Badger Meter Inc (BMI) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2008 Badger Meter conference call.

My name is Erica, and I will be your coordinator today.

At this time, all participates are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of the conference.

(OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr.

Rick Johnson, Senior Vice President of Finance and Chief Financial Officer.

You may proceed, sir.

Good morning, everyone and welcome to Badger Meter's third-quarter conference call.

I would like to thank you for joining us today.

As usual, I will begin by stating that we will make a number of forward-looking statements on our call today.

Certain statements contained in this presentation as well as other information provided from time to time by the Company or its employees may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements.

Please see our 2007 Form 10-K for a list of words or expressions that identify such statements and the associated risk factors.

Also, I will give you my quarterly reminder about our guidelines.

For competitive reasons, we to not comment on specific individual product line profitability other than in general terms nor do we disclose components of cost of sales; for example, copper.

More importantly, we will continue our practice of not providing specific guidance on future earnings.

We believe guidance does not serve the long-term interest of our shareholders.

And if you'll permit me to editorialize a bit, Ii would suggest that our guidelines do serve us well.

We want to remind you that we manage our business for the long-term.

Because of the upheaval in the financial markets over the past several weeks, I've received some calls from analysts, shareholders and others who suggested that the Company abandon its guidelines and tell them something that would give them an indication of our results.

When reminded about the fair disclosure rules, I was even told by one person that all of the rules were out the window.

I politely disagree and suggest that continuing to manage for the long-term, despite the bumpy economic times, will best serve the interest of our holders of the long-term.

With that said, let's turn to the third-quarter results.

Yesterday after the market closed, we released our third-quarter 2008 results.

Net sales for the quarter were a third-quarter record $68.8 million, a 9.6% increase over last year's third-quarter sales of $62.8 million.

The increase was driven by higher sales of the Company's utility products, including ORION sales to Chicago and higher prices offset somewhat by lower sales of its industrial products.

Looking at the breakdown of sales, residential and Commercial water meter sales represented 82.7% of total sales for the quarter, compared to 80.4% in the third quarter of 2007.

These sales were $56.9 million, an increase of $6.4 million over last year's amounts of $50.5 million.

Sales to Chicago in the third quarter of this year were nearly $4.4 million versus only $200,000 last year.

Commercial meters -- excuse me.

Commercial meters also saw a nearly $2-million increase.

While sales of the ORION products which include Chicago were relatively flat, there was an increase in Itron related sales of 39%.

Even though this is the third quarter in a row where we have seen an increase in Itron sales, we do need to point out that ORION sales even in this quarter outsell Itron products by a nearly two to one margin.

We continue to believe that ORION is the primary driver of our AMR business and that recent increases in Itron sales are just a function of current customer mix.

For commercial meters about two-thirds of the increase is coming from volume increases while the balance is coming from price increases.

Industrial sales represented 17.3% of total sales for the third quarter of 2008, compared to about 19% for the same period last year.

Sales were about $400,000 or 2.9% less than last year's level.

Most of our industrial product lines have been affected by the economy and have seen declines in sales due to lower volumes.

The one exception to this is our increased sales of [bells] that saw a 22% increase in sales in Q3 over Q3 of last year.

While gross margin dollars between this year's third quarter and last year's increased due to higher sales, the gross margin percentage declined to 34% from 36.1% last year.

The decline was due primarily to the product mix in the quarter.

Like last quarter, we saw more Itron sales which have a lower margin than our own proprietary products.

Also contributing to the decline is the lower mix of industrial products which have higher margins.

Increased sales volumes, higher prices and favorable warranty experience did negate some of the product mix impacts.

Selling, engineering and administrative costs for the third quarter are $1.3 million higher than last year.

We continue to have consulting costs associated with sales process enhancements and planned increased research and development costs.

In addition, we have intangible amortization expense for the recently acquired GALAXY technology.

The effective tax rate for this quarter is 33.8%, compared to 36.1% for the same period last year.

We have now revised our annual full-year estimate to be 36.7% and as such, we have a slightly lower effect in the third quarter as we catch up to that annual estimate.

