Badger Meter Inc (BMI) 2009 Q2 法說會逐字稿

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

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

We will conduct a question and answer session towards the end of today's conference.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

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

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

Thank you very much.

Good morning everyone, and welcome to Badger Meter's second-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 on to our results.

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

We are pleased to report that despite a 9.2% decrease in sales, we had record quarterly earnings and earnings per share.

And those records are not just for the second quarter, they are for all quarters.

The revenue decline was caused by lower sales volumes of our products.

Total sales were $67.8 million for the quarter compared to $74.7 million last year.

I will point out that last year's sales were $74.7 million still stands today as the all-time sales record.

So you can see, we had a very tough comparable for the top line this time.

Utility sales declined $3.9 million or 6.3% from $62.2 million last year to $58.3 million this year.

Staying in the utility area, residential sales declined 3.1% while commercial sales declined 18.5%.

We had very strong commercial sales in the second quarter of last year.

ORION and Itron related sales declined 9.3% and 7.4%, respectively.

The ORION products continued to outsell the Itron products by a ratio of nearly 2.3 to 1.0.

Sales of the company's fixed network product, GALAXY, continued to increase and accounted for 1% of total sales for the quarter.

The first-quarter sales also included nearly $4.2 million of sales to the city of Chicago as compared to $3.6 million in the second quarter of last year.

This project continues to be on track and is a little more than halfway through its completion.

We have received a number of questions about what is going to happen in the next phase of the Chicago product.

Our discussions with Chicago water department personnel have indicated that a timetable for the rest of this project has not yet been finalized.

So it's premature for us to say much more than that at this time.

We saw a nearly 24% decrease in our industrial sales due to continuing volume declines, both domestic and international, in all six of the small niche product lines comprising this group.

Until general economic conditions improve, these product lines will continue to struggle.

Gross margins increased in the second quarter, both on an actual dollar basis as well as a percentage basis.

Margins for the second quarter of 2009 were 39.3% compared to 35.3% in last year's second quarter.

We continue to see 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.

We will continue to benefit from the lower commodity costs, particularly if copper remains under last year's levels.

Obviously the lower industrial sales, which generally have higher margins, did negatively impact margins somewhat.

Selling, engineering and administrative costs for the second quarter of 2009 declined nearly $700,000 or 4.6% compared to the second quarter of 2008.

The reduced sales do have some impact on expenses.

For instance, commissions, which were down corresponding to the lower amount of sales.

In addition, the company has experienced more favorable healthcare costs as well as some benefit from foreign exchange.

And in these economic times, there has been continuing emphasis on cost control.

Our effective tax rate for the quarter was 37.2%, a little lower than the 38.3% used for the second quarter of 2008.

Our current estimate for all of calendar 2009 is 37.1%.

The result of all this is that earnings from continuing operations were nearly $7.8 million for the three months ended June 30, 2009 as compared to $7.0 million for the three months ended June 30, 2008.

On a diluted basis, earnings per share from continuing operations was $0.52 for the second quarter of this year compared to $0.48 for the same period last year.

There are no real significant changes to our balance sheet since year end.

We have been able to reduce inventory and receivables slightly from the year-end balances, which did result in increased cash generated.

During the first six months of this year we have made a total of $4.0 million in cash payments to our pension plan.

We anticipate making another $2.1 million in payments before the end of the year.

Even after making these payments, we have managed to reduce our debt by $8.4 million since year end.

Our debt as a percentage of total capitalization now stands at 11.9% as of June 30.

All of our debt now is shown as current, since even the remaining maturities of the long-term debt are now due within a one-year period.

The cash flow statement will reflect increased cash generated from operations, even after the pension payments just discussed, and less capital expenditures than last year, as our buildings are now complete.

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

Thank you, Rick.

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

As Rick pointed out, this quarter saw lower sales but record earnings, due primarily to lower copper costs and our own cost containment efforts.

We are pleased with the results, especially as we have been able to continue to generate record earnings through a very tough economic downturn.

During the sales decrease, the water meter industry has seen some resilience to the weakening economy over the past year.

However, recent market reports indicate that the total US market for water meters and related reading systems has decreased about 15% over the 2008 level.

Our utility sales for the first six months of this year have decreased only about 2.8%, so it does appear to us that we are gaining market share in this downturn.

