Mueller Water Products, Inc. (MWA) Q2 2013 Earnings Report, Transcript and Summary

Welcome, and thank you, all, for holding. [Operator Instructions] 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 muellerwaterproducts.com. Mueller Water Products had 157.8 million shares outstanding at March 31, 2013. Discussing the second quarter's result this morning are Greg Hyland, our Chairman, President and CEO; and Evan Hart, our CFO. This morning's call is being recorded and webcast live on the Internet. We have also posted slides on our website to help illustrate the quarter's results, as well as to address forward-looking statements and our non-GAAP disclosure requirements. At this time, please refer to Slide 2. This slide identifies certain non-GAAP financial measures referenced in our press release, on our slides and on this call, and discloses the reasons why we believe that these measures provide useful information to investors. 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 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 for 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 2013 second 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 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 Co. business. Mueller Co. 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 Co. converted 43% of the incremental net sales to adjusted operating income due to higher volume and a favorable product mix. Mueller Co. continued to see shipment volumes of its valves, hydrants and brass products increase. Additionally, net sales of Mueller Co.'s newer technology products and services again more than doubled in the quarter on a year-over-year basis demonstrating the traction we believe that 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'll now turn the call over 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 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 Co. 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 a percent of net sales declined 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 2012 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 swap 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 of our 8 3/4% Senior Unsecured Notes during the quarter or $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 cost and original issue discount that were written off. The 2013 second quarter income tax expense was $2.5 million or an 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 have 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'll 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 the beginning of the year deferred taxes of $5.9 million, terminated interest rate swap contract costs 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'll now move on to segment performance and begin with Mueller Co. All of Mueller Co.'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 Co.'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 the 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 1/3 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 margin 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 on a 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'll now turn to Anvil. Net sales for the 2013 second quarter declined 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 4-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 3/8% senior subordinated notes due 2017, $177.8 million of 8 3/4% senior unsecured notes due 2020 and $3.1 million of other. Net debt leverage was 4x at March 31, 2013. Using March 31, 2013 data, we had $156.3 million of excess availability under our asset-base credit agreement. I'll now turn the call back to Greg.

Thanks, Evan. I'll 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'll begin with Mueller Co. We believe a number of factors contributed to Mueller Co.'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 2 regions of the country that also experienced the greatest growth in housing starts. In addition, our January price increase on valves and hydrants was 2 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 Co., which excludes our metering and leak detection products 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 1/3 of Mueller Co. 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 have been uneven, the macro factors that impact our markets appear to be holding their own and for the most part, remain positive. The outlook for states and local governments continues to be mixed. While 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% to the first 3 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 spots 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 helped bolster the health of municipality as local governments benefit from increased property taxes, as well as connection fees and other ancillary fees associated with residential and nonresidential construction. Turning now to our outlook for the third quarter. On a year-over-year basis for the third quarter, we expect Mueller Co.'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 would 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 metering systems in the third quarter, the year-over-year comparisons will get tougher when we reach the 1 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 Co.'s net sales to increase year-over-year. However, we believe the growth rate will be less in the third quarter that in the second. We expect adjusted operating income from Mueller Co. 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 constructions and oil & 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 Co. 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 remained relatively stable and have declined recently. We expect that average costs for all of 2013 will be comparable to costs for 2012 as we expect to benefit from lower raw material costs offset by higher cost of purchase 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 pension contribution to be minimal this year. We are pleased with our second quarter results, especially the operating leverage we achieved at Mueller Co. However, the rate of growth Mueller Co. experiences in the second half of the year will depend on how quickly distributors turn their higher levels of inventory they entered 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 the newer technology products and services to be profitable for the full year based on second half performance. For Anvil, we believe we can see modest improvements in the second of the year as conditions in its end markets are expected to improve. With that, I'll open this call for your questions.

[Operator Instructions] Our first question today comes from Mike Wood.

