Badger Meter Inc (BMI) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Badger Meter earnings conference call.

My name is Josh and I will be your coordinator for today.

At this time all the participants are in a listen-only mode.

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

(Operator Instructions)

I would now like to turn the presentation over to our host for today's call Rick Johnson, Senior Vice President of Finance and Chief Financial Officer, and also Rich Meeusen, Chairman, President and CEO.

Mr.

Johnson, you may proceed.

Thank you very much, Josh.

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

I want to thank all of you for joining us.

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 risk and uncertainties that could cause actual results to differ materially from those in these forward-looking statements.

Please see yesterday's earnings release for a list of words or expressions that identify such statements and the associated risk factors.

Let me reiterate some of our guidelines.

For competitive reasons we do 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 continue our practice of not providing specific guidance on future earnings.

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

Now onto the first-quarter results.

Yesterday afternoon after the market closed we released our first-quarter 2009 results.

We are pleased to report that despite a 4.5% decrease in sales we had record first-quarter earnings and earnings per share.

The net sales decline was due to a 28.7% decrease in an industrial sales offset by a 1.1% increase in utility product sales.

Total sales for the quarter were $65.3 million, down $3.1 million from the record $68.4 million in the first quarter of last year.

Breaking sales down, utility sales were 86% of the total revenues for the first quarter.

This is up from a little more than 81% in the first quarter of last year.

Utility sales were $56.2 million, an increase of $600,000 or 1.1% from last year's $55.6 million.

The increase was the net result of a 9.3% increase in residential sales which includes ORION, Itron, and GALAXY technologies and related parts and a 28.3% decrease in commercial sales driven by lower volumes from the first quarter of 2008 when commercial sales were unusually strong.

For our residential business, sales of ORION products increased 7.1% on higher volumes for the period compared to the first quarter of 2008 while sales of the remarketed Itron products increased by approximately 13%.

The ORION products continued to outsell the Itron products by a factor of 2.7 to 1.

The first-quarter sales also included approximately $2.1 million of sales to the city of Chicago in connection with our three-year, $39.8 million contract.

This compares to approximately $2.3 million in the first quarter of 2008.

The project continues to be on track.

As I noted, we saw a nearly 29% decline in our industrial sales.

This was due to volume declines in all of the six small niche product lines with the declines ranging from 9% to as much as 37%.

We have said all along that these products were susceptible to the economy.

This was true as we moved through 2008 and has continued into the first quarter of 2009.

Gross margins have increased both on an actual dollar basis as well as a percentage basis.

Margins for the first quarter of 2009 were 40.1%, up significantly from the 35.8% in last year's first quarter.

Clearly in these results we have seen a favorable impact from the reduction in commodity costs, particularly copper and the cost of our radios which are sourced in Europe and have benefited from the strengthening of the dollar.

While the cost of copper has risen from its lows in the first quarter, the current price still is below last year's level and we hope to see a continuation of lower costs quarter-over-quarter through the remainder of the year.

The lower industrial sales, which generally have higher margins, did dampen the margin somewhat.

Selling, engineering, and administrative costs for the first quarter were effectively flat compared to the first quarter of 2008.

These costs were the net effect of lower commissions due to the lower industrial sales and overall lower healthcare costs offset by higher amortization charges for our GALAXY technology, which if you recall we purchased in the second quarter of 2008.

We also took a charge for early retirement programs that are being offered to Tulsa and Milwaukee employees who meet age and years of experience requirements.

I should also note that the first quarter of 2008 included costs related to efforts to establish a presence fro ORION in the natural gas industry that did not recur in the first quarter of this year.

And as usual we are experiencing normal inflationary increases which are being offset by what I would characterize as an even more rigid cost containment effort.

Our effective tax rate for the quarter was 37%, very comparable to the 37.4% in the first quarter of last year.

At present this is our estimate for 2009 which will be adjusted during the year based upon actual circumstances.

The result of all of this is that earnings from continuing operations were nearly $7 million for the three months ended March 31, 2009, compared to $6 million for the three months ended March 31, 2008.

On a diluted basis earnings per share from continuing operations were $0.47 for the first quarter of this year compared to $0.41 for the same period in 2008.

In terms of our financial condition, our overall balance sheet has not changed significantly since year end.

In fact, our total assets grew by less than $200,000 compared to the December 31 balances.

By holding receivables and inventory balances closer to the December 31 balances we did manage to provide more cash from operations than last year.

As a result, we have reduced our debt by another $6.9 million to the point where our debt as a percentage of total capitalization is now less than 14%.

That was as of March 31.

Obviously, a company such as ours has first-quarter tax payments due in April and new for this year we actually have pension payments due.

I told you in our last conference call that we will have to make pension payments in 2009.

At that time I estimated that the amount could be about $5 million for the year.

That continues to be our estimate as we work with our actuaries to determine the actual amount.