As Rick mentioned, we believe that this 15% industry-wide downturn is due to a combination of tighter municipal utility budgets and delays being caused by utilities waiting for economic stimulus money, of which only about 7% has been dispersed to date.

We specifically know of several of our own customers who have delayed projects in anticipation of receiving some sort of funding.

The positive side of the situation is that the projects are still there, and we are confident they will proceed once the cities either receive stimulus funds or are told that they will not receive the funds, in which case they would use their own funds.

Although we may continue to see some topline weakness because of the situation, we are still confident in the long-term strength of this industry.

The industrial side of our business has dropped to only 14% of our total sales, as this business is much more susceptible to the effects of the general economy than our water business.

Of course this business also has a significant potential for improvement as the economy improves in the future.

In response to the downturn, we've made significant cost reductions in these businesses over the past several quarters, including some staff reductions.

We believe that these businesses are well-positioned to grow with future recovery in construction, oil production, and general industrial activity.

Also, with the recent completion of our new building in Nogales, Mexico, we are in the process of expanding our production activity there to take advantage of the cost savings in that facility.

As we mentioned in our press statement, we are also excited about the introduction about the new E-Series water meter.

This meter uses ultrasonic technology to measure the water flow, which eliminates any moving mechanical parts in the meter.

As a result, the meter will not suffer the normal wear pattern of mechanical meters and will better maintain its accuracy over its 20-year life.

We spent several years developing this new product and believe it could set a new standard for water metering.

Having said that, however, I should also point out that the water metering industry is a cautious and relatively slow-moving industry.

Many customers will want to pilot test this new meter, some over a period of years.

Historically adoption rates for new metering technology in our industry have been very slow, and we would expect to see the same pattern for this product.

Nevertheless we believe that the features and benefits of the E-Series Meter are compelling enough to drive many customers to seriously consider using this meter over the long term.

Finally, let me make a few comments on the balance of the year.

Although we do not give formal guidance, I will say that we expect to continue to see some weakness in our revenues if the economy continues to lag.

However, if copper prices remain low and the dollar remains strong, we also expect to continue to see bottom-line benefits from those lower commodity costs.

The interplay between these two factors will be a major determining effect on our near-term results.

In the long term we continue to believe that we will benefit from the fundamental drivers of our business -- water conservation driving demand for meters, and the need for operational efficiencies driving a demand for AMR and AMI.

We are well-positioned with both our ORION drive-by system and our GALAXY fixed network system to continue to take advantage of these fundamental market drivers.

At this time we would welcome your questions.

(Operator Instructions).

Steve Sanders, Stephens Inc.

Good morning, guys.

Just a follow-up maybe for you, Rich, on the stimulus funding.

I think you talked last quarter about some opportunities for some of the water utilities to get direct funding from AMR/AMI because they are obviously green projects.

Can you just give us an update on that?

Or are your comments just more around the utilities waiting for the stimulus funding for mains and other big projects, which would free up money for AMR/AMI?

No, we have found in the last few months that quite a few of the utilities have applied for direct funding.

There was $2 billion set aside for clean water, drinking water basically.

We expected that a lot of that would go to mains and the distribution system.

And indeed some of it is.

But because there is a call-out in the stimulus package, in most cases, for some of the money to be used for green projects, water metering and AMR systems are considered green, they help identify leaks, they help customers reduce their usage, and as a result a lot of the cities now are applying for direct funding to be used for their water meter projects.

And so we have several of our customers that are holding up some projects pending getting an answer.

They've told us they fully intend to go ahead with the projects.

They will either you stimulus money or other money sources, but they want to get an answer to the question -- when will they get their money?

will they get any money?

Do you think a lot of those issues will be resolved by the fall?

Are we talking a matter of months or quarters, or is it too early to tell?

Well, I think there's a few factors there.

I think we are talking a matter of months for this year's stimulus funding.

But only about 25% of the total stimulus package is being funded this year.

Now, I don't know how that relates to the $2 billion for clean water, but in total I was told that 25% this year, 50% next year, and then 25% in 2011.

But as far as this year's money goes, which is what's holding up some of our projects, I think we're going to see resolution in the next several months on that.

Two other quick questions, and then I'll get out of the way.

Are you seeing many water utilities looking at leveraging gas or electric AMI networks to collect the water data?

If so, would the competitive dynamic in a situation like that be much different than what you face on a typical project?