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

Yes, Mike, from a drag standpoint, they reduced Mueller Co.'s overall margins by about 280 basis points. As I said in my prepared remarks, right now, as we look at our funnel of sales opportunities and the growth track that we're on that we think that these businesses could be profitable for the full year due to their second half performance. Now I do have to qualify that. As we've said that I think -- and the meter business certainly is a little more project oriented than our base, valves and hydrants demands, so demand can be lumpy. By that I mean, it would be very easy for an order that we expect to ship in the fourth quarter for our customer to push that 3 or 4, 5 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 files that we think that if we ship the orders that we have in our backlog and 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're 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 at higher R&D spending.

Great. And are you able to quantify how you look at the pre-buy versus last year, maybe how fiscal second quarter was in terms of the expected full year sales in the products that were shipped into distribution?

Yes, yes. We can a little bit, and we don't think this is going to impact our 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've 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've said, we get a sense from our distributors that they are more optimistic this year about the end market demand than they were at this time last year. But all in all, that we think that we estimate that without this pull forward shipments, our net sales at Mueller Co. would have grown almost 18%. Operating income would have still more than doubled, would've been up about 120%, and instead of the 670 basis points improvement in margins, we estimated it would have been about 550 basis points. So again, a strong quarter. We -- the pull forward in 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 ask one more question, can you just talk about how long your lead time is in Anvil and what you're seeing today in orders in talking about the second half inflection?

Sure, Mike. The orders -- on shipments on Anvil, we work with a very, very short-term backlog there. We measure it in just a couple of weeks. If we look on a year-over-year basis, as we've 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's 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.

Next we have Walt Liptak.

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

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 2 weeks, 2 weeks and as I've said in -- when I answered Mike's question, it gave us a little more shipments than 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 subtract this 18%.

Okay. Could you tell that there was some sort of a, slowdown or some kind of an impact after January 23, or does the business remain strong through...-

It took -- 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 the -- it followed the normal pattern and I would say that when you look at our overall bookings, our overall bookings for valves and hydrants were up on a year-over-year basis that in fact if you look at our valves and hydrants, they were up anywhere between 9% and 11%, the bookings on a year-over-year basis. So we still had increased bookings on a year-over-year basis.

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

The moderation for revenues in the third quarter is really more dependent with the -- and I'm talking on a year-over-year basis. Since our distributors entered the quarter with more inventory than they did a year ago, they're going to be able to satisfy -- obviously satisfy end use demand or end market demand in the third quarter out of their existing inventory. So that we'll start our shipments, when they start reordering our shipments, we'll start shipping those and it is 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 it's a -- 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 inventories entering the third quarter this year than they did last year. Certainly, as we said in our prepared remarks, across the board, they're more optimistic this year about the end market demand than they were last year.

Okay. And then if I could ask just one quick kind of follow-up on that with the weather impact. I wonder if there's any way that you can quantify it and to your, in the third quarter, or catch up on any lost days because of the weather.

Yes, good question. Actually, we don't 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. Certainly, while a good portion of the U.S. experienced severe weather that limited construction, we believe our shipments didn't suffer much since our distributors received 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 reorder. In fact, we think that weather impeded construction in April and that could even spill 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 that the weather could impact how quickly distributors turn their inventory this quarter once delayed projects are released. But since we had this pull forward of orders, since we were able to ship them and our distributors were willing to take them, we probably didn't have much of a weather impact in the second quarter.

Nic Prendergast. Nicholas V. Prendergast - BB&T Capital Markets Inc.: Nic 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's probably majority volume, but I'd kind of like to get a handle on that.

Yes. The percentage basis, we did have positive pricing and I can give you that. Nicholas V. Prendergast - BB&T Capital Markets Inc.: Well, 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 the -- pull forward and we ship at the old price. So from that standpoint, we wouldn't realize the pricing. Nicholas V. Prendergast - BB&T Capital Markets Inc.: Understood. Understood. Okay, so it is almost 100%.

And to your other question, it added about 12% to our year-over-year revenues. I think subtracting the distributor pull forward, about 10%, in 10%, 9%, 10% total. Nicholas V. Prendergast - BB&T Capital Markets Inc.: Okay, okay. And I guess, you kind of led into my other question then. So the price increases are in effect so there was some order pull forward. How are the prices sticking so far -- rather the price increases sticking?

