Badger Meter Inc (BMI) 2009 Q3 法說會逐字稿

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

My name is Marisol and I will be your operator for today.

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

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

(Operator Instructions) I would now like to turn the presentation over to Mr.

Rick Johnson, CFO.

Please proceed.

Thank you, Marisol.

Good morning, everyone.

Welcome to Badger Meter's third-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 interest of our shareholders.

Now on to the results.

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

As you look at those results you see that we have reintroduced the caption 'Discontinued Operations' in the income statement.

The third-quarter results include recognition of previously unrecognized tax benefits for certain deductions that were taken on prior tax returns related to the shutdown of the Company's French subsidiaries back in 2006.

At the time the losses were incurred there was uncertainty over whether the Company would be able to sustain the deductions on the tax returns.

The IRS has recently completed their audit and allowed those deductions.

As a result, the tax benefits associated with these totaling nearly $7.4 million were recognized as earnings from discontinued operations in the third quarter of this year.

On a diluted basis earnings per share from discontinued operations for the three months ended September 30 were $0.49.

Now in addition interest expense has been accruing on the potential liability and with the completion of the audit these amounts have also been reversed.

Since the interest has been accruing as part of continuing operations since 2007 the reversal of interest expense is also shown as part of continuing operations.

For the three months ended September 30, 2009, interest expense has a credit balance because it includes a reversal of nearly $1.2 million worth of interest expense.

On a net after-tax basis this equals approximately $0.05 per share.

For the nine months ended September 30, 2009, interest expense is a credit because it includes a net reversal of approximately $900,000.

On a net after-tax basis this equals approximately $0.04 per share.

With that explanation behind us, let's focus on the remainder of continuing operations.

In the third quarter of 2009 we saw an 11.6% decline in sales over the third quarter of 2008, and yet we had record third-quarter earnings and earnings per share.

The results for the third quarter were similar to those of the second quarter.

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

Total sales were $60.8 million, a declined of $8 million from $68.8 million last year.

Utility sales declined $5.1 million or 9% from $56.9 million last year to $51.8 million this year.

Residential sales declined 7.7% while commercial-related sales declined 14.4%.

ORION and Itron related sales declined 12.7% and 9.5%, respectively, compared to the third quarter of 2008.

The ORION related products continued to outsell the Itron related products by a ratio of nearly two to one in the third quarter of 2009.

While current economic conditions may be contributing to this sales decline, it is our belief that it's more likely due to the delays associated with the federal stimulus programs.

We continue to hear stories of companies who are prepared to make a purchase from us but not wanting to make a decision until they know for sure what the rules are for obtaining those funds.

In the quarter Chicago sales were $3.5 million compared to $4.4 million last year.

While the sales are down from the same period last year, the project is still progressing.

It is our understanding that decisions regarding the future phases of this project will more likely than not be deferred until 2010.

Industrial sales for the quarter were $9 million, a decline of $2.9 million or 24% from sales of $11.9 million in the third quarter of 2008.

The product lines that make up the industrial area continue to struggle due to economic conditions.

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

Margins for the third quarter were 39% compared to 34% in last year's third quarter.

We continue to see a favorable impact from a reduction in commodity costs, particularly copper.

In addition, continued focus on all aspects of the cost of manufacturing, as well as favorable healthcare experience have improved the margins.

Our selling, engineering, and administrative costs declined $1.2 million or 8.2% quarter three over quarter three.

Obviously, with lower volumes we have certain lower expenses such as incentives and other related costs.

In addition, favorable healthcare and continued cost containment efforts have contributed to this reduction.

The effective tax rate for the quarter on continuing operations was 40.1%, which is an increase from prior quarters as we have now revised our estimates for the full year effective tax rate to 38.1%.

The increase was necessitated by increases in state taxes and the mix of states served.

The result of all of this is that earnings from continuing operations for the third quarter were nearly $7 million, a 19.5% increase over last year's amount of $5.8 million.

On a diluted basis earnings per share from continuing operations were $0.47 compared to $0.39 last year.

There have been some changes in the balance sheet.

One of the more significant changes is that we have made payments into our pension plan this year totaling $10.1 million resulting in a reduction in the long-term liability that is captioned 'Other Accrued Employee Benefits.' We do not anticipate making any further payments in 2009 towards the pension plan.

The cash flow statement continues to reflect cash generated from operations even after the pension payments I just mentioned.

Even with these payments we continue to reduce debt.

At September 30 our debt as a percentage of total capitalization was less than 10%.

And as I indicated in the second-quarter conference call, the debt is now shown as current since the remaining maturities of long-term debt are due within a one-year period.

Finally, last week we renewed our line of credit with our primary bank increasing it from $30 million to $35 million.

It is in effect through October 2010.

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

Rich?

Thank you, Rick.

I also want to thank everybody for joining us here today.