And then the second question is just on the pricing side, with copper obviously down, are you starting to see any pricing pressures, or do things seem to be holding up pretty well?

Well, let me take the first question, and I'll let Rick answer the second one.

On the question of the utilities leveraging off of electric or gas reading, there's two pieces there.

One is the combination utilities, where the utility actually owns some water properties and electric and gas properties.

In those situations we usually work with our alliance partners because we don't offer any electric program, an electric AMR or AMI package, but we have partners who do, partners like Itron, partners like Aclara, organizations like that.

So we usually work with them.

And that represents a fairly small percentage of our industry.

The other issue is whether or not a water utility would work with the electric utility in its district, even though they are not owned by -- there's not joint ownership, would they work together to use one reading system?

We have seen that on a very small basis in some communities, but there are footprint issues where they have different footprints, and that causes problems.

And a lot of the water utilities prefer to own their own data, they don't really want to turn that information over to the electric utility in town.

So I would say that has been a very small percent of our activity.

We haven't seen much of that and we don't expect to.

With regards to pricing pressure, we really are not seeing much of it in the marketplace at this time.

We like to say we have rational competitors.

In our opinion copper is still a volatile commodity.

You say it's down.

Yes, it's down from last year's amounts, which were north of $3.00 a share.

But it was just less than six months ago that it was $1.20 a pound, and today it's $2.40.

So in six months it's doubled.

And so because it's still volatile, it's difficult for a customer to say, hey, I want to lock in a certain price -- because they are unwilling to commit to delivery dates.

(multiple speakers) If you can't commit to a delivery date, it's hard for me to commit to pricing.

Right.

Thanks for taking the questions.

Ryan Connors, Boenning & Scattergood.

A couple of questions.

First off, just on the utility business, is there any way you can give us an idea kind of what rough capacity utilization rates you are running at right now in that business?

The reason I ask, I'm trying to get a sense for -- obviously the copper raw material input issue is a positive for margins right now.

But unit sales declining, in theory there's a negative absorption impact of that and negative operating leverage, whatever, however you like to call it.

So I assume the capacity utilization is down.

Is there any way you can quantify that for us?

Our business is very lumpy.

We have -- as you've seen in the past, we have up quarters, we have down quarters, and it's kind of hard to say exactly what capacity utilization is.

I will say that we have historically over the period of the last 10 years been producing around 1.5 million meters a year, and that may range anywhere from a low of 1.4 million to a high of 1.6 million, in that range.

We have the capacity to go well over 2 million meters without incurring a lot of capital costs.

We have the equipment, we have the production lines, we can add shifts, so that isn't a problem.

Frankly, a drop of 100,000 meters one way or the other, whereas it hurts the top line, it doesn't have a big impact on the absorption issue because of the flexibility we've got in our operations.

So that hasn't been a big issue.

The bigger issue has simply been that we do lose the margin, especially on the electronic side when you have a drop.

And that actually segues nicely into my other question, Rich, which is that you mentioned the industry statistics.

You're reading I guess a 15% decline, and then your own number's down 3% for the year.

Is there any way you can break that down for us between manual read systems and AMR systems?

In other words, has one fared better than the other?

Are they both trending along at those same 15% for the industry, 3% for yourself, those same kind of rates?

No, I think it's been about the same for both, from what I saw.

And unfortunately I don't necessarily get -- until we get the Scott Report information, which is later in the year, we don't get a real good look at the radio sales.

We do get information from other sources on numbers of meters, and it's hard to tell what is manual and what is automatic meter reading, because there's a mix, especially on the touch read side, which kind of falls in between.

So that's a hard one to answer.

But based on what we've seen, it does look like both of them are down.

That's all very helpful, thanks very much.

John Quealy, Canaccord Adams.

A couple questions.

First on pricing and pricing strategy, has there been a strategy, given the amount of attention of your distributors in utilities on stimulus?

Will you go through the remainder of the year and into next year with perhaps a little bit of a different pricing strategy, perhaps some carve-outs for some large volume business, if in fact it does come in later?

Obviously as you pointed out, pricing has remained pretty firm with pretty volatile underlying costs.

So I'm just wondering if your approach, given what could be some significant volumes later in the year industry wide, changes at all.

Our pricing strategy is not linked to stimulus money or non-stimulus money.