Given our current low debt we do not feel there is an issue in terms of being able to finance these payments.

With that I will now turn the call over to our CEO, Rich Meeusen, who will have additional comments.

Rich?

Thank you, Rick.

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

We are obviously very pleased with this quarter's results, as Rick pointed out.

The quarter was primarily impacted by lower industrial sales, relatively flat utility sales, and significantly improved margins.

Let me start by addressing the sales decrease.

Like all companies in the industrial sector we expected to see the decrease in industrial sales, which represent a relatively smaller portion of our total sales.

That segment of our business tends to move with the general economy and we expect to see improvement there when the overall economy improves.

Regarding the utility side of our business, total sales were relatively flat with lower commercial meter sales offsetting higher residential and AMR/AMI sales.

As Rick said, this is the result of some large commercial projects in the first quarter of last year.

We continue to see good growth in our residential markets driven by strong AMR/AMI sales.

On an overall basis we are pleased to see that the strength of our ORION and GALAXY products as well as some continuing Itron projects have off-set many of the impacts of the slower economy, and we do not expect any significant change in these trends going forward.

With the lower sales our record profits were clearly driven by the improved margins for this quarter.

As we stated in our fourth-quarter conference call, we expected to see near-term favorable impacts of decreasing copper prices and the stronger dollar, both of which reduce our product costs.

We have not yet seen any significant customer pushback or competitive actions that would cause us to materially decrease our pricing at this time, nor are we contemplating any changes in our pricing at this time given the volatility in both the cost of copper and the exchange rates.

As we look out at the coming quarters we recognize that we have some tough comparisons to the record quarters of last year, but we expect to continue to see some favorable impact on our margins from both copper prices and the stronger dollar.

We also continue to focus on the long-term prospects for our business.

We believe that we can continue to grow both sales and earnings over the long term based on the fundamental market drivers in our business.

We are benefiting from three basic drivers for our water utility business and services which are number one, the regular replacement of water meters and the related reading systems; number two, the increasing need for water conservation in North America; and number three, the continuing trend toward advanced metering technologies.

Badger is well-positioned to take advantage of each of these trends.

The demand for our metering products is driven by water shortages and the focus of communities on environmental sustainability.

There are still an estimated 13 million residents in the United States that purchase their water from a public water system at a flat rate without the water saving incentives provided by metering.

This continues to represent a major opportunity for Badger Meter.

In addition, the demand for our metering technologies continues to be driven by our customers' needs for better data and greater operating efficiency.

With less than 30% of the water meters in the US converted to advanced metering technologies we still have a significant market potential that has driven and should continue to drive sales and profits for our company.

We are also making strategic cost reductions in certain areas of our business in response to the current economic conditions.

We have reduced staffing at certain production facilities that focus on the industrial side of our business.

The late 2008 completion of our new facility in Mexico is also giving us the opportunity to further reduce costs as we expand our operations there.

Although it is prudent and necessary to contain costs in any economic downturn, we also believe that we have a unique opportunity to position ourselves to take advantage of the economic recovery that will eventually occur.

Right now it's certainly a buyers' market for talent and we have made some strategic hires that will benefit us in the long term.

We also continue to invest in our R&D programs.

In fact, while many companies are tempted to cut back R&D in weaker economic environments Badger has continued and will continue to invest in our R&D programs at a rate consistent with past years.

We are developing new products and enhancements to our current products that should position us well in the future.

That completes my remarks and at this point we will take any questions.

(Operator Instructions) Rick Eastman, Robert W.

Baird.

Hi, Rich, Rick.

First of all, on Chicago did you say $2.1 million of revenue?

Yes.

In the quarter?

Okay.

And that is down a little bit kind of off the run rate?

Is that just weather, seasonality, or --?

There is nothing to suggest that anything is wrong.

If you remember last year was really the first full quarter that we had it.

We had $2.3 million in there.

I think early last year we just grabbed some additional low hanging fruit.

The project is on track, it's on target so it's right where we thought it would be for this quarter.

Okay.

Then just along the lines of the utility business, what is going on in the distribution channel there?

I know that your distributors and dealers typically don't hold a lot of inventory, but are you seeing any adjustments there or at the utility level?

Because when I look at the utility growth rate at flat or say plus 1% you don't attribute that to economic weakness, so is your perspective that that kind of a growth rate is just seasonality or timing of orders or shipments?

This is Rick.

What I said is the residential was up 9.3% and commercial was down after an unusually strong first quarter in 2008.

Again, the commercial business along with the residential and along with our old business can be lumpy.

We had unusually spiked high last year and we got down to more normal levels this year in terms of that commercial, but we are still seeing the growth.

As far as the inventories at the distributorship, we have no evidence -- generally, they are not stocking a lot to begin with.

A lot of our products is mass customization so there is not a lot of inventory to carry.

So we are not seeing that.

We are not seeing anybody building up; we are not seeing substantial reductions in inventories.