First, let me say that in light of the weaker revenue numbers for the quarter we are very pleased that we were able to generate record earnings due to our continued focus on cost containment and pricing discipline.

As you all know this has been a difficult year for the economy and we have not been immune to the pressures that all the businesses are seeing.

However, our strong market position, leading technologies, and dedicated employees continue to drive good bottom-line results.

Since Rick has done a good job covering the numbers, let me cover a few other items.

Yesterday we also announced the signing of a contract to provide ORION radios and collectors to be installed on gas meters for Duke Energy, one of the nation's largest energy companies.

This contract is exciting because it represents our first major win in the natural gas market.

While we have provided ORION gas units to several smaller utilities, Duke's decision to partner with Badger Meter demonstrates the adaptability of our ORION product to the natural gas industry.

We believe that we can build on this success to drive future sales in this market.

An obvious question relates to the size of this contract.

While the exact number of units and timeline can vary somewhat depending on Duke's installation plans, we estimate that this contract represents potential revenues of up to $20 million which will probably be spread over a period of several years.

In the past we have also cautioned you that in the AMR AMI industry a contract is not a purchase order.

We say this because we and other companies have occasionally seen customers cancel or curtail contracts before the end of their term.

However, in this case, we have been working with Duke for several years and have installed over 60,000 ORION units as part of a pilot project.

Duke has evaluated ORION and other products in a careful, deliberate manner and we believe that this contract represents a major commitment by Duke to proceed with a full rollout of the system.

Let me now comment on the balance of the year.

Although we do not give formal guidance, I will say that we expect to see some weakness in our revenues as the delays caused by the stimulus funding continue.

On the other hand, if we do see allocation of the stimulus money or at least issuance of notices of funding decisions, we would also expect to see some increase in our utility revenues.

We believe that our industrial revenues will continue to be impacted by the slower economy in the near term.

As you know, last week we were once again named to Forbes Magazine's list of the best 200 small companies.

This is indeed an honor and recognition of our solid performance over the past one and five years.

Going forward in the long term we continue to believe that we will benefit from the fundamental drivers of our business -- water conservation driving the 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 in addition to our newly signed contract with Duke Energy to continue to take advantage of these fundamental market drivers.

At this time we will welcome your questions.

(Operator Instructions) Steve Sanders, Stephens Inc.

Good morning, everyone.

Just a follow-up question on Duke.

So the $20 million over several years is that the full project that you bid on or do you think there is incremental opportunity here within the next couple of years with Duke?

Well, that is the full project that we bid on for Ohio.

We have also been running pilot units in other areas of Duke's service territory, and so there is more opportunity down the road if Duke decides to expand this type of application.

Okay.

And will this be a drive-by system or is this configured so that ultimately it can talk to an electric system?

This is not a drive-by system.

The ORION radios are being used as a short-hop product to get over to a box provided by another vendor which will then be brought back to the utility through some sort of backhaul system.

Okay, great.

Then, Rich, I know this is a bit of a frustrating topic, but kind of a follow-up on the anti-stimulus.

I guess there are several stages for the money to flow through from the EPA to the states to ultimately the communities and your customers.

What is your best guess at this point on when this at least turns positive or -- at least turns to a neutral and potentially a positive?

Should we think about early 2010 or what would you say on that?

My best guess is early 2010.

We have seen some states starting to release money; California has done some releases.

The others seem to be slower and we are not seeing much out of them at this point.

But if I had to guess -- and it is purely a guess --- I would say early 2010.

Okay, and then two quick ones maybe for Rick.

On copper, I think you commented that the fourth quarter is going to see some of the same challenges that we have seen recently.

We have also seen copper rally so just wanted your kind of general commentary on how your copper pricing would look in the near term versus the past couple of quarters, whether you have changed your purchasing or hedging approach on that.

And then, Rick, just can you give us the actual operating cash flow and CapEx numbers as well?

Sure, let me start with that one.

The cash flow is -- cash provided from operations is $24.5 million and CapEx for the first nine months of the year is about $6 million.

To copper, I phrase it this way, we had a big benefit from copper in the second quarter.

That benefit narrowed somewhat in the third quarter as copper continued to rise throughout the year.

You can simply track copper year over year and realize that last year clearly in the fourth quarter copper was going down and this year it's not.

When we look at it on a graph, we are generally talking about a two to four months lag period before prices actually hit our cost of goods sold.

And so right now, this morning, I believe you said copper was $2.90 and in January of '09 it was -- or December of '08 it was $1.20.

So it's significantly higher and then sooner or later these lines are going to cross.

There is probably a bit of benefit left for the fourth quarter but not nearly as much as the second or third.

Okay.

And you have not changed your purchasing or your hedging or anything like that?

No, and we get asked that question a lot.

The reality is if a customer were to come to us when copper was $1.20 and say lock in my purchases at that price we would turn to the customer and say lock in the firm delivery dates.

And to a customer -- there is not a customer that locks in delivery dates with us or that makes it hard to do that.