Regardless of how a city finances a project, our pricing is more linked to the size of the project, what kind of efficiencies we can get in the production process and in providing that product, and also to the nature of the product itself.

We really don't have a strategy linked to pricing.

I'm sorry, in the past, how often did you raise prices, on average?

On average -- well, we went from for 10 years where we didn't raise prices.

We raised prices on July 1 of 2006, 2007, and 2008, and this year we have not adjusted prices.

Perfect, thanks.

And then going over to the new opportunities, Rich, you talked in the past about being bullish on gas opportunities.

There is certainly some speculation out there that Badger could be involved in a pretty sizable combo, if you will, or near combo.

Can you comment about the dedication of resources towards the gas business.

If you were to win a large contract, would you need to scale up in any way?

Can you just give us a little bit more opportunities and what you would need to address those, if in fact some of those big awards were to come your way?

You're right, we are chasing some big projects in gas.

The issue in gas is that all the projects are big compared to water.

Just by the very nature of the industry, they are all large projects.

And if we hit one big one, it will represent significant volume.

The fortunate thing for us is we don't make gas meters, we make gas radios.

We've basically adapted the ORION radio for gas.

And all that really requires for us, because it's essentially the same radio board that we use in water, all it really requires for us is some plastic molding operations to make the housings, and then some assembly and test operations.

Those are very easy for us to ramp up.

And we would ramp all of that up probably down in our Nogales facility, where the cost would be relatively low.

And would you expect at run rate that the margin contribution to Badger for the gas module would be consistent with a water module for AMR?

How would you look at overall the profitability of that new line, or a bigger contract for that line?

These gas projects, because of their very size, are very competitive, they are bid project, and the margins would probably be less.

I think gas margins would be comparable to margins in the water industry for the same size projects, if there were projects that big, but that would be less.

One last question.

In terms of the time frame, how long did it take you to develop the flow meter for the residential side?

And how long do you think it's going to take to have meaningful, maybe the sort of GALAXY 1% type benchmark?

What's a good benchmark?

Five years?

Three years?

Thanks very much.

Are you referring to the E-Series Meter?

Correct.

Yes.

It took us a little over two years to develop that meter.

And I would expect -- one of the things is we need to get the meters certified by AWWA, but AWWA will not certify a meter until it's been in the field in use for five years.

So we will see significant pilot projects.

And those could be sizable, that could be even more than 1%.

But it's going to take quite a few years before we get the meter certified and you start seeing really significant sales.

Thanks.

Good luck on the gas, guys.

Rob Mason, Robert W.

Baird.

Good morning.

A couple of things.

I think you've said in the past that about a third of your customers, a third of your municipal customers, operate on June fiscal years.

Is that a good approximation?

Yes.

We've never done a study, so I don't have a report I can give you.

But I have seen that quoted in other documents, and I think it's probably about right.

A third on June 30 and two thirds on 12-31.

Have you seen -- for those that closed their years in June and started the new year here a couple of weeks ago, have you seen or have you heard from the field that those June budget years have been reset much lower as you enter a fiscal 2010 scenario?

I would have to say that we have heard anecdotally of some cities that have had to reduce their budgets, especially cities that have been hit very hard by the economy, cities that are heavy into the automotive industry.

And also some cities have said, well, let's cut this back because we may get stimulus money.

So I think we've seen some of that.

I'm not sure how widespread it is, because it's all anecdotal.

And then just again, maybe around the regional framing of your utility customers, are you seeing outside of those depressed regions, which I think you've talked about in the past, have you seen any other significant variances by region?

No, not really, not by region.

And then maybe just the last question is, it looks like your industrial sales, second quarter versus the first, seem to have stabilized.

Is that your assessment as well?

Yes.

Again, that can be lumpy depending on projects, but we have seen a stabilization over the two quarters.

It's stabilizing at a low point compared to a year ago, but sequential quarters have been fairly stable.

Very good, thank you.

Michael Coleman, Sterne Agee.

On the stimulus dollars, I just want to get a little more clarity on this.

When your customer applies directly with the AMR and green, that's through the DOE, and then of course the drinking water is through the EPA, where they've released money to the states.

Is there any potential where the states would wait until the -- to see what the DOE does on what utilities are applying for directly, before they would release money at the state level?

No, I don't think those two are that linked.