Rick, this is Rich.

Well, that is confusing.

Rick Eastman, this is Rich Meeusen.

Too many Ricks and Riches here.

Rick is right that we aren't seeing any change.

I have been out talking to our distributors; none of them have significantly changed their stocking levels.

And I think Rick is right, we saw some lumpiness between the quarters.

We can have some big projects one quarter and not have them the next quarter.

Okay.

And then just one last question and this is actually out of the annual.

But I think you quoted your ORION gas sales in the annual, I think the number was around $4 million, so it's not a big number in '08.

But I am curious is that the front end of some larger projects or is that a cumulative kind of pilot number?

What is the status maybe of ORION on the gas side?

Rick, it's Rich Meeusen again.

We have had numerous pilots on ORION and we have won a few jobs where the customer is starting to implement the ORION gas over a portion of their service territory.

The ORION projects tend -- these gas projects tend to be huge.

Unlike water they tend to be millions of units, not tens of thousands of units so when you get one it can be very significant.

To date what you have seen in our sales is a lot of pilot projects and then some early implementation of phases of a territory.

Okay.

Then just the last question that I have, as we have gotten the second Nogales facility up to speed -- and I am sure it's not full production yet, but it's a bigger impact on your cost of goods sold -- when you talk about the dollar strengthening how much benefit did you get in the quarter from the very weak peso at your gross margin line?

As I am sitting here I realized we probably didn't mention that all but we did get some benefit.

Obviously, we don't quantify these things but I would say copper is obviously a bigger benefit than the strengthening of the dollar.

But the dollar strengthening against both the euro and peso has helped us.

Beyond that we are probably not going to disclose much.

I guess when I am looking at the volumes in the business and the sales down, if I do some back of the envelope math on copper price reductions and on the peso's decline that pretty much seems to sum up to most of the gross margin improvement.

Is that fair math because the industrial side of the business, obviously your gross margin there in dollars is not going to match last year?

Rick, also there is the strengthening of the dollar against the euro, because most of the radio boards we buy are purchased in euros.

So that had a significant impact too.

All right, thank you.

Ryan Connors, Boenning & Scattergood.

Good morning, Rick and Rich.

I wondered if you could just -- you talked a little bit about pricing, Rich, but I wondered if you could just expand on your thoughts there a little bit in terms of --.

A couple of years ago you all were kind of leaders in increasing prices to deal with the raw material cost spikes so now we are obviously in a different kind of environment.

And, again, you gave us your brief thoughts, but if you could just expand on how you see that playing out in terms of the game theory of if margins are looking a lot better might there be some competitors who figure they will take advantage of that to try to pick up share?

To me that seems like a very key issue in terms of the remainder of the year competitively.

And if so, if you could expand your thoughts there that would be helpful?

We are kind of in an oligopoly.

There is a small number of large competitors in this market space.

The whole market has been fortunate that for the most part these competitors are very rational.

So when copper -- when we started seeing the volatility in copper Badger Meter was the first one to go out and start putting in price increases and we were glad to see all of our competitors following in that to get margins back to where they belong.

Now are margins over 40% sustainable in this industry?

Probably not.

I think the margins eventually will come back down just because of competition out there, but right now with the volatility in copper -- it was another 10%, 15% just a few days ago and now it's back under $2 today.

Copper is very volatile and I don't think any of us are willing to go out there and cut prices dramatically on what are relatively long-term contracts given the current volatility in the copper.

And I think our customers understand that too.

If a customer says to us I want you to lock in on lower prices I say to them, well, will you lock in on your purchases.

And they don't want to do that.

Well, then I don't want to lock -- I can't go out and hedge copper.

So we are in the same position as our competitors.

I would expect to see over the long term that pricing -- we will see some price pressures and pricing will come down again in the long term.

But in the short term with copper -- and that assumes some stabilization in the economy and in copper.

But in the short term with the volatility in copper and the volatility in the economy, I am not sure we are going to see it in the short term.

Okay.

That is very helpful, Rich, I appreciate that.

Then just staying on that issue of copper and raw materials, in terms of inventory turns can you kind of update us on your view of how quickly the copper spot price takes to roll through your income statement?

I know you have addressed that in the past.

I believe you have said it's three or four months.

Does that hold now or are the things you are doing differently where that would be quicker or more drawn out?

No, this is Rick.

That is probably still a fair estimate.

Our business is always lumpy so it can vary a month or two either way.

Sometimes the short is two months if we are really cranking it, sometimes as long as four; so your numbers are reasonable.

That copper has to go through a smelter and then from there it has to go to the foundry and from there it comes to us and is in our inventory before it turns into cost of sales.

So you can imagine it takes a little bit of time.

You should also remember that about 40% of our brass products are being made from virgin copper and about 60% from scrap copper so there is some impact.

Although the scrap market --

Follows copper.