Okay, okay.

Thank you very much.

John Quealy, Canaccord Adams.

Good morning, Rich and Rick.

Congratulations on Duke.

A couple of questions on the gross margins year on year.

Gross margin came in at 39% in Q3; last year it was about 34%.

Of the 500 basis point movement can you comment how much was price, how much was copper, or other initiatives to expand that margin or AMR mix?

Some of it clearly was volume in a negative sense.

With volume going down margins were affected negatively and I think the commodity cost pretty much offset the volume plus.

We didn't really raise prices this year over last year, so I am calling that pretty much of a wash.

So I would say it's still -- and other costs though.

I mean, we taken a hard look at all the manufacturing costs.

We are running very favorable on healthcare and some of that does translate into the cost of goods sold.

So it's a variety of things but clearly commodity is the biggest one.

And on the SG&A line you guys have done a nice job of tightening the belt.

Obviously, you mentioned commissions not coming in with that lower revenue line so that helps, if you will.

Would you expect that trend to continue moving into '10 as long as revenue stays muted or are you getting to the end of that cost savings on the SG&A lines?

Well, I think we have taken a lot of savings and we are operating on a limited basis.

More importantly the trick will be as revenue start to increase again is holding the line on those.

Now some costs obviously will go up -- incentives, commissions, and the like.

But we have taken -- we talked we had an early retirement program early in the year.

We took some of the costs out of the business and so it's our intention to try and keep those costs in line as we move forward.

And final two questions.

You folks are talking about moving the workforce around.

I think maybe some Tulsa positions go to Milwaukee, some Milwaukee goes to Reynosa.

How does that impact whether cost of sales or SG&A in '10 at all?

First off, it's not Reynosa; it's Nogales, John.

Yes, we did talk recently and there were some articles in the local paper here about moving some jobs from Milwaukee down to Mexico.

That is a continuation of a strategy that we have been doing over the last 10 years, and it's part of the facility expansion that we made last year and are now working to fill a facility.

So this is kind of old news to people around here.

They understand what our plans were and we are moving forward with that.

We are also talking about moving -- and that is probably about 70 jobs that would move down there in the second half of 2010, which is about a third of our shop workforce here.

The jobs from Tulsa to Milwaukee, we are talking 20 to 25 jobs being moved, and that is more engineering, R&D, marketing, things of that sort.

All of this is part of just optimizing our facilities to get the best use out of each facility and put the jobs where they make sense.

We won't be seeing any benefit of that until the second half of next year because none of it will be done until then.

And then we will see the full benefit in 2011.

Okay, great.

And then lastly, with regard to future expectations for gas wins this Duke project was fairly certain for over a year, and obviously we have gone through the regulatory process and other issues, but the sale cycle is long.

How do you handicap future wins in size moving forward for your team internally?

You are right; the sales cycle is very long.

We have installed on the Duke project over 60,000 units all part of the pilot project over the last couple of years.

So it has been a very long and a large pilot.

We have other projects that we are in conversation with; some we are installing pilots on also.

But these are projects that take sometimes up to two or even three years before the decision is made, especially in a case like Duke where we are working with several other partners and other technologies to put together the entire smart grid that will talk to the meters and get the readings back.

So sometimes we are partnering with the electric side of the business, sometimes we are partnering with other providers.

So it is a long cycle.

It's hard for us to say that we think there is a 50% chance or a 25% chance or a 75% chance on any particular project.

But we do think the win of Duke does validate this product in the marketplace and will dramatically improve our chances going forward to win other projects.

Great.

Thanks.

Congratulations again.

Carter Shoop, Deutsche Bank.

Good morning.

I wanted to follow up with the Duke commentary there.

When you look at your pipeline for gas deals are you bidding primarily with the ORION product portfolio or is it more the GALAXY product that you are looking for opportunities in gas down the road that would be outside of the Duke contract and Duke potential wins elsewhere?

At this point it's entirely ORION because we are either bidding it as a drive-by system or as a connectivity system to some of our other partners' systems.

So it is entirely ORION.

That doesn't mean we won't offer GALAXY in the future and we are looking at that.

That is helpful, thanks.

Shifting to gross margins again.

The year-over-year commentary was very helpful.

Can you talk a little bit about some of the quarter drivers to gross margin?

In particular how much of it was commodity versus restructuring benefits?

Okay.

Quarter over quarter, again, volumes would have taken gross margins down just simply because we didn't have the volume that we had in Q3 of last year.

Commodity more than made up for that and actually helped improve the margin a little bit, but beyond that we don't give you much color.

Healthcare is in there.

Manufacturing costs and then the same things I said before, those are the quarter-over-quarter comments.

I am not sure I understood the question though.

When you say quarter over quarter are you talking sequential quarters or from year to year?

Sequentially obviously sales are down 10% so you held gross margins at 39% level.

So I am trying to understand what offset the significant lower fixed cost utilization there?