The annual estimate can vary due to the effects of foreign exchange on our US taxes.

As a result of all this, earnings from continuing operations for the third quarter of 2008 were $5.8 million, compared to $6 million last year.

On a diluted earnings per share from continuing operations were $0.39 for this quarter, compared to $0.41 in the third quarter of last year.

I do want to make some comments about our financial condition.

Given the recent events in the market and the credit crisis that appears to be taking place, I do want to reassure our listeners that Badger Meter is in sound financial condition.

As you know, in the beginning of the third quarter, we took some of our short-term debt and replaced it with a two-year $15 million term loan at set interest rate of 5.04%.

For our interim or daily purposes, we issue commercial paper which is backed by our principal line of credit.

That line of credit was set to expire at the end of this month on October 31.

I am pleased to tell you just this week -- excuse me -- we renewed that line of credit for another full year.

We also continued to issue commercial paper.

Just yesterday we issued 57-day commercial paper at an all-in annual interest rate of 4.8%.

This demonstrates to us that there is still demand in the market for this type of financing.

If for some reason this demand would cease to exist, we would be able to finance our short-term needs from the line of credit itself.

We do not see this as necessary, but it is there should we need it.

Our total debt level as a percentage of total capitalization is approximately 23% at September 30.

We also do not believe the credit worthiness of any of our existing or potential customers will be significantly influenced by the current events of the market.

As such, we believe all of our receivables as shown are realizable.

With that, I will now turn this over to our President and CEO, Rich Meeusen.

Thank you, Rick.

I would also like to thank all of you for joining us today.

Given the difficult economic environment that exists today, we are pleased with our third-quarter results which include record sales and comparable earnings to last year's very strong third quarter.

Our net income did fall short of analysts' consensus, but those estimates were developed three months ago and much has happened in the economy since then.

And as I said, we were also up against a very strong comparable since the third-quarter 2007 was a record quarter for the Company.

The weakening in our industrial products was to be expected, since that portion of our business is very sensitive to the overall economy.

In past quarters, we have repeatedly stated that our water segment has not always been immune to the impacts of the general economy.

We said that a deep recession could eventually have a negative impact on our water meter and AMR/AMI sales.

I believe we are beginning to see some impact of the general economic conditions on our water business.

As I stated in the press release, at this time it is too early to tell if this will have a prolonged effect on us or if this is just a temporary impact.

We also have positive tailwinds in the short term.

The significant drop in copper and oil prices should translate into lower cost for castings and plastic resin.

Many of our electronic components, including the ORION radio boards, are sourced from Europe.

The stronger dollars should also reduce the cost of those components.

Although pricing in our market continues to be very competitive, we believe we will be able to maintain pricing and improve margins as these favorable cost factors take hold.

There are a few other favorable near-term impacts for our business.

First, we are currently moving into our new new facility in Nogales, Mexico which we will enable us to take advantage of production efficiencies.

Also although interest rates have risen, our relatively low debt structure somewhat mitigates these impacts.

These are all near-term factors, and I will again remind that you our results can be somewhat volatile from quarter to quarter.

But as we've said in the past, our primary focus is on generating long-term results and long-term growth in shareholder value.

We believe that our long-term strategies are still sound.

Over 80% of our businesses is in the North American water market which continues to represent our greatest opportunity.

Our leadership position in both metering and the AMR/AMI aspects of this market allows us to capitalize on these opportunities.

We continue to invest in long-term R&D projects to improve our ORION and GALAXY product offerings as well as improving the basic meters themselves.

Badger Meter has a strong balance sheet.

Our fiscally conservative approach has allowed us to increase our dividend 22% this year while still maintaining a debt-to-capitalization ratio below 25%.

We believe we are well-positioned to manage and even grow through these difficult economic times.

Let me conclude by repeating that given the current economy.

We are pleased with results for the quarter and remain optimistic about our long-term opportunities.

At this time, we will take any questions you may have.

(OPERATOR INSTRUCTIONS.) The first question comes from the line of John Quealy from Canaccord Adams.

You may proceed.