From what we can see, the money is going to get to the states, and the states intend to release it to the municipalities.

I don't think there are any plans to delay based on what they see on a national level.

Good, thank you.

Michael Cox, Piper Jaffray.

Thanks for taking my questions.

On the copper side, I know that hedging copper is not your practice, but I was just wondering if you could comment on your current inventory position there.

Did you take advantage of any opportunities as copper prices were lower than I guess where they are today?

Generally speaking, no.

Again, what we do, inventory levels are comparable to where they have been in the past.

As I said, we have attempted to reduce inventories, and they have been reduced since year end, that's just normal business practice.

The hard part in trying to hedge copper is we are trying tying into orders, and when customers won't commit to delivery dates, it can be very difficult to take advantage of it.

That's fair.

And in terms of project activity, I'd be curious if you're seeing utilities delaying AMR/AMI projects specifically, or is it more broadly delaying regular replacement of meter projects?

No, it's mostly AMI/AMR projects.

Because of the regular replacement states, they do that through their operating budgets, and that's a fairly routine thing.

It is the new projects we are seeing the delays on.

And then my last question, just on the cash flow.

I was wondering if you could provide operating cash flow for the quarter or year to date, and then what your CapEx plan is for the year.

We're just reaching across the table to get that.

On a -- cash flow generated from operations was north of $15.5 million compared to about $10.0 million for the first six months of last year.

CapEx is about $4.6 million, $4.7 million, somewhere in there, to date.

That's down from eight -- I'm going by memory, but they are trying to hold up the flashcards for me.

Compared to about $7.5 million.

For the remainder of the year we'll operate at a run rate probably no more than double I would say what we've gotten for the first six months.

Let me also point out that the $15.5 million of cash generated by operations for the first six months is after paying the $4.0 million into the pension plan that Rick had pointed out.

So we did have a particularly strong -- thus far this year we've had a particularly strong cash generation period.

Thank you very much.

Glenn Wortman, [Badger Meter].

Just for the record, I don't think you're with Badger Meter, right?

Or Glenn, you're not with Badger (multiple speakers) with Sidoti.

With Sidoti, yes.

You guys have mentioned a difficult comparison for commercial meters during the quarter.

How would you qualify those comparisons for the rest of the year?

Oh, flat probably.

Yes.

Probably flat.

We were unusually strong in the first and second quarters of last year due to the lumpiness of the commercial meter business.

(multiple speakers)

In the second half of last year I would say the commercial meter business was more normal.

Thank you.

Just generally speaking, do you consider the second quarter a seasonally stronger quarter than the third quarter?

(multiple speakers)

The two flip back and forth between which is the strongest.

Generally, either the second or the third quarter is our strongest quarter, but there's no pattern.

Sometimes it's the second, sometimes it's the third.

And I realize -- I'm assuming where you're going is that if a third of the utilities are resetting their budgets at June 31, you might see a pattern where one is stronger than the other.

But we don't.

I think there are just as many utilities that are coming up on the June 3 year end that are trying to spend their budget as there are who are waiting for July 1 to start spending the next budget.

So it does flip back and forth, there isn't a pattern there.

I think in the old days we would've said the fourth quarter generally would be the weakest quarter, and that worked until last year, when it beat the third quarter.

We are having trouble even judging the seasonality of the business right now.

And then finally, did you move any additional production down to Mexico during the quarter?

Can you just maybe discuss your plans for the rest of the year?

We have moved plastic meter production completely down to the border.

But we have done that over the past six months or so.

We do have -- for the rest of the year we have plans to move some other functions, but I really don't want to get into the details of exactly what functions we are moving.

Thank you very much.

David Woodburn, ThinkEquity.

Thanks for taking the questions.

First of all, on city of Chicago, I can understand your position on the potential contract, but how about the existing contract?

Can you give us an update on where you're at with that and how much is left?

We said we are a little bit more than halfway through.

The original contract was $39 million -- almost $40 million.

I think we are a little north of $21 million into it, something like that.

Everybody is nodding their head yes, so that's the right answer.

And then a more broad question, I think I heard either in your comments or one of my peers on the call talking about selling AMR/AMI for leak detection.

Is that a benefit that utilities can get their arms around right now?

Not in terms of importance.

Obviously, they realize that.

But enable the ability to utilize that?

Well, clearly that is one of the big benefits of AMR and AMI that has existed for the last 20 years since we introduced it.