Well, it's commodity.

I mean, this year it has been commodity and our cost structure has been lower.

We took some of the employees out of the workforce.

But you are talking quarter three compared to quarter two of this year, right?

That is correct.

So Rick was answering on the basis of year over year.

When you are talking about quarter three versus quarter two you are right the lower volume does ad cost and where do we get the savings.

It has really been through maintaining pricing discipline and through other cost reductions.

Like we said, we have been very fortunate in our healthcare costs and we have been able to drive down other costs out of the organization quarter over quarter.

Do you know -- did we shift any employees from Milwaukee down to Nogales in the first and second quarter that you saw benefits from in the third quarter or is it --?

Not really.

Okay, that is helpful.

Can you remind us how you guys think about seasonality in the water utility business in the fourth quarter?

I think it's usually down on average given the past three years about 8% or so.

Is that how you think about seasonality, if you kind of strip out the impact from the stimulus and everything else?

Well, up until last year that is how we thought about the fourth quarter.

And if you recall last year we had an unusually strong fourth quarter and it surprised even us.

There is always that seasonality and it sometimes has to do with where the mix of customers happens to be at that point in time.

If you are starting to deal in -- it maybe more of the northern clients and things start slowing down a little just because of installations and the like.

And if we had to pick which quarter generally is the weakest quarter of the year, hands-on I think we would all pick the fourth quarter.

But as I said, last year we got the surprised in the fourth quarter so that is how we think about seasonality.

Where we are this year, because of the effects of stimulus, if the dollars where to start to flow suddenly we might see a sudden pickup near the end of the fourth quarter.

Right now we are guessing more likely that is going to happen in the first quarter.

Okay, that is helpful.

In regards to the Chicago contract, when do you envision the first stage of this being completed?

Well, I think it's -- we have about a year to go on the contract and right now we anticipate finishing on time and being -- we are on track to make that completion.

More importantly is where does that contract go beyond that, and as we said Chicago has indicated to us that that decision likely is not going to come until next year.

Okay.

Two more quick ones, if I may.

$10.1 million for payments into the pension; what do you envision for 2010 in regards to payments for the pension?

Well, a lot of that depends upon what the assets do this year.

The $10 million kind of substantially funded in the plan.

Depending upon which voodoo actuarial methods you use, we could be 100% funded in one view.

We could be a little over 90% funded in another, but that doesn't take into consideration the asset gains of this year.

We reassess that as of January 1 of next year and it's possible we will make no payments.

I don't anticipate making as substantial amount of payments as we did this year.

We took advantage of the fact that we had the ability to do it this year and as I said we are getting close to being fully funded.

Okay, great.

Last question, in regards to Duke when do you expect to start volume shipments to that customer?

Right now our best guess is that we will probably see some product flowing out of here in the first quarter.

Thank you very much.

Scott Graham, Ladenburg Thalmann.

Hello?

Hello?

It sounds like we lost him.

Ryan Connors, Boenning & Scattergood.

Good morning, Rich, Rick.

I wanted to talk a little bit about just the utility customer end market.

You talked a lot about the stimulus and so forth, but just in terms of customer budgets.

We are now into a new budget year.

Obviously, if there was any pressure on budgets it was downward and just ex-stimulus, if you will, do you get the sense that the money is there absent stimulus dollars to fund metering programs, AMR programs, etc., at the level they had been prior to the downturn?

So let's say the organic (technical difficulty).

Do feel like it's there and do you feel like the market is under downward pressure, again ex-stimulus?

Ryan, the way I kind of analyze the market is based on some rough estimates that we did in a survey about half of the cities in the United States, half of the water utilities in the United States, are operated as enterprise funds.

And the city, even if the city is having extreme budget pressure, can't just go in and grab that money and in about half of them the city can grab the money.

So right away that puts about 50% of the utilities in a situation like one utility manager of a large utility told me.

He said, I don't care what happens with the city.

I have got my money and they can't touch it.

I am going ahead with my meter program.

For the other half of the cities it's kind of spotty.

There are some cities, especially cities that are heavily dependent on the automotive industry, where we have seen them say we are going to pull back on our metering program.

Because the -- politically it's just not the time to launch a new program; we are going to cut back, especially where they were looking at installing AMR or doing a big technology rollout.

Most of these recognize that when they build a new house they have to have a meter.

Most of these recognize that when their meter gets to 15, 16 years old they have to go out and replace it.

So I think our replacement business and some that other business will continue even in those cities, but we can be affected on new technology rollouts.

When you come right down to it that ends up being a fairly small piece of the market where they are impacted by the core economy.

The rest of the cities have the money; they are going to move forward.

We don't see a big impact there.

So right now if I had to guess I would say we are seeing a bigger impact from stimulus than we are from general economic conditions.

Okay.

That is good color, thanks.

Thanks for that, Rich.