Hi.

Good morning, Rich and Rick.

Good morning.

A couple of questions.

On the outlook, you did talk a little bit about water.

Can you give us a little more detail?

Was it manual read?

Was it AMR?

Was it commercial?

What part -- or is it broad-based that you're seeing on the water side in the headwinds that you are getting?

I think it is probably more of the AMR side only because -- excuse me -- I am death warmed over today.

Only because -- those are generally longer lead times.

And -- it is not even so much delays -- where it is an announced delay, we are just seeing a longer sale cycle on some of these projects.

This is Rich.

Let me make one thing clear about our reference to near-term projects.

We have not seen any of the current projects that are in process being cancelled or pushed out.

What we did start seeing in September anecdotally from the field sales force were that some of the projects that were in the pipeline that were coming in the near-term, some of those cities, and it is not widespread.

That's why we use the word some.

Some of those cities are starting to delay because of the current economy and just saying, we are not sure what's going to happen.

We don't see any projects going away.

We are not aware of any projects that have been cancelled.

It's just some of the cities have said, we are not ready to start yet; we want to see what's happening with the economy.

And in terms of the industrial side, obviously a lumpier business, a much easier correlation to make with regards to your results this quarter.

I would imagine that weakness should pervade or at least headwinds should pervade in that side moving forward as well?

I think that depends upon the economy, but if we continue to have an economic slowdown in the industrial side of the business -- in the industrial markets, that will impact our business.

, Now the exception to that is valves.

Our valves are -- we have seen increased sales in valves.

Our valve business is still strong.

A lot or our values are sold into the petro-chemicals industry and that's where we are seeing a lot of

If I can ask you a follow-up to one of the comments you made to position Badger to even grow during difficult times.

Can you give us some sort of flex or range of impacts in terms of if this is a short-term pause, what that does to the business?

Does it continue to grow on the top line, the bottom line or is it a longer-term pervasive cycle?

Can you give us an idea of how you look at the flex and the model given those two scenarios?

I am not sure if you are asking me to give short-term guidance.

I won't do that and I am uncomfortable doing it.

Our position is that we believe our basic strategies are still strong, that we continue to operate in a market that has strong long-term fundamentals.

The demand for water, the need for metering, the efficiencies caused by AMR -- that can be created by AMR, all of those factors are still driving our fundamentals.

We think we are still in a good position with the right products, and we should over the long-term be able to generate good results.

I really can't comment on the near-term.

I should have asked that a different way.

If you go back and look at water business sales over the past eight years; year-on-year, they have generally held up and grown even in a couple different economic cycles.

Is there anything about what you are hearing from your channel that would suggest differently this time, Rich?

We are not hearing anything differently.

But I will point out that looking over the last eight years, we have said in the past that when we -- when the economy hits a rough spot, there has been some impacts.

When you say it has held up, if you look back to 2000, 2001 particularly, you will see there was some decline in the market.

There was some delaying of projects by cities.

They certainly didn't cancel anything.

It was just a temporary delay.

I wouldn't say that we are immune to that.

I wouldn't say -- I would not say we have been immune to it over the last eight years, and we may see some impact now.

My last question.

The Itron agreement is coming up for renewal.

Can you give us an update on how that process is going to work as we get into '09?

Yes.

We have already started conversations with Itron.

Early indications from Itron are that they are very interested in renewing the contract, but it's just a matter of working out the details.

Okay.

Thanks, guys.

Okay.

Your next question comes from the line of Richard Eastman from Robert Baird.

You may proceed.

Yes, just a couple of questions.

Rich, can you just talk to the commercial meter strength.

Is that a function of some trailing projects?

What is the visibility there, and why is that business remaining so strong?

The commercial meters very often go along with the residential meters on big projects.

Like we are selling commercial meters to Chicago just like we are selling the Residential meters.

However, there are a few cities that will source their commercial meters separately from residential meters.

There are a lot of unmetered cities where the residential meters -- where they don't have residential meters that will buy commercial meters.

We are seeing some good strong demand from cities that are upgrading their infrastructure on the commercial side, especially cities that are selling water to other cities .