Yes, the scrap market generally follows the virgin copper market.

Okay.

And then a couple of questions on Chicago.

You mentioned that all systems go in terms of the current contract, but regarding the next leg of that, because obviously Chicago is only doing a portion of the city right now.

First off, to your knowledge are they still planning to let the next phase of that contract fairly soon after the current phase is complete?

And then also just I know that you were doing plastic ORION with them, I believe, and obviously they bid that out pretty much at the peak in copper.

So is there any talk that maybe at a lower copper price they might ultimately look to just do the traditional copper?

First off -- well, let me take the first part of that which is the possibility of a contract extension or a new contract.

You are right; Chicago has about 500,000 residential units in it that are meters, opportunities for services, opportunities for meters.

Our contract is to do 162,000 of them over three years.

We are about half done.

So we have got about a year and a half before the project is finished and that represents about one-third of the city.

For those of you who don't know, that doesn't represent like the South Side or the East Side.

It literally is scattered across the city every third house that we have been doing.

So there is an opportunity when this is done to go after the other two-thirds, and Chicago has indicated every intention to eventually do that.

We have not started any negotiations with Chicago on that extension yet, but we would expect that there will be some negotiations coming up as we move through this year.

Regarding the plastic meters, Chicago did select our plastic meters.

They did not select them because they were cheaper or any of those reasons.

They selected them because of other issues -- lower workman comp issues because of lifting issues, they are lighter.

They have the same warranty, the same performance as our brass meters.

Also, you have less risk of vandalism with plastic meters than you do with brass meters.

So for all those reasons Chicago selected our plastic meters.

Also, there is absolutely no lead in plastic meters so you don't have the lead issue.

So those are the reasons they pick them.

It had nothing to do with the pricing of copper, so we don't see that as an issue coming up.

And, frankly, they didn't have to deal with the perception of replacing a brass meter with plastic because they never had meters to begin with.

Right.

Got it.

That is helpful.

Thanks for your time today and congrats to you and your employees.

Steve Sanders, Stephens Inc.

Good morning, Rick, Rich.

Good quarter.

Just to make sure, on the commercial meter business it sounds like 1Q '08 was unusually high, not that 1Q '09 was unusually soft.

Is that fair?

I think that is fair.

We can trace half the decline to one customer last year alone, so yes.

There is a lumpiness in that business.

Okay.

And then maybe, Rich, on the market share for water AMR and I guess including AMI, it looks like the Itron piece of the business has flattened out a little bit.

Can you just talk about your outlook on continuing to take share on the AMR/AMI side?

According to some of the last reports, we are gaining in share on ORION.

We are dropping share of our Itron project, which we expected.

It's a little deceptive because sometimes our Itron sales can be up, but we are not always selling the radio.

Very often those are meters and encoders that connect to the Itron radio and the customer is either buying the radio directly from Itron or already has the Itron radios.

So even though Itron dollars for us may go up that doesn't always represent radios that we are selling.

Clearly, the trend has been for the last four or five years a decrease in Itron radios sold and a significant increase in ORION radios sold and we are continuing to see that trend.

Okay.

I guess it would -- just kind of continuing with that, it seems like your combined ORION/Itron/AMR market share is closing in on your meter market share.

First, is that accurate?

And once it gets pretty close to your meter market share how difficult is it to continue to grow beyond just a market rate?

Well, our meter market share is pretty close to 30%.

Our combined ORION/Itron market share -- and I am assuming maybe you are looking at the most recently issued Scott Report, which has a lot of these numbers in it.

Am I right?

Yes.

Yes.

So according to the Scott Report I think we are down -- we are around 20%.

But you have to remember that when it comes to the AMR/AMI there are a lot more competitors in the market.

There isn't just the water meter manufacturers.

Now you have got Aclara out there and you have got Itron out there and you have got all of these other players out there.

So we have got about 20% market share in North America for the AMR/AMI and so we still think we have got a good room to grow on that.

And I don't think that is tapping out in any way.

Okay, okay.

And then a follow up on the gas side, it sounds like you are getting some good initial traction.

How are you differentiating yourself in that market?

It's big deals, it's obviously very competitive.

What is resonating in terms of some of your successes with customers?

Our gas market, our gas product is fairly targeted because we do not have a gas electric product out there.

Some of these gas meters are part of a gas electric combination so we are not even chasing in that market.

What we are after are the gas companies that want their own system, maybe a drive-by system, maybe some sort of network system, but they want their own system not linked to electric.

And because of the strength of ORION, right now it's really a drive-by product that we are offering.

We are finding a lot of utilities where all they want is a read, a fairly simple system.

They want a drive-by system and they are finding that to be most economical.

And then last question for Rick, can you just give us operating cash flow and CapEx for the quarter?

If you gave it, I missed it.

And your CapEx outlook for the year?

CapEx is about $1.3 million, and I think that is about half of what it was last year at this time.