It's the ability of the meter to detect if there might be a leak inside the house, and basically it sets a flag and sends a signal to the utility to warn them so the utility can warn the homeowner.

And that system works very well.

Also, we have -- we are offering now an acoustic leak detection, because the meter leak detection really only works downstream of the meter into the house.

Upstream of the meter going out into the mains in the street, it doesn't do it.

So we offer to our customers an acoustic leak detection device that actually hooks onto the main out in the street and uses either ORION or GALAXY to send that signal.

So those are benefits of the system that the utilities are very interested in.

Great, thanks guys.

Brian Rafn, Morgan Dempsey Capital.

Good morning,/* guys.

A question for you on the AMR/AMI.

Obviously with the difficult municipal budgets, are you guys getting any leverage on the marketing side from the labor cost savings from manual reads?

(multiple speakers)

I'm not sure I understand the question.

Can you ask the question another way?

Yes.

The normal conversion from -- municipalities use water utilities going from a manual read, very labor-intensive, guys walking through backyards and stuff like that, to the AMR/AMI.

Does the fall-off in municipal budgets, tax receipts, all the things that we've talked about, does the labor savings thought to the water utility, is that a high enough priority where they think you don't want to be putting in huge new systems when budgets are tight, but is there some ability for you guys to market that the labor savings offsets that -- the idea of putting in certainly a large system?

Yes.

Clearly there are two huge benefits of going to an AMI.

One is the labor savings, which is very significant.

And the second one is that as long as you're going in and putting in AMI, you might as well change out your meter, and that improves accuracy, improves revenue for the utility.

So generally the combination of those two things creates a very high internal rate of return for the utility and is the driving force behind going to some sort of automated technology.

That is our key marketing tool when you're going out and trying to sell these products.

Is the crisis siege mentality, to that point -- I guess I'm just trying to weigh the fact of -- from a water utilities district, is the thought of ruffling the constituency of taxpayers higher than that internal rate of return savings, or is it about balanced here in these difficult markets?

We see it vary.

There are some utilities that say, with the economy the way it is now is not the time to announce a major project.

There are other utilities that say, well, if we do this project, it's going to improve our revenues and reduce our operating costs, so now is the perfect time to do it.

So we hear both sides of it from our utilities.

Fair enough.

Give me a sense -- you are always very good at giving us a sense of the industry.

When you talk about infrastructure repair and you talk about water and sewage, what from your standpoint, from Badger Meter's opinion, is the water infrastructure, mains and certainly the pipelines, the heavy utility stuff, is that in a real state of disrepair, or is some of this more rhetoric than it is reality?

No.

If you go to the cities that have been around for 100-plus years, cities that built their water systems in the mid-1800s -- and I'm talking about some of the largest cities in America -- those systems are in significant disrepair.

Obviously newer cities that have grown up, like Vegas and Phoenix and places like that, have newer systems and don't have as significant a problem.

They've got water problems -- don't get me wrong.

But as far as their pipes and mains, they don't have as serious a problem.

But when you're talking about the older cities, the New York, Chicago, San Francisco, even here in Milwaukee, Philadelphia, those cities have very significant problems, maintenance has been deferred for a long time, and they know that they have to do something to address it.

Having said that, though, generally the purchase of a water meter is a separate decision from the CapEx associated with that.

My standard line sometimes is, even a company going out of business keeps a cash register by the door.

We are the cash register.

And quite frankly, you could say they deferred it.

Sometimes is just a matter of when you have a major downtown city, they don't want to fix a main until there is a leak because they don't want to tear up the street.

So it's those issues at play.

But regardless, the decision on metering is generally a separate issue, and that has to do with revenue generation.

Yes.

Going back to Rich's comment, would you still say that the old lines, these systems that go back in some cases to the Civil War, is the response still -- we are going to repair it, the mains, when they rupture, or is -- are they getting some religion relative to looking at the whole system?

No, generally it's still, let's wait for it to rupture, because they don't want to rip up the streets multiple times.

Yes.

I got you.

You guys mentioned too, pricing on the radios has declined.

Is that -- from deal -- is that just a currency issue, or are you actually getting some discounting?

No, that's a currency issue.

On [E Meter] series, can you give me a sense -- your meters kind of range from $25 to $30 in the low end to $125 to $131-plus on the high end.