That's where you see a lot of demand for the very large turbo meters and that's really what's been driving

Okay.

On the gross margin side, if we look at this 34% in the quarter, understanding it is primarily mix, is there any reason going forward -- as we move forward over the next few quarters -- certainly fourth quarter being a seasonally weaker quarter anyway.

But is there any ability on your part to move that margin higher in a step function fashion if the mix doesn't change much?

I think there is, Rick, because as I said, you have not yet seen in the margin the impact of the recent declines in copper prices or oil prices.

Okay.

All right.

And those two in particular and the stronger dollar; all of those should translate into lower costs for us if they remain low.

Right now anything that happened in the third quarter really ended up just in the inventory evaluation and didn't get out into the field, because we are in a FIFO basis.

We expect to see some favorable impact from that.

Now, of course, that can be offset by mix depending upon what goes forward.

Okay.

Can I also ask, Rich, what is your conviction here that the pricing environment in this cycle, assume it stays -- that demand stays weak here for whatever, 12 months, your conviction that pricing -- that pricing mentality won't revert back to what we have seen in the past where we start to discount for volumes.

How do you have any conviction on that in this cycle?

That is a valid question.

We saw a ten-year period in this industry where every year pricing went down.

Now that was driven by a combination of electronics getting cheaper and that happens on the AMR side and very tough competition out in the marketplace.

The competition hasn't gone away and of course the electronics do continue to get cheaper, but we were able to pass on some significant price increases over the last couple of years as the commodity prices went up and as our competitors followed us on those price increases.

I believe we have an opportunity going forward to hold on some of those price increases even in light of lower commodity prices.

But a lot of that is going to depend upon the rational actions of our competitors.

Obviously my conviction depends on whether or not the competitive environment remains reasonable.

And have the distributors, the distributor network, have they responded in short order to maybe the softening demand?

Should we expect that they will work their inventories down a bit as we head into the fourth quarter, maybe making the seasonal impact of the fourth quarter maybe a little bit more extreme?

I don't have any indication from the distributors of any plans to reduce inventory or any adjustments of that sort.

This is Rick.

Maybe I will just add, a lot of our distributors and a lot of what we make is what we call mass customization.

It is made for particular customers of the distributors.

They carry some stock inventory to help replenish, but this is not like an automobile dealership where they have cars on the lot.

For most part, that has never been an issue for us.

Okay.

One last question.

We talk about the project delays or deferrals in the short-term or at least in the longer selling cycle.

Can we infer from that there should not be any disruption in Chicago shipments?

Does that stay -- is that very much on schedule?

Absolutely.

Right now, Chicago is on schedule.

It is moving forward as planned.

The only delays we get in Chicago are access delays, where sometimes it is hard to get into a house.

Frankly we are very pleased with the sales levels and the progress we are making down there.

Okay.

Very good.

Thank you.

Your next question comes from the line of Ryan Connors from Boenning.

You made proceed.

Good morning, guys.

Good morning, Ryan.

I just want to start off -- on just drill down on the issue of the Itron resales for a couple of minutes.It's the second quarter in a row that you have seen that.

One of the things that we've heard is apparently they have got salespeople and so forth out there saying they have really improved their sealant technology which has historically been a big selling point for Badger and that therefore, they've taken away a competitive advantage.

I just wanted to get your comments on that.

In particular, is that true?

Have they gained ground there?

And is that potentially any reason why in the short-term they are seeing a little bit more strength at least on a relative basis versus the ORION sales?

This is Rick.

I will let Rich comment about the sealant, but on the Itron sales, we have traced really the increases for the past several quarters back to a handful of existing customers.

No new Itron customers.

Just existing customers that are either accelerating projects or are attempting to finish them.

From a sales standpoint, we are still confident that ORION is the dominant player in the industry.

But what I will say, and we did look into this over the last few days.

The indications from the field are that Itron has corrected some of the very significant problems they had with their pit unit.

Their new pit unit, the 60W that they have released is performing well in the field.