Cash generated from operations I know is over $9 million.

Somebody is pointing to me -- your $9.2 million and that is up from $4.5 million last year.

Really what happened is if you look at last year's cash flow it was down a little bit because we grew inventory and receivables.

This year we obviously didn't have as much of an impact from them so we are pleased.

CapEx for the year, we have said all along that if you look over a rolling three, four year period on average CapEx going forward now should not exceed depreciation and amortization.

Again, that can be lumpy depending upon where we have particular bottlenecks at points in time, but we feel we have adequate capacity.

And given that, if I had to guess right now I would say maybe $8 million for the year.

But, again, it's something we are watching carefully.

If we don't have to spend it, we won't.

Right.

And in the charge you mentioned, can you break it out or was it material?

It sounds like it was on severance side.

In that one we are probably -- you are talking about the early retirement programs we have.

We are probably talking a little more than $0.5 million.

Okay.

That is helpful.

Thanks very much.

Okay.

I should also mention just for those listening though that we had a significant charge in last year's first quarter, which is pretty much an offset to this year's $500,000 charge, the gratuity we talked about for gas ORION.

That is why it's pretty much flat and it didn't have as much of an impact.

John Quealy, Canaccord Adams.

Hi, guys.

It is Mark Sigal for John.

Congratulations on the solid quarter.

Are you guys seeing any instances of stimulus-related spending yet and any impact that you are seeing from higher level of funding out there on the RFP side?

This is Rich.

We are hearing a lot from our customers about stimulus money and their desire to use it in metering programs.

We have met with certain government officials in certain states to educate them on why the stimulus money should be used for metering; that it's a green program and it makes a lot of sense.

But you have to remember that I think about less than 10% of the stimulus money has been allocated, let alone spent, so there isn't a lot of money floating around out there at this point.

But it is causing a lot of utilities that maybe didn't look at AMR systems in the past to start considering them.

And those are the discussions we are having.

Okay.

And then on the utility sales in the quarter, the 86% mix there, can you give us a sense, the break down of how much of that content was automated?

Let me say this that historically -- I have been looking back over the last couple of years and I don't this quarter was much different -- a little over half of the meters we sell have radios associated with them.

It probably represents more like 70%, 75% of our utility business in revenues.

Okay, that helps.

Then just lastly can you talk a bit about the progression of the pipeline for GALAXY?

Well, we have won several GALAXY accounts and we have them installed and operating.

We are pleased with how they are performing so we have some good reference accounts now.

We have also won some good, what I would call medium-sized accounts.

Those are accounts in the 50,000 to 100,000 unit size, and so we have got some of those out there that we have now won and we will be starting to work on.

We obviously don't like to name our particular accounts for competitive reasons, but we are very pleased with how it's moving forward and we see an awful lot of activity in the pipeline on GALAXY.

All right, great.

Thanks a lot.

Carter Shoop, Deutsche Bank.

Good morning.

Wanted to first clarify some information about Chicago.

I think last quarter you mentioned that you thought it was going to be in the $3.5 million to $4 million range.

It was a little bit less than half of that this quarter.

Would we expect 2Q and the rest of the year to go back to that $3.5 million to $4 million range or will there be a little bit of a catch up from the lower level here in 1Q?

I think we would be back in that range for Q2 and Q3.

It's just, frankly, it's an easier time to do business in Chicago only from the standpoint winter is over.

Got it.

And then in regards to a follow-on contract there, it sounds like negotiations this year.

Would that mean then a possible award in 2010?

Is that the right time frame?

That would probably make sense, yes.

And in regards to the gas business, can you talk a little bit about your outlook in regards to ramping volume there throughout the rest of the year?

Do you expect that to materially pick up from 1Q levels or is 1Q level a decent run rate right now?

That is going to be a very lumpy business, I mean, again because of the size of the contracts.

You are either going to win a big one or you are not.

So we aren't really going to comment on whether -- we don't give forecasts so we don't comment on how much we think it's going to be.

But, frankly, we don't know whether we are going to have big sales, little sales depending upon what we win.

So it's a hard thing to predict and I would rather not even try.

But based on the contracts you have won right now we wouldn't expect a material pickup?

No, I wouldn't expect a material pickup based on existing contracts.

Great.

Last question for you, can you discuss your outlook and appetite for possible acquisitions?

Yes, we have chased acquisitions in the past and when we look at acquisitions we are talking about relatively small acquisitions in the $10 million to $40 million range.

In past years we have always been outbid by private equity.

Now private equity has kind of had their bag of money taken away from them.

Also the multiples tended to get really high and we backed away when the multiples got over 10 times EBITDA.

We aren't going to pay that, but you would have other people who would come in and were willing to pay that.

Now multiples have contracted.

We don't have the competition from private equity.

We really think we have a good shot at making some strategic acquisitions this year and we are out looking at several opportunities at this point.