How is that -- the sizes, the pricing of the E Meter as you roll it out?

Do you have -- are you going to have multiple flow meters as far as flow rates in that?

Give me a sense of the product line.

Well, the E Meter will be offered in multiple sizes and also in multiple material.

One of the real benefits we see the E Meter is that we can offer it in a stainless steel, which eliminates the entire lead issue.

And we see that as a real positive.

Obviously this meter has a lot more features, it's going to hold its accuracy longer, it's going to have a better life, it's going to generate more revenue for the utility.

It's a great meter, so it will be sold at a premium over our current leaders.

The lifespan (technical difficulty) is that based upon just the battery life?

Yes, it's based on the battery life.

All right, thanks guys.

Appreciate it.

Carter Shoop, Deutsche Bank.

Good morning guys.

This is Bheeshm Chaudhary for Carter Shoop.

First question on Chicago, I know you guys said that Chicago has not come out with a official timeline.

I was wondering what your thoughts were.

When do you expect an award?

Is it still a 2010 event, or it could be as early as late 2009?

And then the second question on Chicago was -- if they do go ahead with a fixed network solution for their follow-on deployment, how confident are you that Badger will be chosen?

Is GALAXY ready for the big deployment?

Well, the first question is, I would say that this is probably more of a 2010 issue in Chicago, not a 2009.

And obviously we are in talking to them all the time.

But from our indications, our estimate would be it's a 2010 decision.

Secondly, yes.

GALAXY is well-positioned to take on a project like this.

And the real benefit of GALAXY in Chicago as a fixed network, if that's what Chicago would want, is that GALAXY is designed to work as a hybrid with ORION.

You've used the exact same meter reading system, the same reading equipment, same billing interface, everything is the same between GALAXY and ORION.

It's seamless to the customer.

So when we designed GALAXY we designed it so that it could be used very efficiently in a hybrid system that mixes fixed networks with drive-bys.

And I would hope that that would be very appealing to the city of Chicago.

That's helpful.

On the gas side, you had earlier mentioned there was some big $1 million point plus pilots that you have been working on.

Any color on the progress of those and any clarity on the timing of when these contracts could be announced?

Again, a 2010 event?

Or maybe late 2009?

That would be helpful.

I don't think we talked about the size of any particular contract, we just said that we are chasing some large contracts, because in gas most of the contracts are large.

And we are really not in a position to even estimate when something might happen.

And then lastly, on the stimulus, there's this "buy American" clause.

And you -- obviously your radio technology is being sourced from Europe, and meters are increasingly being manufactured in Mexico.

Do you think that affects your competitiveness for the stimulus dollars?

No.

We've been looking at the requirements in the "buy American" clause, and we are confident that we can produce any meters that -- and radios that are required -- that are being purchased with stimulus money under the "buy American" clause, that we can produce those meters here in a Milwaukee and meet those requirements.

Thank you, that's helpful.

Eric Stine, Northland Securities.

Good morning.

Well, most of my questions have been answered, but maybe you could just give a little more clarity on the delayed purchasing decisions.

Is there any way you can kind of break that down?

Is that skewed more towards existing rollout schedules, those types of customers, or is it more towards the customer who is looking at initial AMR upgrade?

I'll start and then Rich can add some color if he wants.

We are both.

We are aware of customers that have specifically -- the order is sitting on the table, we even know what it's going to be, and they have been told they're going to be awarded some money, and they are simply waiting for the money.

On the other hand, we were also aware that some of -- a lot of our sales are through distributors, particularly smaller utilities.

And even if they were ready to place the order -- hey, there might be money out there, we're just going to explore that possibility.

So it kind of runs the gamut.

But I would say that this tends to skew more towards customers that have not started a project.

I don't know of any customer that's in the middle of an AMR/AMI deployment or in the middle of a meter change-out that has said, we are going to stop the project because we are waiting for stimulus money.

We are not seeing that.

Chicago is moving forward.

All those projects that we are doing are moving forward.

It really is the people who were considering doing a project that have put a delay on it.

s

That's helpful.

And just as far as the second quarter, can you kind of discuss -- I know quite a bit of your business obviously has a set project rollout.

Can you just kind of discuss the breakdown in the quarter, that sort of business versus what was book and ship in the quarter?

That's a good question.