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

Next we have Matt Vittorioso.

Barclays. Evan, I guess, just I was hoping you could comment on the capital structure. You've got the higher coupon 8 3/4% senior notes, how many if any more calls, the 10%, the 103% calls you have on that, and then what are your thoughts on the 7 3/8% subs that are callable, is that something you're looking to address in the near term? Would you be looking to call those bonds currently, or you content to wait and let the call price step down later?

I'll ask Evan to address that.

Yes. Right, Matt, with the redemption that we did in the quarter, that was our final 10% call. So from a de-leveraging standpoint at this point, we do have the restricted payment basket under our senior indentures for about $65 million, with which we can repurchase the 7 3/8% sub notes, which became callable at 103.68% at June 1, 2012. And then the senior notes, the 8 3/4% notes are callable at 104.375 beginning September 1, 2015. We certainly continue to evaluate other debt repayment options in our capital structure and certainly, as we've made announcements in the past, if we decide to take some actions, we would announce that. But everything, as we always do, is under continual evaluation. But certainly, with the debt pay-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'd say, abnormal restrictions that the 8 3/4% put on you addressing the 7 3/8%, or is it just sort of typical as long as you're refinancing and you keep it a sub note, you can do the refinancing, is that correct?

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

Fair enough. And then just one last question on the cash flow, 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 would be the working capital. I mean, it looks like to support your growth, working capital has been a use of cash through the first couple of quarters of the fiscal year. I'm just curious if you can quantify or give us directional color on how much of that cash might come back in the second half of the year.

As we indicated, free cash flow for 2013 will be stronger, greater than what we saw in 2012. I think, roughly, 2012 free cash flow was $45 million. So 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 based on operating income performance. There is a -- as the business grows, there's a natural use of working capital, but we do 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 will be more based upon what I'll term as operating income generation.

Yes. A little further, still, if you look at our inventory turns, certainly, at Mueller Co. they're -- Mueller Co. they're up year-over-year, where second quarter last year we were at 4.2 turns, we're at 4.6 turns. And so as Evan mentioned that we still focus certainly on what we could 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're bringing in raw material earlier in the quarter and we're paying for that raw material within the quarter, but most of our shipments are a little back-end loaded, so they're still on the receivables side. So when we get to third and fourth quarter, especially on the collection side, that's when we start collecting a lot of our receivables. But as Evan said, that we're still confident in higher year-over-year cash flow and another area that we 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.

Seth Weber.

It's RBC. I wanted to revisit the incremental margin topic. Obviously, very good in the quarter. If the MSE is kind of moving towards profitability, pricing is getting better, the material costs, I assume, are going down, I mean, is there any reason to assume why incremental margins couldn't actually be sustainable or better from these levels going forward?

Seth, a lot of it really depends -- really will depend on our mix. And 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 that's 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 valve and hydrant volume. We could also see it deteriorate somewhat if valve and hydrants become a smaller percent of the overall mix. I know that we've talked in the past that we think for total Mueller Co. in the 35% we're comfortable. I was expecting about the 35% range, but as we saw in this quarter, certainly, when we have a nice -- a slightly higher mix of valves and hydrants, we can get that above 40%. Then our capacity, certainly, our capacity utilization continues to be positive, so if you look at our total Mueller Co. this time last year, it obviously varies by our different plants, but we were in the low 50% capacity utilization. And in this quarter, we were in the mid-60%, so very nice increase and that certainly contributed to the conversion margin.

Right. I think what I heard -- what I thought you say earlier was the pricing really didn't hit this quarter, so that the pricing increase should actually still be on the comp, which I've assumed, all drops -- pricing basically drops to the bottom line, right?

No, I'm sorry. I'm sorry if I may have misspoke that. We didn't get any realization of the January price increase, but we did get year-over-year pricing because in the first quarter last year, we didn't get any benefit from that quarter's price increase. We've got benefit this year from that pricing increase.

Okay, that's helpful. 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? And do you think that there's opportunity to drive that number higher as the environment gets better?