Again, they are all small opportunities.

And is it safe to assume that any deal would be immediately accretive?

That would be one of our conditions, yes.

Great.

Thank you very much and congratulations on a good quarter.

Eric Stine, Northland Securities.

Hi, guys.

Congratulations on a good quarter.

Last quarter you guys provided nice detail on the health of municipal water budgets, what you are hearing, and talked about kind of a third of those budgets that are finalized kind of in this time frame for July 1.

Any thoughts or details you can provide there?

We have been talking for sales force.

They have been out there talking to the municipalities.

In fact, the term I heard this morning was 'cautiously optimistic' that they are seeing the utilities moving forward with their plans.

Other than some cities that are very significantly impacted by the automotive industry, and those would be a lot of the Michigan cities, we are not seeing any plans being canceled or contracts being taken off the table.

In fact we asked the question, if the stimulus money weren't out there would they feel the same way.

The answer generally was yes, although it might be just a little bit longer in terms of the sales cycle.

Okay.

That is helpful.

Just turning to ORION/Itron, can you just talk about the Itron were there any -- were those just existing customers or any new Itron?

Those were all existing customers.

All existing, okay.

And I guess finally I will just ask about the expense side, the early retirement payment should we think of that as a one-time item or maybe an ongoing program?

I think it's really a one-time.

We made an offer to some of our older employees.

We had a significant number of employees over 65 who were still working here because it's such a wonderful place to work I guess.

So we did make an offer and a lot of them took the offer.

Okay.

So we should think about that going forward kind of coming down maybe from that $14.7 million, I believe that was a number?

Yes.

Yes, it was the number.

$14.7 million is the number.

So that number will come out of there.

I can't necessarily predict that the $14.7 million is going to come down, but that number is going to come out of there.

Okay.

Fair enough.

I would like to see it go up for commissions on more industrial sales, for instance.

Understood.

As far as the pension expense and the impact there towards the end of the year, should we think about that more in terms of you taking on debt to fund that and increase interest expense and maybe a slight uptick in operating expenses?

I don't think you will see an uptick in operating expenses because for the most part the pension expense is locked in as of the first of the year.

It's actuarially computed.

Now they may have an impact going forward.

If we wind up borrowing, which we likely would, right now our interest rates are very favorable so you would see an increase in interest expense as we fund that.

I don't think the predominance of funding is until September.

We have already made an estimated payment last week or two weeks ago of about $0.5 million.

We have another one due in July with the remainder due in September.

And we have substantial unused lines of credit with the bank.

Right.

And we float commercial paper in this market which right now is at very favorable rates.

Plus we continue to generate cash so we will see where we happen to be.

Right, okay.

Thanks a lot, guys.

(Operator Instructions) Scott Blumenthal, Emerald Advisers.

Good morning, gentlemen.

Congratulations on the quarter.

You did mention earlier that copper was a bigger benefit than the dollar strengthening.

I think that was Rick that said that.

If you through the resin and the dollar/euro, dollar/peso all in there can you maybe give us kind of a hierarchy as to what provided the most benefit and what the least?

Copper gave us the most benefit that is clear.

The rest we just don't get into that much detail, but it's clear all of those -- we said commodity costs in general, copper particularly had an impact.

Copper was the biggest one.

Okay.

Apparently with what is going on down in Nogales there is some benefit from moving some work down there.

Are there any concerns at this point -- speaking with a couple of other companies that have operations down there, do you have any concerns with the security or safety at this point with the kind of unsettled social situation going on down there?

This is Rich.

I was just down there a few months ago and spent some time talking with the mayor of Nogales and with the governor's representatives in the city all about this issue, because obviously we are concerned.

A lot of the US companies down there are concerned.

At this point there has been a lot of violence along the border.

It has been a little worse in Juarez than it has over in Nogales, but there has been violence in Nogales, too.

Most of the violence has been gang-on-gang violence so we haven't seen a lot of impact on it in our area.

Our plant is located fairly close to the border so we feel a little more secure there.

But we do have good security at our plant.

We do all of the things that the US government recommends and the Mexican government recommends to maintain security.

We don't feel that we are going to see any interruption in our operations down there because of this.

I think the government and the military in Mexico is getting the situation under control, it just takes time.

As the mayor of Nogales pointed out to me, there were quite a few killings in New York last year too, so we have our own problems over here.

And he feels that they are getting things under control.

So we are watchful.

We have some level of concern but we are not going to overreact.

Frankly, there are a lot of companies with much larger operations in that area than we have who would have an even bigger problem than us if there was any interruption of the supply chain.

So we will keep an eye on it.

(technical difficulty) incurred higher security or other costs, maybe move the goods because of the situation or is it pretty much what you had expected --?

No, we haven't incurred anything higher.

When we built the new facility we did spend a little more money on security issues, guard houses, and cameras and things of that sort.

But we really haven't incurred any higher operating costs.