In our business, we only have in our backlog maybe a month and a half of orders in our backlog.

So our business tends -- as we said, it tends to be a little lumpy and hard to predict.

And the fact is, some cities will give us a contract to do a project over three years, like Chicago did.

Other cities will say, no, we're not going to give you a contract, we're just going to release a purchase order every month for what we need.

And that may be a very sizable project.

So it's awfully hard to sit here and say, here's how much is on fixed projects that we are rolling out over a period of time versus here is how much is in-and-outs in a month.

Because the cities order under whatever pattern they want.

Okay, so you've got good visibility, just sometimes timing is -- can be the issue.

Well, timing has always been the issue in this business.

Right.

Right.

Just turning quick to ORION and Itron, I believe you said the mix was 2.3 to 1.0.

Were any of those Itron customers existing -- I mean, were those simply existing Itron customers, or were any of those new deployments?

For the most part it's all -- we may have had one new Itron customer, otherwise they were all existing customers.

Okay.

I appreciate it.

Thanks.

Sunil Kashyap, Soundpost Partners.

Do you -- you said Chicago was $4.2 million.

Is that correct?

Yes.

Great.

And could you give some color on the backlog for the quarter?

No, we don't disclose backlog.

Only at the end of the year?

Only at the end of the year, that's correct.

Going back to margins, I think on the last call you guys mentioned about being able to maintain gross margins for the year.

Just wanted to kind of get some thoughts on -- do you still feel pretty confident about that?

Well, I don't think we ever said we were going to maintain our gross margins for the year, because that would fall under the category of providing forecast information.

And we don't do that.

What we said is that if copper prices remained low, that's going to continue to benefit us as a company.

But we really don't give out information on what we think our margins are going to be going forward.

Let me ask that -- so I mean I just wanted to get a sense of -- you said -- I think some -- one of the prior callers was asking, and you said you don't hedge copper prices.

So I just wanted to make sure, I think from what I've read is that you guys have a three-month lag, so I just wanted to make sure -- obviously the prices are very different, I mean, they've come up.

But still they're quite lower than what they were last year.

And is there any sort of range that you feel comfortable with or (multiple speakers)

Again, we don't give any forward-looking guidance at all.

You are correct, generally our -- what's recognized as the cost of sale is anywhere from a two- to a four-month lag from what occurs out in the marketplace.

And even some of the metal is actually coming from scrap, so -- and there is a scrap index out there that can vary slightly from copper but generally follows copper, and that's why we all kind of look at the price of copper.

But beyond that we really can't say much more on that.

All right, no problem.

On the radio side of the business (multiple speakers)

Can we just ask you to speak up a little, please, because we are having trouble hearing you.

Sure, sure.

On the radio side of the business, you guys talked about I think there were a couple of callers, and you talked about from the currency effect, you saw costs going down.

I was a little surprised, because the US dollar has depreciated against the Euro in the last quarter.

So what's -- how did that benefit us?

Maybe you have (multiple speakers)

But we are really talking Q2 of '09 versus Q2 of '08 in that comparison.

Okay.

[Fiscal year-ago stuff].

Right.

And the radio costs are -- is that also lagged or is it pretty (multiple speakers)

That's a pretty current.

That's pretty current.

All right.

Good.

What are your expectations for the interest payments for the rest of the year?

Interest payments?

Well, we will continue to generate cash, and we will continue to pay down debt, so I expect it will be going down.

The debt we have left right now is long-term.

It's pretty much at a fixed rate at about 5 -- a little more than 5% for the rest -- for one more year.

If we need cash in the interim, we float commercial paper here at very favorable rates.

No, I mean I think you mentioned that you were going to pay off all your long-term debt this year, so that's why I was kind of curious (multiple speakers)

Well, it will be paid off in the next 12-month period (multiple speakers) June of next year.

Assuming no (multiple speakers)

Assuming -- right.

All right.

Maybe I misheard that.

All right.

Great.

That answers my question, thanks a lot.

(Operator Instructions).

It appears there are no additional questions.

I just want to thank everybody for joining us today.

As I said, we were pleased with the results, booking record earnings in a relatively tough economic climate, especially given the delays that are being caused by the uncertainty over the federal stimulus.

We were very pleased with what we were able to accomplish, and we are excited about the future for the company.

So thank you.

This concludes today's presentation, you may now disconnect.

Good day.