Badger Meter Inc (BMI) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011 Badger Meter, Incorporated earnings conference call.

My name is Stacy; I'll be your conference moderator for today.

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

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

(Operator Instructions).

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

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

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

Please proceed.

Thank you very much, Stacy.

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

I want to thank all of you for joining us.

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

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

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

Let me reiterate some of our guidelines.

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

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

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

Now on to the first-quarter results.

Yesterday afternoon after the market closed we released our first-quarter 2011 results.

In most past conference calls we've indicated our sales and results can be, for lack of a better word, lumpy.

This was true for the first quarter.

If there is one message you leave with today, it's that this quarter was one of those lumps and the results, while disappointing, have not changed our view of the market and our potential for the future.

Like last year we are off to a slow start, albeit for different reasons.

Sales in the first quarter of 2011 were $57.4 million, a decline of 7.2% from sales of $61.8 million last year.

The decrease was due primarily to lower volumes of meters sold with AMR and AMI technology, lower sales of commercial meters and lower levels of services, principally installation work.

Offsetting this were higher sales of specialty products as well as higher sales of manually read meters.

Also included in sales for this quarter, but not in the first quarter of 2010, were approximately $1.8 million of sales associated with Cox Flow Measurement which was acquired in April of last year and approximately $500,000 associated with our January acquisition of Remag AG in Switzerland.

Water applications represented 73.3% of sales in the first quarter compared to nearly 86% for the same period last year.

Water application sales declined $10.9 million or nearly 21% to $42 million from $52.9 million last year.

By far the biggest reason for the decline was lower sales of meters with AMR and AMI technology.

Sales of ORION-related products declined nearly 32% while sales of ITRON-related products declined 15%.

In the first quarter ORION continued to outsell ITRON by a ratio of 2.7 to 1.

This decline, as well as declines in the sales of commercial meters, was due to a combination of several factors.

The uncertainty over governmental spending, be it at the federal, state or local level, appears to be affecting our customers' decision-making processes.

We suspect that even utilities that have the funds available are taking additional time before they make purchase commitments due to the uncertainty as to how federal and state funds will be allocated and their impact at the local level.

We also believe the winter weather, particularly in the Midwest and Northeast, had an impact on the first-quarter sales.

Cities, villages and towns struggled with excessive snow and figuring out how to pay for snow removal.

This clearly had a short-term impact on their budgets.

In addition, the pace of installations was slowed because of the weather.

For many years we've made a point of saying that housing starts did not have a significant impact on our business.

Now with housing starts at an all-time low there is some impact that does affect our business.

Finally, as many of you know, in early February we introduced the next generation of the ORION family of meters which are part of our new advanced metering analytics system.

There will be limited release of the new system in the second quarter with full release in the third quarter.

It is possible that some of our customers are waiting for this next generation of products.

While it is difficult to quantify the impact for any one of these reasons, it's clear that the combination of all of them had a major impact on sales for the first quarter.

On a more positive note, specialty applications did see some increases.

Specialty applications represented 26.7% of sales in the first quarter compared to 14.4% in 2010.

That higher percentage was obviously due in part to the decline in the water application sales.

However, we did see sales increase from $8.9 million in the first quarter of last year to $15.4 million in the first quarter of this year, a 73% increase.

As I previously noted, this quarter includes the sales of Cox Flow Measurement and Remag.

However, we also saw significant increases in sales of radios for the natural gas industry for installation on their meters and double-digit increases in our automotive and valve businesses.

The gross margin as a percent of sales was 35.6% this year compared to 37.6% last year.

The decline was due in part to the higher price of commodities that we have talked about in our prior conference calls.

Copper continues to be above $4 a pound.

Oil costs, which affect transportation costs and purchases of resin, also continue to increase.

While we had indicated that copper would be a headwind this year, I don't think anyone was forecasting the rise in oil prices.

We did increase prices on the first of the year in anticipation of higher costs, but we are not sure if these price increases are sufficient to cover the continuing rise in commodity costs.

We will be considering whether another price increase is in order yet this year.

Foreign exchange also had a negative impact on margin in the first quarter, quarter one over quarter one, because of the radio boards that we source from Europe.

Offsetting these negative effects were higher margins associated with the increased sales of specialty products.

Our selling, engineering and administrative expenses were up about 5%.

Most of the increase relates to the additions of Cox and Remag which were not included in the first quarter of last year.