This is causing some customers that had already committed to Itron, who are in the middle of Itron installations, put a hold on those installations until this problem was resolved.

It's now caused some of them to restart up their Itron programs and we have seen some of that impact.

Yes, I would have to agree that Itron has improved their pit unit and it is performing well.

That having been said, I would not say that Itron is taking market share away from Badger Meter because they have now fixed their problem.

There is still a lot of concern out there and we believe the ORION product is still a superior product, but we sell both Itron and ORION.

There are customers who for various reasons have a preference for Itron and we're certainly going to fill those customers' needs.

We are going to continue to move forward with Itron as a partner.

We think that the 60W product they have is a good product and it's going to work well for a lot of customers.

Okay, great color.

Thanks for that, Rich.

Another thing on the AMR side, you talk about some project delays on new AMR rollouts.

How does AMI fit into this macro situation?

The capital investment is presumably higher, and so you would think that to the extent that AMR is negatively impacted, people would back off of AMI rollouts.

Are you seeing that and is that impacting your outlook for GALAXY?

I don't think it is impacting the outlook for GALAXY any more than it is for ORION.

In other words, when we talk about projects that were in the pipeline that are being delayed a bit, I would apply that to both GALAXY and ORION; to both the drive-by the AMI product and to the network, the AMI product.

AMI has always had a longer sales cycle than AMR.

There is a requirement to identify where you place the towers.

There is a requirement to do propagation studies.

It is a more complicated sale and it does require more time.

We've always had a longer lead time.

We have seen no projects that were in our pipeline get taken off the table.

We are still pretty confident that we will see a lot of network projects go forward.

Again as we have said in the past, we believe in the water industry, drive-by will be the dominant technology for a long time to come.

Where all the city really wants is a read, drive-by is the most efficient way to get that.

But where cities are looking for more features and more information, then AMI -- the network technology that GALAXY represents makes a little more sense.

Okay.

Just wanted to revisit the industrial side for a second.

You do sell some product into the auto end market and obviously they have been enduring some tough times there.

How big a factor was the automotive end market and applications in terms of the year-over-year decline in revenue for industrial?

For the quarter, automotive was down -- low double digits, driven primarily by volume.

We have had volume declines in that business.

For the year, it is down volume-wise but it's only down maybe about 3%, 4% revenue-wise year-to-date.

It's really the quarter that took the hit for automotive.

Is that the worst of the end markets in that industrial business?

It's among them.

Bear in mind, that automobile represents about 3% to 4% of our sales.

It is not a huge piece of our sales, but it is one of the ones that has been hit the most.

Okay.

That's great.

One final one for you, Rick.

The tax rate looked a little lower in the quarter.

Can you talk about your current assumption for '08?

We think it is going to be 36.7% for the year.

Every time we get to the end of the quarter, we estimate what we think it is for the full year and we adjust to get to the year-to-date amount.

Since we had a higher estimate at the end of the second quarter, there was a little bit lower effective tax rate in the third.

That is our best estimate at this point in time.

That is helpful.

Thank you for your time today, guys.

(OPERATOR INSTRUCTIONS.) And your next question comes from the line of Brian Rafn from Morgan Dempsey Capital.

You may proceed.

Good morning, guys.

Hi, Brian.

A question for you on the commercial meter side.

What is the sales cycle?

If you look at the residential side, you guys have always said that the inaccuracy of the meter -- it's about a 15-year life cycle.

It's about a 6% replacement per year.

What is the metrics of the commercial meter cycle as far as lifespan and that?

Most of the commercial meters -- the commercial meters come with the same 20-year warranty as the residential meters.

I think we see most cities changing out commercial meters a little slower than residential.

Residential maybe on average has a 15-year life.

Commercial might be 17, but it isn't very different.

That is the metric.

Okay.

Relative to how you see installations Rich, do you see cities -- you mentioned certainly cities that export water.

Would a city install a commercial or replace a commercial meter system first and then install residential?

Is it offsetting?

Is it -- give us a sense of whether it is pre or post the residential repair?

I can't say either one.

There's no standard answer.

There's no standard answer.