And then just sort of relaying that discussion into Chicago, my understanding is that Chicago is one of the cities, as you mentioned, where the funds are co-mingled, if you will, between the city and the water utility.

Correct me if I am wrong on that, but that is my understanding.

Correct, Chicago is treated as a department of the city.

Right.

So I am just trying to get an idea of how you look at that.

Obviously, as you mentioned, you are on track to complete that project next year.

So do you worry at all about becoming a victim of your own success in the sense that in order to continue your growth trajectory into 2011 you have got to sort of replace, if you will, that business?

It's kind of tough to see them continuing at the current run rate right through, so how do look at that as an issue for the growth of the Company in general?

Is Chicago in the twilight phase now?

You are right, we had a similar situation in 2001, I believe, when Philadelphia came to an end.

Philadelphia was a very large project that ran for two years and when it came to an end we weren't able to replace that business and we saw a decrease.

There is a risk of that scenario in 2011.

However, when we look at things like Duke and some other large cities that are out there that are in our pipeline, we are fairly optimistic about our ability to replace that business.

Also, there is the fact that Chicago is interested in continuing.

When we are done with Chicago -- it isn't like Philadelphia where when we were done the entire city was metered.

In the case of Chicago when we are done with this project a third of Chicago will be metered and they have a desire to meter the rest of the city.

So we believe there is a strong likelihood of us getting follow-on work in Chicago.

Okay, that is helpful.

Thanks for the color.

And just a quick housekeeping item.

Rick, could you repeat the ORION Itron sales year-over-year growth figures?

ORION and Itron.

Okay, ORION sales declined 12.7% to Q3 over Q3 and Itron declined 9.5% Q3 over Q3.

Is that what you are looking for?

Yes, it is.

Thanks for all your help, guys.

Eric Stine, Northland Securities.

Good morning, guys.

Thank your for taking my questions.

First, just on ORION Itron, just wondering if you could let us know were any of the Itron customers new deployments or were those existing Itron consumers?

Okay.

We both just looked at each other.

For the most part I would say substantially all of them were existing customers.

I do know of a couple of new ones.

One or two new ones.

One or two new ones, but all of the others were existing customers.

Okay, but very small numbers?

Yes.

Eric Stine" Okay, I appreciate that color.

Then maybe could we just turn to AMI?

Can you give us an idea of the progress you are making there and maybe what the revenues were for that in the quarter?

We are looking at what our GALAXY sales were for the quarter.

They were about $0.75 million.

For the quarter.

Okay.

The GALAXY product, the network products continue to be a slow ramp up.

A lot of these projects take time and it is moving forward.

We are happy with the pace, but it is a slow ramp up on these.

Is that a function of just long sales cycles or the economic environment, meaning a little bit more infrastructure cost is not something that municipalities are interested in right now?

No, I really think it's a long sales cycle.

The other problem is it isn't just the sales cycle; there is also a longer installation cycle.

Unlike drive-by where you can simply put the product in and be reading it the next day, with networks you have a lot more infrastructure that has to be installed.

Okay.

That is helpful.

Maybe we can just -- one last thing just touch on your fourth quarter last year.

You alluded that that was unusually strong and I believe it was due to some business out of Mexico.

I mean in part on that business are there any opportunities that we should maybe think about in this fourth quarter?

There are always opportunities in Mexico.

Last year's fourth quarter we basically received orders as late as December 15 and still managed to deliver them by December 31, because what happens is it's a very short lead time from the time they cut the order to when they want the product.

Again, we see some opportunities down there.

We are taking some steps to build the inventory to be ready for those potentials.

But, again, it's one those -- we joke it's kind of like the lottery.

We either get it right at year-end or we don't.

If we don't the inventory is still good, it can be used elsewhere, but we are taking the steps to take advantage of that market.

Okay.

I guess just one last question, just on pricing you have talked about you have been disciplined on the pricing side.

Do you have any concern as these stimulus projects start to come on that those are going to be more competitive and that there may be some pricing pressure?

I don't think the stimulus projects in and of themselves represent any kind of different pricing scenario than non-stimulus projects.

The utilities are taking the same approach.

Most of them are bids and quotes and I don't see a difference in how they are treated.

Okay.

Thanks a lot, guys.

Rob Mason, Robert W.

Baird.

Good morning.

Most of my questions have been answered, but I did want to circle back.

Earlier in the year we mentioned currency as possibly benefiting gross margin.

I am going to assume that tailwind has faded.

You didn't mention it, but just could you clarify that?

Is a good assumption, yes.

And so that will be probably a headwind here in Q4?

That is right.

Okay.

And then you also mentioned inventory, Rich.

Just given the expectation that by Q1 there is perhaps some pent-up demand, are you taking other steps or should we expect that in the fourth quarter to see that you are taking steps to build some inventory to address that?

Well, this is Rick.

This is one of those unanswered questions internally because when business does pick up does it pick up and resume as normal, however you define normal, or is there a lot of water building behind this damn and when it finally does start flowing it's a minor flood.