Okay, terrific.

Thank you.

Brian Rafn, Morgan Dempsey Capital.

Good morning, guys.

Can you give me a sense on the large meter side kind of the economic sensitivity between say the commercial industrial side versus the utility side?

You have always talked about, I think, from the standpoint of the obsolescence factor.

You overengineer the brass meters and it's really the accuracy of the meter itself measuring.

Is there more or less of a sensitivity to when those meters become more inaccurate that they get swapped out in the large meter side versus say the smaller residential side?

Brian, that can vary.

Some larger cities tend to change their commercial meters more often simply because more of the volume of water is flowing through them.

It's not necessarily that they wear out faster as much as the sheer volume and the revenue associated with -- even a couple percentage points decline is significant enough for them to warrant changing them out.

Now in terms of the sales themselves, we have generally said residential and commercial kind of go with each other.

However, there are municipalities out there that buy residential and commercial meters separate.

And I think this is just more a function of the lumpiness of that business than anything else.

Okay, okay.

With the installation of the plastic meters in Chicago, from the standpoint of winning these national sales contracts does that help the sales of those plastic meters in your portfolio because you have got such a big beta site certainly here in Chicago?

Or was that just a one-off because of some of the theft or the vandalism issues specific to Chicago?

No, this is Rich.

I think it has definitely added to the credibility of the plastic meters.

Prior to Chicago choosing the plastic meters, we didn't have a lot of large cities picking them.

And like I said, the plastic meters have the same life, the same warranty, the same performance as the bronze meters.

They are a very good meter.

So having the Chicago contract adds a lot of credibility to it and we are seeing a pickup in our plastic sales as a percentage of the total.

Okay.

On that idea, Rich, from the standpoint of the plastic being a little cheaper, does that help shorten the sales cycle with some of the fence sitters maybe that are looking at their capital budgets because there is a plastic option that does have credibility and it doesn't -- is certainly as costly as some of the brass?

No, Brian, I wouldn't say that.

The price differential isn't that great especially if you are looking at an AMR solution.

The price differential between plastic and brass isn't that great.

Obviously, if you are buying manual read meters without the radio, yes, it's more significant.

But once you add on the price of the radio it isn't that big, and so I wouldn't say it accelerates the sales process.

Okay.

You mentioned too, Rich, I think you said that the infield installed base of AMR/AMI is probably 30%.

What would be the installation run rate in any one year?

I am assuming it's more than 30.

Well, according to the most recent Scott Report I think the total sales of radios last year among the companies were around 5 million radios.

So that would say that you were picking up another, I don't know, 5% to 7%.

However, we are in a replacement cycle now and a large portion of that is being replaced.

So one way of looking at it is that five years ago we were about 15% converted and now today we are closer to 30% converted.

So that is kind of the rate we are going at.

Okay, okay.

The early retirements from the standpoint -- what was the total headcount in Milwaukee and Tulsa?

I want to -- 28 maybe -- eight in Tulsa for sure and I think we have estimated about half in Milwaukee will take it.

So we are looking at maybe 17 people; 25 total.

25 total.

Out of 1,200 employees.

Yes.

You guys always talk certainly about pushing R&D; you have done a superb job over the years doing that.

From the standpoint of sourcing radio boards from DLAG in Germany, is there any technology upgrades to the radio board itself?

Are there new faces, new products, better accuracy, longer duration that is from an R&D standpoint with the radio board?

Yes, there absolutely are.

And am I going to tell you about any of the details?

No, I am not --.

All right, guys.

Thanks lots.

Jamie Aitkenhead, Thames River Capital.

Hi, guys.

I just wanted to clarify what the message is in gross margins.

Obviously you have had uplift in gross margins in Q1 and, Rich, you commented that you can't really see those margins settling above 40% long-term.

Is that equivalent to you saying that you are going to maintain margins at this level for the duration of the year?

Secondly, as the business mix changes away from conventional meters towards AMI/AMR is copper going to become a less significant part of your cost of sales?

If so, what other commodity should we be keeping an eye on in there?

Jamie, let me take the second part first.

Yes, as the market moves more to buying AMR/AMI products copper does become less of a percent and electronics become a greater percent and electronics becomes a greater issue.

So that would be the thing to keep an eye on.

Regarding the margin issues, we aren't saying that our margins are going to stay above 40% or go below 40%.

All we are saying at this point is that we have got some headlines and we have got some tailwinds.

The tailwinds we still have a pretty favorable copper and exchange rate -- euro/dollar exchange rate out there.

Some of the headwinds, yes, there could be some competitive pressure that would cause us to reduce pricing.

But we really don't want to comment on when we think that might happen or how significant they are.

That would be outside of what we are comfortable --.

I have to point out we had a great first quarter.

Copper was as low as $1.20 near the end of the year and it has been as high recently as $2 a pound, okay?