It is all over the board, Brian.

Okay.

From a price standpoint, you guys mentioned certainly the talking about the discounting.

Is there more or less elasticity with the municipalities on the large turbo meters versus -- if you get into a period of time -- where your commodity feed stock costs are coming down.

Is there more pressure?

Is there a differentiation between your ability to hold prices in commercial versus residential?

I don't think there is any difference, Brian.

I think they are both about the same.

Okay.

Your sense of -- you are talking about the normalized obsolescence on the residential side.

With the delays, certainly budget issues, is there any possibility that you might see more migration to plastic meters?

I am not sure that the plastic meters would be that different going forward.

The main reason why the cities are choosing the plastic meters is not a cost factor.

It's more because -- because they are lighter, easier to work with, and you don't have the vandalism issues with plastic meters that you have with the bronze meters.

That is why Chicago made those choices.

If price sensitivity increases going forward, we may see a move more to our LP meters which is the new meter that we introduced that uses a third less copper than other meters.

We may see an increase there, but frankly -- and if there is a drive to low lead -- to a greater drive to low lead because the LP are all the low led meters.

Frankly I don't see a movement to plastic just based on price alone.

Okay, Rich.

Fair.

You talked about the number cities that were potentially delaying in the bid quote cycle.

Is there any size, geographic location, any specificity that you would see -- the Eastern seaboard versus say the oil patch?

No.

They were all anecdotal stories.

In the month of September, we just kept getting -- this city is going to reduce their budget next year.

It's a story here, a story there and that is how we get a lot of market information.

Is it indicative of a trend?

I can't say for sure.

That is why we are hedging a little bit on the timing question.

I don't want to give the impression that it was widespread; it wasn't.

It was just a few cities that we heard about and we felt that it was important to at least mention it in the press release so people were aware.

For three quarters, we have been seeing -- we have not been seeing the impact of any economic slowdown.

We felt given the fact we made those statements in the past, since we had some anecdotal evidence, we owed it to the markets to at least make reference to it.

Okay.

Let me add, we have been in tough economic times for a year.

All right?

Really what we said is the story of water was outweighing the economic downfall.

Now we are -- in the past couple of weeks, we are in uncertain times.

How that plays out over the next even month or two is still yet to be determined.

Okay, okay.

From the standpoint of some of your feed stocks -- I know you don't talk about copper prices, but if you look at oil and gas relative to resin costs.

And you look at copper prices.

Can you give us a sense timing-wise when those savings will start to flow through?

Are we talking quarters, months, half a year?

Generally it takes a couple of months from the time we see a movement in our commodity prices until the time it turns into a cost of sales for us.

Okay.

Okay.

Anything on your valve strength?

Is there any thoughts, possibilities of adding more capacity?

You mentioned the petro chemical valves or is that just a niche business that you have capacity there?

It is a niche business and we have plenty of capacity.

Okay.

You also mentioned too, the start-up in Nogales.

Could you put a little more color into how many shifts you are running.

What's the status of operations there?

Just for people who aren't familiar with it, we have a 60,000-square-foot facility in Nogales that we lease.

We have recently completed construction of a 120,000-square-foot facility.

We are moving out of the 60 into the 120, into the new building so the lease cost also go away.

The new building gives us much-needed space.

As we have grown over the past year, it has gotten very tight there.

We are running three shifts down there.

Also the additional space that we have down there gives us the opportunity in the future to shift more work down into the Nogales facility and that should help us reduce our costs.

Okay.

One final one.

We get into a situation here certainly where we have had boundless long economic expansion since Ronald Reagan was in the White House.

If we get into a longer duration economic downturn here, not months but longer certainly than a year.

How does that impair your -- you guys have always been a fairly high R&D spender and new product prototyping cycle time efficiency.

How does that effect the new product design?

Frankly I think it won't, because even during past economic downturns, Badger Meter has continued to spend on R&D a fairly stable level.

And frankly, we maintain a very long-term outlook.

Our R&D projects are primarily related to products that won't be introduced for another two or three years.

For us to cut R&D, it has an impact down the road and we have no intention of doing that.