That is kind of the question we ask almost daily and we are getting a handle on it.

If you put a gun to our heads right now, it's probably two-thirds of the people are saying that it's going to be business as normal and there is a faction that says we may have a minor flood on here.

We are watching it carefully.

We will take necessary steps to make sure that we can respond to customers on a timely basis, so again depends on timing.

You may see a little buildup in inventory because of that.

Okay.

And maybe one last housekeeping question.

Do you have a number for how local read meters performed in the quarter?

Sure.

Local reads were actually up and volume was up on both.

They were up about 12%.

Okay.

Any sense what drove -- that seems like a high number from a volume standpoint.

No.

We are all shaking our heads around the table.

No, we really -- nothing jumps out at us where there was a big, unusual order.

Local reads is always a small piece of the sales anyway.

And it tends to be a very lumpy business.

Okay.

But could that possibly be for some restocking activity in the channel?

Not really.

We were talking this morning about the fact that most of our distributors during this downturn have thinned down their inventory quite a bit.

And we don't see them bringing it back up at this point because they are just not confident that there is a flood of business coming in in the next month or so.

So we don't see a lot of restocking activity out there.

It could be some utilities that were planning to move to AMR have now delayed that plan and therefore are just continuing to buy their regular local read meters instead of AMR.

That is possible.

Okay, helpful.

Thank you.

David Woodburn, ThinkEquity.

Thanks for taking the question.

I guess following or using the phrase anti-stimulus again, are some of the projects you have seen been put on hold are they likely to actually receive stimulus funding?

Or is it a case where there is another project that the water utility hopes to receive funding for and they are just waiting to roll out their AMR or meter upgrade to see what the overall capital budget looks like?

Does that make sense?

Yes, it makes sense.

I think most of the delays that we are seeing are utilities that have applied for specific projects related to meters.

You are asking also about what we call the trickle-down effect.

To the extent that I have also applied for money for mains or something and I get that money is that going to free up money for meters.

We are not seeing as much of that.

That is a hoped-for benefit somewhere down the line.

And then for the stimulus projects are they justified more on the labor savings from the operational standpoint or the water savings aspect?

I think it's a combination of both.

There is a portion of the money that is set aside for environmental reasons and obviously water conservation is one of those.

Okay, great.

Thanks, guys.

Brian Rafn, Morgan Dempsey Capital.

Good morning, guys.

Can you give me a sense -- Rich, you talked a little bit about in some of the automotive OEM areas.

Are you seeing across the United States any reduction in the installation or replacement for obsolescence kind of your 6% every year, 15 to 16 years?

Are you seeing any core business deteriorating on just the normal obsolescent replacement?

I think your question -- another way to state your question is we see in the field -- kind of an average life for water meter is about 15 years and are we seeing utilities stretching that out and saying to save money let's not replace for 18 years or 19 years?

We are not seeing that.

We have been asking that question and we are not hearing about it at all.

Okay, okay.

Having that said, though, again go back to Rich's anecdotal stories.

To the extent it's 15 years but half my town just got laid off, I might my delay it one year.

And they might do it, but that is it.

Nobody is looking at changing the overall cycles.

Okay, okay.

We haven't heard anything about that.

All right.

Rich, you also talked about -- you alluded to some national sales accounts, largest cities in the pipeline.

Can you look at -- after Chicago what is kind of collectively across the US on the water side?

Will there be a half a dozen cities, would it be one dozen cities, is it the one or two knock offs?

Give me a sense as to what that universe is for you guys.

It's more of about half a dozen cities.

If you look at the 25 largest cities in America, about half of them have either switched to some sort of automation or made a commitment and half of them have not.

So there is probably about half a dozen out there that are talking about it and looking at it that would be larger cities of the Chicago size.

Obviously, we are not going to name any specific cities.

Okay.

Would those be looking at technology upgrades?

In other words, when they go they are going with something that is not just a local read.

They would be going with something, an AMR?

Correct.

Okay.

Give me a sense, you guys increased your line of credit and you talked about weakness on the industrial side.

Any niche opportunities there as far as M&A or looking at stuff that may be trading at a low multiple of EBITDA?

Yes, clearly.

Over the last several years we have chased two or three acquisitions every year and usually been outbid by private equity with a big bag of money who were willing to pay multiples of 12 or 14 times EBITDA.

In all cases we walked away and we didn't make acquisitions.

I think now private equity has had their big bag of money taken away from them and the multiples have come down to more reasonable levels.

So we are interested in making small niche acquisitions.

We have talked about this publicly in the past.

When we talk about acquisitions we are talking about things in the $10 million to $40 million range, nothing huge.

But we do believe we are in a better position now to look at those companies that have interesting, unique flow measurement technologies that might bring some synergies to Badger.

And we are out there talking to companies and pursuing those.

Okay.

I missed your opening comments for the first minute or so.

