on a year-over-year basis. But then again, that's on a smaller number. So bookings that we saw, bookings activity was very strong in the fourth quarter. And I think that, that was a combination of both end market demand. But we also said in our prepared remarks that our distributors have built some inventory during the quarter. So I think that also contributed to our bookings demand.

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

Yes, earnings improvement, actually on a year-over-year basis, that in 2012, we -- our loss was a little greater than the previous year at Mueller Systems. And that again, most of that was related to R&D spending for products that we right now expect to introduce to the market in 2013 for testing, as well as additional depreciation coming through the P&L on software development. As we develop software, that's capitalized, or a portion of that is capitalized, and then it is depreciated over a 3-year period. So we're hitting that period where we're having the software development depreciation hitting on our operating income, but our leasing revenues have not caught up to offset that expense. We expect those leasing revenues obviously are going to get better in 2013. And then beyond, we think then it becomes a real contributor to margins. So as I said that we think that this is the year, especially based on the American Water win that we announced in May. So we really only had the benefit of maybe about 3 or 4 months of that contract. We expect to have the benefit of full year for that contract in 2013 and just the overall growth in volume to absorb those fixed costs. That's why we think that we have hit bottom, and we'll see the improvement in 2013.

Got you. And then one last quick question. If you just talk a little bit more about the drivers of your operating profit pull-through in Mueller Co.? Then maybe a little bit about the impact of pricing that of material costs for the business?

Sure. If we look at the fourth quarter, on pricing material, pricing for total Mueller Co. was both a positive, as was raw material costs. So on a year-over-year basis, both of those contributed to positive growth in our operating income. And we also saw contributions due to our volume increase of the lower per-unit overhead fixed cost. And I think as Evan mentioned, or we mentioned, that if we look at our base business, we converted in fourth quarter almost at a 50% rate.

Brent Thielman. Brent Thielman - D.A. Davidson & Co., Research Division: Yes, D. A. Davidson. Yes, Greg, just had some questions around I guess the technology divisions in Mueller Co. You mentioned that you think you're going to get to profitability in second -- sometime in the second half of the year. As you get these businesses to that level, do you expect the margins will be above, below or sort of comparable to the core business for Mueller Co.?

Matt (sic) [Brent], and I think we've been pretty consistent, that we think in about 3 years that they will be comparable. That -- with our Mueller Systems business, that now we are where we're not only selling the hardware and meters, but also the software. And when the 2-way AMI becomes a greater percentage of our overall Mueller Systems revenue, those have -- we expect those to have some very nice margins. So we're in the building stage. But again, when we look at where they're positioned and the growth that we're expecting, that we think by 2015 that these businesses will have comparable margins to the Mueller base business. Brent Thielman - D.A. Davidson & Co., Research Division: Okay. And then just trying to get a feel for the sort of ramp here in fiscal '13, I mean, should we expect to sort of see less of a margin drag in the segment Q1 and Q2 as you stretch towards that second half?

Depending -- yes, depending how our contracts ship. And again, as I've said, that we can see from time to time, that we can see some projects being delayed from 1 quarter to the next quarter, because this is right now, it's truly a project business, that we would still think even though the businesses could be in a loss in the first half of the year, on a year-over-year basis, we would think -- we would expect that these businesses would contribute operating income in '13 versus '12. So in other words, that we think that as our volume grows that we will -- that the loss will lessen and it will be a positive contribution on a year-over-year basis in the first half of the year. Brent Thielman - D.A. Davidson & Co., Research Division: And then just on the, I guess, just the municipal side of things. Could you talk a little bit more just sort of the types of work you're seeing out there. Is it more replacement demand driving improvement, or something else out there?

It goes across the board. We have been seeing -- actually, what we have been seeing a spike this year of more transmission work. And transmission work is when they need to put in new lines either to tap into new sources or they just absolutely -- the existing line is no longer operable. So when we see that kind of spike in distribution work, as we saw this year, we would think then we would see follow-on distribution work in the following year. So it's really been a combination. As I said, I think we were somewhat surprised by the amount of distribution work we saw this year. So it truly is a combination of going in and replacing existing products, as well as putting in new transmission lines. Brent Thielman - D.A. Davidson & Co., Research Division: And then just lastly, the acquisition you announced for Anvil, it looked relatively small. But any sort of color on the opportunity there?

Yes. It's a very, very small opportunity. I mean, very, very small acquisition. And the opportunity is that we will have -- we'll be able to consolidate manufacturing operations and it does give us 1 new product, an installation product. So we have not come out and said specifically what it'll add to the bottom line or what it adds to revenue, but it is a very nice acquisition because it allows us to consolidate manufacturing opportunity. And whenever you can have those kind of opportunity, especially in a product where we're the market share leader, then you can get the benefit pretty quickly.

And our final question today comes from Nick Prendergast. Nicholas V. Prendergast - BB&T Capital Markets Inc.: It's Nick from BB&T. Perhaps you could give us an update on your revenue breakdown by end market? I know our last update, I guess, 70% of the revenue was going to muni repair and replace, about 25% to nonres, and about 5% to res. Is it still holding like that or are you beginning to see a shift?

Nick, that's a good question. I think we've seen a slight shift in 2012 when you look at our overall revenue for Mueller Water products. And I've got to remind everyone that, again, we don't have a scientific way to get these numbers. We're based on input from our distributors, on field sales force, and so on. So we don't try to get these to a decimal point and we round them to the best that we can -- the best of our estimate. But we think that muni spending went from about 50% to 55% of our total revenue. We don't think -- though we saw a pickup in residential spending, we don't think enough to significantly move the needle. So we're still putting that about 5% of our revenues in 2012. Oil and gas remain about 10%, and we think nonres came down from about 35% to 30%.

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

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

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