Let me also say that I think Badger Meter is better situated to weather a long-term economic downturn than a lot of other companies.

The majority of our sales are replacement sales, both in meters and now in AMR.

We are very confident that we have a good base of business that will continue and Badger can continue to generate profits going forward.

Also, our balance sheet is very strong compared to other companies so we are not concerned about liquidity going forward.

Given those two facts, I would see no reason why we would cut back on R&D.

Good.

Relative to again -- same scenario, longer duration.

If you were bringing -- you look at your forward pipeline of new products, is the adoption cycle tougher for municipalities with new state-of-the-art technology and new product that you bring to the market in a recession versus an expansion?

I don't even know how I would answer that.

I am not sure if it would be or wouldn't be.

It depends on the customer.

It depend if their meter readers are unionized or not.

There's a lot of factors

It is a hard question to answer.

Okay, guys.

Thanks a lot.

Appreciate it.

Your next question comes from the line of Steve Sanders from Stephens, Inc.

You may proceed.

Good morning.

Good morning.

I just had a follow-up.

Rich, last call you talked about 40% of water meters being at large utilities, 40% midsize, and 20% small.

That's right.

A couple of questions.

In prior downturns, did you see the behavior of the large versus the medium and small to be notably different?

No, we didn't.

When we see a slowdown, we see it across the board.

We don't see a change in behavior between the size of the utilities.

Given the credit market issues, do you think this cycle at this point looks any different if in fact that turns out to be the case?

In other words, does tightness in the credit market have more of an impact on the medium to small guys versus the large guys.

Do you have a view on that?

Steve, if you are asking me if this downturn is different than past downturns, gee, I would love to know the answer to that because everybody on Wall Street is asking that question right now.

I hear some people saying we have never seen this before and this is totally different.

I've heard other people say, we have seen it before and will act like the last one.

I really can't answer.

I really don't know.

I think you gave the answer.

I may have missed it.

What is the lag on copper and resin?

Before you guys would see --

It's a couple of months, Steve.

Before it gets through the smelter -- in the case of copper before it gets to the smelter, the foundry into our shop, turned into a meter and shipped out the door.

On the GALAXY side, you mentioned some traction.

Can you provide a little more color there, and maybe talk about what you are seeing in gas versus water?

Well, let me comment on both of them.

We are starting to see more GALAXY sales.

And we are starting to see more GALAXY projects in the pipeline.

We are pleased with that.

We knew this product would take awhile to take off.

Our salespeople were out there and we think we have some good opportunities coming down the road.

As far as gas, it is pretty much the same story.

Gas was an easy one for us because we didn't have to make a big investment to convert ORION from being able to read water meters to be being able to work on gas meters.

It was a relatively low investment as compared to the GALAXY product.

But on the other hand, we believe there's a huge potential for the gas-only utilities that want a gas drive-by solution.

And ORION for gas is exactly that product and we think it can do very well.

Again a few projects in the pipeline that we are chasing.

Okay.

Okay.

Rick, did you give operating cash flow and CapEx either year-to-date or for the quarter, and if not, could you?

We are still generating the cash.

Somebody is handing me the numbers now.

I think we generated --

Rick is fighting a cold so you have to forgive him for a moment here.

And bad eyes.

Bad eyes.

We generated $17 million cash from operations in the first nine months.

That's down a little bit from what it was for the first nine months of last year.

That's due in part to the fact that inventory grew.

Inventory has grown for a couple of reasons.

One is in anticipation of this plant move, we did some build up -- with obviously some higher costs in there.

Now that Chicago is fully operational, we actually have some inventory already staged down there, ready for installation which results in increase in inventory.

If we didn't have that build-up in inventory, we would probably even be generating more cash.

And CapEx?

CapEx is about $10.5 million for the first nine months of which five -- maybe $5.5 million of it is for the Mexican building.

Okay.

Thanks very much.

Not a problem.

Your next question comes from the line of Richard Eastman from Robert Baird.

You may proceed.

Just a quick question.