That's a good question and certainly, is that 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'm more comfortable saying that we'll probably convert it to historical rates, but always looking for opportunities.

Okay. Maybe just going back to the MSE business. I mean, by my math, it looks like you're doing something in the, I don't know, mid-$30 million revenue range quarterly or something like that, plus or minus. I mean, is that an adequate number? Do you need that number to go higher to absorb costs or -- I'm trying to understand what the sort of breakeven run rate for revenue would be.

Yes, if you look at last year, our metering system, Mueller Systems and Echologics were about 8% of Mueller sales. This quarter, they were 14%. So a nice increase, probably not quite to the level that you 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, certainly, when we've made a 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 that are mechanical read. So as AMI becomes a bigger percentage of our revenues, that's when we'll see a bigger impact on our bottom line. So it is a little more volume, but certainly, a mix greater to AMI would have the biggest impact on our profitability.

And what's the mix today?

Today, the mix is -- it is by far, and I'm going to give you, it varies, by 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.

Brent Thielman. Brent Thielman - D.A. Davidson & Co., Research Division: D.A. Davidson. I apologize, I did get on the call late, but I had a question on Anvil. Was your oil & 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 & 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, driven a little more by, actually, commercial construction. Brent Thielman - D.A. Davidson & Co., Research Division: 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 to legacy Mueller Co. products. But could you provide any color on, I guess, margins you're anticipating on that business in the second half, and then how quickly you think they can ramp up to get to the levels of the traditional Mueller Co. segment?

Brent, we've said, I think, several times that we think it's going to take probably at least 3 years for that business, and we do think it can get into the Mueller Co. margin. And the biggest driver that will really be a much greater percentage of our revenue is in AMI, because as we've talked in the past, it's not only with AMI do we generate revenue when we deploy the system, but then we generate ongoing revenue with software licensing fee. So AMI, we would expect we'll have a much higher margin and when we get 2, 3 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's when we think that this business can generate margin similar to the -- to Mueller, existing Mueller Co.

Our final question today comes from Sean Wondrack.

This is Sean Wondrack, going for Philip Volpicelli at Deutsche Bank. As I look at the business, and I'm sorry to beat 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 said it a lot.

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

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

Sean, I would say that as we've said in the past that as most of our sales go through distributors, that we have to go through a fair number machinations to come up with a -- to settle on a percent breakdown by end market. So right now, I would say, it's -- we just don't 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, it's becoming a bigger percent of our overall sales. So at this point, it's difficult for me to give an exact number, but certainly, we can say with confidence that it is a bigger percent today than it was a year ago.

Okay. And then just in terms of R&R versus new construction, with your large installed base out there, are you seeing R&R pick up at all?

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

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

Yes. That certainly is our theory. In 2011, we saw it drop and it surprised us. We saw it come back in 2012 just because we didn't think they can delay anymore. And I think what we're seeing in 2013 is the same. I wouldn't necessarily say that we're seeing utilities going on a preventive maintenance campaign, but I do think that what we're seeing is just pure necessity.

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

Yes. Echologics is still a very, very small percent of our sales, but we are seeing nice growth on small number that probably that we announced several years ago. We got the biggest contract we have is from the City of New Orleans. They have continued to renew that in the last couple of years, and recently renewed it for an additional year. And some of the pilots that we've had for the last couple of years are starting to turn into new orders. So in a way, we're out there as missionaries, talking about the benefits of acoustical leak detection and that takes some development time. But even though it's still small numbers, we're 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'll hop off. You've mentioned capacity utilization at Mueller Co., can you give us where you're at, 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'll to just pick up with a few percentage points?

I think that it will just pick up slightly. We don't really foresee that when you look at the analysts' forecast. Certainly, some of the indicators have been very positive, or turning positive on non-res construction. I don't 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 spending, we would see that more in our 2014 and maybe only a little uptick in 2013.

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

Well, again, we certainly appreciate your interest in the company and the participation on this morning's call, and look forward to seeing many of you in person and we'll be talking with you again next quarter.

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