Anything on -- you mentioned water mains.

Anything on the larger meters in either the commercial or the utilities side, or was that just about flat with everything else?

We are checking here.

Commercial sales declined about 14%.

Last year was an unusually strong year for the commercial sales.

We had some large projects going.

Your movement of some R&D from Tulsa up to Milwaukee, you know, there has been a lot of talk with Milwaukee being kind of on the vanguard of a national research center for water.

Is that movement to expand or bring these people in R&D up to Milwaukee, is that designed to amp up the R&D for Badger Meter or is it tied into this kind of national water based here in Milwaukee?

Give me a sense -- or is it just a simple consolidation?

Yes, it's really on two sides.

One is to consolidate our R&D in one location we had to kind of split.

We view Tulsa as a very good location for continuing to do manufacturing so we want to keep our manufacturing there but pull out some of the other functions -- R&D, marketing, customer support, things of that sort.

But our choice to bring to consolidate in Milwaukee runs more to the vision for Milwaukee's future as a water technology hub.

Milwaukee has over 120 water technology companies in this region.

Five of the 11 largest water technology companies in the world are located in this region or have major operations here.

So given all of those reasons, we do have a lot of confidence in the future of this region for R&D for technology.

We are going to have the talent in the region and so that is what we are looking at.

Okay, okay.

Rick, property, plant and equipment budget for this year?

Well, as I said, we have about $6 million of CapEx in.

That is obviously down from where we were last year.

It's pretty much in line with depreciation and amortization, and that is probably where we will wind up for the year.

Okay.

And then on some of the healthcare savings, that I suppose is event driven specifically depending on surgical procedures or whatever?

Like most companies we self-insure up to a certain amount and we just haven't had some of the large ones that we have seen in the past.

Yes, okay.

All right, guys, thanks much.

Good job.

Gary Lenhoff, Ironworks Capital.

Thanks.

Rick, it looks like your receivables picked up a bit in the quarter with sales down so that your collection cycle extended by maybe nine or 10 days.

Can you comment on that and specifically whether you are having any specific bad debt issues?

I am not having any specific bad debt issues per se.

There is one large account that was a timing issue.

We received funds in October already.

The DSOs as we look at them are up about five days.

I also think that we have about a little less than $1 million of taxes receivable buried in that number just simply because after I made that pension payment I actually wound up being in a receivables position for my current year taxes.

So you see some of that in there also.

Not materially enough to break out separately, but it does -- it makes the numbers just look a little bit funny.

Okay, thanks.

Glenn Wortman, Sidoti & Co.

Good morning, guys.

On the natural gas, aside from Duke do have ongoing pilot programs with other large utilities?

We have ongoing pilot programs with a lot of different size utilities, but I guess I don't want to go into any specific detail because our agreement with those utilities is that we are not disclosing them.

So I will just say that, yes, we do have ongoing pilot programs with a large number of different size utilities.

Okay.

And then also I may have missed it, but I don't know if you provided us with the unit volume on the Duke contract if you can?

The total volume -- and it's going to be totally up to Duke as far as how broadly they apply this -- but the total number of units in the territory that they are talking about right now is about 400,000 units, although we have done about 60,000 of them as pilot projects.

So there is probably about 340,000 units left.

And before you take a $20 million contract and divide it by the number of units, you have to remember that there are a large number of collectors also in that area.

So it's both the radios and the collectors that make up the total contract.

Okay.

Thank you very much, guys.

Scott Graham.

Good morning.

I am sorry for before; I seem to have disconnected myself.

So the two questions I had for you were this.

I was just wondering if you could tell us -- I am looking at the water numbers and kind of see (inaudible) that sales -- and I know I don't want to focus too much on one quarter right now.

I know it's a longer cycle business, but it actually does look like the business deteriorated a little bit because you had a deeper decline on an easier comparison.

I shouldn't be reading anything into that, should I?

No.

That is an awful lot of granularity for a business that is relatively lumpy.

Yes, right.

That is what I thought, okay.

So then maybe we can springboard from there into kind of how you saw not necessarily sales, but maybe order activity in the business as the quarter progressed.

Was September the most month of quotes, how does that look?

Again, that is pretty lumpy.

But I will say this, we have since the beginning of the year seen a fairly steady increase in the pipeline.

We track our opportunities in various stages through the pipeline and we also value that pipeline.

We have seen a pretty steady increase every month since the beginning of the year in the pipeline.

That gives us some belief that there is a demand building up out there that is being delayed.

And I guess that is all I can really say about it.

Okay.

And you would consider that on the replacement side not necessarily even the stimulus side?

Stimulus would --

No, when I talk about our pipeline that is not really replacement pipeline that is projects.

And a lot of it is technology projects, things of that sort.

Our replacement business is kind of outside that pipeline that I am talking about.

That is helpful, thank you.

Now as part of my trick of disconnecting I missed a little bit of the discussion on what I thought was that you were starting to see some stimulus monies flow through a little bit into your business.