Rich or Rick, could you just talk to the net price capture in the quarter on the utility side of the business?

s it -- do you think it is a point or two or three?

I think, Rick, it varies.

We obviously got more price capture with commercial meters simply because there is more metal content.

Sure.

Whereas -- and with local rates, because quite frankly it is a smaller dollar amount of a sale and therefore, metal is a higher component.

Whereas maybe wit the Itron and ORION, it varies depending upon the customer.

Okay.

But it is a positive number though, correct?

Yes.

Then one other thought.

Rick, would you happen to have -- your operating expense in the quarter was at $14.2 million, the actual number?

Yes.

Okay.

And just one last comment.

(multiple speakers)

-- on the sheet, how's that.

That's fine.

One last comment -- much appreciated for getting rid of [Mecca Plus] when did you.

That would be painful right now, I suspect.

Point taken.

Thanks.

See you

Your next question comes from the line of Richard [Ferdi from Servant Brack] and Company.

You may proceed.

Good morning.

Thank you for taking my call.

Not a problem.

Most of my questions have been answered, I just have one quick housekeeping question.

Can you give me an exact number for interest expense for the quarter?

Rick is looking.

Not on this sheet.

Stand by.

If that is your only question, why don't we go on to the next question and I will announce it.

All right.

There you go.

We've got it.

Here it is.

$379,000 .

Thank you very much, guys.

Not a problem

Your next question comes from the line of Scott [Umenthal] from Emerald Advisors.

You may proceed.

Good morning.

Thank you for taking my question.

Good morning.

Could you repeat the information, Rick, on the line of credit?

You said you renewed it for a full year.

What is the capacity there?

It's a $30 million line of credit.

That's our principal line of credit.

Okay.

Thank you for that.

One question on Nogales.

You are basically going to be doubling capacity, and I think that Rich mentioned that you are running three shifts full out.

Do you think that in the current climate you may be apt or inclined to lean on that facility a little more to get some cost improvements?

And can you tell us what exactly it is that you are making down there?

Sure.

First off, what we are making down there is all of the registration and the radio boards, and also all of our plastic meters are being made down there.

Here in Milwaukee, we still make the wet side of the meter, the bronze castings with the plastic inserts and the chambers and disks and all that.

It's a lot of electronic assembly down there.

It's some plastic molding, but it's a lot of assembly of parts and electronic assembly.

Just so there is no confusion, we are not -- when you say we are running full out down there, we are only using probably right now about 80,000 of the 120,000 square feet.

We have room -- we have square feet to grow, okay.

We are running three shifts, but expansion down there is relatively easy for us.

Since it is primarily electronic assembly, it is not a lot of capital equipment.

It's a lot of tables and it's a lot of people, but it's not a lot of capital equipment.

We are very -- it is a facility that we can flex production very easily.

We can either increase production or decrease production without incurring a lot of costs.

Okay.

When we talk about running three shifts, it is really plastic molding machines which are are capital in nature and it's just better to keep them running around the clock.

We get the most value that way.

The highest volume of production is coming off of the day shift.

We have a few things going on at night just where we want to pick up some additional production.

You have a resin cost advantage since petroleum has -- at least, it's my impression it is a little less expensive in Mexico than it is in the United States.

Is that helping you at all?

No.

We source our resin all through the US.

I am not aware of any cheaper resin that can be bought in Mexico than in the US.

I think it is a world price.

Okay.

Fair enough.

Thank you.

Okay.

This concludes the question-and-answer portion of the call.

I would now like to turn it over to Rich Meeusen for closing remarks.

I would just like to say that given the economic condition -- the economic situation that we are in right now and seeing that a lot of other companies are struggling with liquidity and with significant sales and earnings decreases, we are very pleased with where the quarter came out.

We still feel that all of our long-term strategies are valid.

We believe we can continue to grow the Company and do well over the long-term.

Badger has always had some volatility in the short-term, but we believe we are well-positioned to take advantage of the market drivers.

I also want to thank everybody for listening in today and we will talk to you next quarter.

This concludes our question-and-answer portion of the call.

Everyone, have a wonderful day.