What we are saying is that it's still under last year's level so that should provide some helpful comparables for the remainder of the year.

But it didn't say at $1.20 either; that is that volatility we commented on.

Thanks very much, guys.

Very helpful.

Ryan Connors, Boenning & Scattergood.

Just had a quick follow-up.

To the extent you are at liberty to do so, can you give us a break down on the 1.1% increase in utility sales between just price, volume, and then currency?

I think you have done that in the past.

Can you do that for us?

I would say price had a small impact on the increase in margins and obviously the costs -- copper had a significant increase.

What was your other question?

Well, I am looking for revenue, Rick.

On the revenue side?

Right.

For the most part it was increased because of residential AMR.

All of residential was up over 9%.

The decrease became on the commercial side.

Volume was clearly the driver on the commercial side, and it was price and volume on the residential side.

Okay, that helps.

Thanks again.

Hua Liu, Perella.

Just to follow up on Ryan's question, on the utility side of the business can you maybe just refresh us kind of what were the price increases implemented over the course of last year?

We can refresh you in that we don't disclose what the price increases are.

We never disclosed how much they were.

What we said was that we had increased prices to try and offset the spike in copper and the increased cost of electronics and everything else.

So now that those have come down a little bit we are seeing some of the benefit.

Right.

And so when you guys think about raising prices it's really too -- I guess over a more extended period of time it's to keep your margins where they should normally be.

Exactly and we went over about a 10-year period where price increases just weren't acceptable in this market and every year we and our competitors were pretty much decreasing prices.

Then when copper spiked and our customers were more willing to accept a discussion about price increases we were able to pass some on.

We did that in '06; we did in '07; we had a small increase in '08 to get ourselves back to where we wanted to be.

Now, like I say, the copper has come down, the dollar has strengthened, but there is still a lot of volatility.

You don't know what is going to happen.

Right.

So volume is kind of on the utility side kind of flat to down with the price increases that we had last year to make up for copper, right?

No, volumes on the commercial meters in utility were down.

Volumes on the AMR/AMI, the residential that was all up.

Right.

But in the aggregate?

You are mixing some pretty weird volumes there because if you are counting one $10,000 meter and one $100 meter those are some pretty strange mixes.

So I don't think it would be really meaningful to tell you whether it was up or down in the aggregate.

We don't look at it that way.

Right.

Okay.

But it was price and volume on the residential side?

Correct.

Then just kind of housekeeping question, working capital is that going to be a source of cash going into the next quarter or did we really take down inventories to a more manageable level and a sustainable level (multiple speakers)?

A lot of that is going to depend upon where sales go in the next quarter and a lot of that depends upon where sales are in June, the last month, as to what happens with receivables and inventory.

We think over the next year or two we can improve our inventory turns.

I am not sure we can do much about days sales and receivable, given the fact that they look pretty good right now and we really never had many bad debt problems in our company.

And still don't have many.

Okay, great.

Thanks very much.

(Operator Instructions) Brian Rafn, Morgan Dempsey Capital.

I just wanted to follow up on the kind of commercial utility, the large meter size.

How much R&D do you guys do in developing because we talk about certainly iterations and product line extensions and new models on the residential side?

How much change in meter sizes, availability, flow rates, how much product line development is there in the larger meter area?

I would say there is a significant amount of development there too.

Badger back in around 1999/2000 constructed a new flow lab just so we could do R&D primarily in the large meter sizes.

We did come out with a new line of compound meters that have allowed us to gain market share since that time over the last eight years and we have had a significant increase in market share because of that.

We have also done development in fire service leaders and fire service assemblies.

So we have been doing quite a bit of development in our large meter site, just like we have in the AMR and the small meters.

What is the biggest meter size flow rate that you guys make today on the large meter size?

The large turbos will go up to eight inches I believe, but then over that you get in to mag meters.

The mag meters there are some I can stand in and I have stood in them -- and I am not a short guy for the record.

Are the sizes of those, Rich, based upon engineering specs that are requested or do you make those sizes as a standard product line?

We and our competitors all make those sizes as standard sizes.

I would say they are standard from the American Water Works Association.

It's AWWA standards.

Okay.

On this hole, we have certainly talked about stimulus.

One of the areas certainly is the energy portfolio of the United States.

The talk about more FERC licenses for nuclear power plants; lots of water plumbing in a nuke plant.

Is that something from a meter, a valve size that would be something of an area of interest for Badger Meter?

Yes, we do sell our valves into nuclear plants.

They are used for controlling water on the non-nuclear side; so there is two different sides of the operation.

But our valves are used in there and also our meters are used in there so you are right.

At this time we are showing no further questions available.

Mr.

Meeusen, you may proceed, sir.

Thank you.

I just want to thank everybody for calling in and for all of the brilliant, insightful questions.

We are, obviously, pleased with our results for this quarter and we were happy to share this discussion with you.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a wonderful day.