And my simple question is, you guys or the meter is suggesting to me that when stimulus monies flow into a water utility that is not necessarily the first place that they are looking.

But maybe -- that is from my education.

Could do kind of characterize how from a time standpoint where are you guys are in the infrastructure water utility spending cycle, if you will?

This is Rick.

If you look at the electric, now clearly we are not in the electric business, but in the electric all the stimulus money is coming from the Department of Energy and it's generally flowing directly to investor-owned electric utilities.

So you are dealing with one layer of government.

On the water side it's being administered by the Environmental Protection Agency, the EPA.

It starts at the EPA and in each individual state it goes to a state agency and from there it goes to the municipality.

So your question is really -- there are 50 answers to your questions because it really depends on how each state divvies out that money.

So when you step away what we said is we are starting to see some states, for instance, California, where some of the money is starting to flow.

There is a lot of states where the money hasn't started to flow yet and so it's kind of -- to have one kind of one catchline that describes it is very difficult because it's kind of hit and miss right now.

You know, I get that.

The reason why I am asking the question is that I was presupposing that you guys would not be a first tier in the lineup of beneficiaries for stimulus at all.

That you were actually a little bit later and so I was a little bit surprised to hear that you were already starting to see some monies and wondering if that was in fact stimulus or something that was in fact going through anyway.

So if you look at some of the websites that are out there that track stimulus money and stimulus requests, you will see that there are requests from utilities for stimulus money directly for metering.

So I wouldn't say that we are at the end of the process or we are eighth or something like that behind mains and other things.

It's quite a mixture of what the utilities have requested.

Some of them have specifically requested metering as their primary use of stimulus funds.

Right.

That is fair.

I actually do track those websites and I didn't see that much of that, but will go back and check that for sure.

So would it be fair to say that -- changing direction here in terms of the raw materials.

If some of these bids start to maybe firm up a little bit more, is it possible that from a raw material standpoint you guys actually might be able to lock some stuff in here at this level of copper for a specific delivery or is that just not one to happen in your business?

This is Rick.

I just don't see it happening because customers don't lock in delivery dates.

And so in order to lock in a price on something you have got to lock in a delivery date for when you get it, which is generally ahead of when you want to ship it to a customer, and that just does not happen in this business; number one.

Number two is I am not sure we would lock in at today's price because we think copper is a bit high right now.

There are as many pundits out there saying copper is going up as there are saying copper is going down, so we don't know.

Is copper low right now or is it high?

Your question would tend to imply that copper is at a bargain right now and it's only going higher.

I don't know.

Fair enough.

Okay, that is all I had.

Thank you.

[Brian Freckman], [Lion Street Capital].

Sort of getting rid of all the FX in copper, can you just talk about where your gross margins were on a volume basis?

So I know you said that volume was down.

How much did that affect gross margin?

Well, it's significant in that we told you what the revenues were down.

And so, again, we don't get into real specifics about dollar amounts, but when we say commodity had a positive impact, it obviously more than made up for the volume decline.

Beyond that we don't give you much more color.

Okay.

All right, that is it then.

Thanks.

[Steve Bogman], [Digi-Star Capital].

Good morning, guys.

Thanks for taking the question.

Just a question on this new contract, are you guys sole sourced on that contract?

Yes, we are.

Now there are other partners involved providing other aspects of the smart grid, but for the radios on the gas meters we are sole source.

You are, okay.

And so is there maybe upside to the 400,000 unit number, if Duke moves to other geographies as well?

Absolutely.

Okay.

And then I think -- I just want to check something that I recall.

You guys previously said that gas projects would generally be lower margin than the corporate average.

Am I recalling that correctly?

Yes, generally the gas margins are a little bit tighter than on the water side or on the corporate average.

And that is simply just because of the size of the contracts?

Right, exactly.

Okay.

But you guys aren't passing through the cost of the gas meter?

You are just selling directly?

There is just a review.

Right.

We don't sell the gas meters.

We are simply providing the radios that go on to the gas meters.

Okay.

But you are not doing an integration function either?

No, we are not.

And we are not doing any installation either.

Got you.

And then I think previously you talked about the radios being sourced out of Europe.

Do I have that correct and do you guys source those in euros and so are at some risk?

Yes, that is correct.

The ORION radios are sourced out of Europe and we buy them in euros.

Okay.

And obviously, given your comments about copper hedging, you are not going to go play the FX market as well?

No, we are not doing that either.

It's not our expertise.

Okay.

Great, thanks very much, guys.

At this time there are no further questions, sir.

Well, then very good.

We want to thank everybody for joining us.

Obviously we were pleased with the quarter.

We are still seeing the weakness on the top line, but we are optimistic about what the future holds for the Company.

So once again thank you for joining us.

Thank you for your participation in today's conference.

This concludes today's presentation.

You may now disconnect and have a great day.