Without those these expenses would be relatively flat.

Now you would expect with lower sales that we should see some decline, and there was a decline in the variable piece of these expenses offset by higher charges for fixed costs such as software amortization.

The effective income tax rate for the quarter was 36.4% compared to 38.1% last year.

The overall rate for all of 2010 was 35.5%.

We always try to estimate what we think the overall tax rate will be for the year as a whole and as such we arrived at the 36.4% for the full calendar year 2011.

As a result of all this, net earnings from continuing operations was nearly $3.3 million or $0.22 per diluted share compared to about $5.4 million in the first quarter of last year or $0.36 per diluted share.

There are a few items to point out on the balance sheet.

Receivables have declined primarily due to the lower than anticipated sales and continued collections.

Inventories do remain high; we talked about a number of reasons on our last conference call why inventory levels are higher than anticipated.

These include the fact that costs are higher, as we've been discussing, lead times on certain electronic components continue to be high even prior to the earthquake in Japan and we anticipate this will continue in the near-term.

With regard to any possible effects from Japan, I should mention that our sales into Japan are negligible and our vendors have assured us that they generally do not source significant products from Japan.

However, that is not to say that worldwide demand may not shift to places where our products are sourced from which could lead to some additional lead time problems in the future.

We are monitoring that situation, but in the meantime carrying higher levels of certain inventories.

The inventory balances then increase further simply because we did not sell what we anticipated to sell in the first quarter, but that should correct itself as we move forward into the second and third quarters.

In our last call we told you that we were transitioning jobs to Mexico.

By the end of the first quarter this was substantially complete.

In January we completed the purchase of Remag AG, a Swiss company that makes a small plastic turbine meter.

The initial valuation is complete and you will see modest increases in the property, plant and equipment and intangible accounts on our balance sheet.

Cash generated from operations for the first quarter was $5.3 million compared to $5.2 million last year as the decline in earnings was offset by a favorable working capital change.

With that I will turn it over to Rich.

Rich?

Thanks, Rick, and thanks to all of you for joining us on today's call.

As Rick indicated, we were disappointed by the first-quarter results.

Continued weakness in municipal budgets, continued weakness in the housing markets and the difficult weather conditions in the Midwest and Northeast all combined to negatively impact our sales levels.

When higher commodity costs, particularly copper, were added to this mix we saw a relatively weak first quarter.

However, as Rick also reminded you, our business tends to be lumpy.

We have often had weak quarters followed by strong quarters and we continue to believe that the fundamental drivers of our business are solid.

Our specialty product sales should continue to grow as the overall economy recovers and our water products should continue to benefit from the need for water conservation and efficiency.

In fact as we mentioned in our press release, we have seen a recent increase in both our backlog of orders and our margins which are being positively impacted by the January 1 price increase.

Of course, it is still early in the quarter but we are optimistic based on what we've seen so far.

Last quarter we announced our newest suite of products which we call Advanced Metering Analytics or AMA.

This system consists of our new analytics-based software and our next-generation ORION SE two-way radio, which can function as either a drive by or a fixed network technology.

The radio can be switched between drive by mode and fixed network mode by simply transmitting a command to the meter which gives our customers flexibility and true migration capability.

The software not only analyzes the metering data to identify unusual conditions, but automatically executes work orders, e-mails or text messages to notify utility personnel about potential problems in the water or gas distribution system.

We believe that the new AMA system will enable utilities to improve operational efficiency, enhance revenues and improve customer satisfaction.

We began demonstrating the new system to customers over the past few months and have had very positive feedback.

As Rick indicated, we expect to begin limited shipments of this new system in the second quarter with full availability in the third quarter.

Also as we move forward with our new AMA platform, we will continue to sell our original ORION and Galaxy products to customers that prefer a one-way system.

We've also completed our shift of production from our Milwaukee facility to our Mexico facility.

At this point over 90% of our residential water meter production is being done in Mexico.

We have retained a small portion of residential meter production in Milwaukee to continue to fulfill the small number of orders that require Made in America certification.

Also all commercial meter production is currently being done in Milwaukee.

We have downsized our Milwaukee shop flow workforce from approximately 180 employees as of January 1 to the current level of below 140.

All restructuring costs associated with this change have been expensed to date and we expect to see cost benefits from this move in future periods.

We continue to look at small strategic acquisition candidates, particularly in the flow measurement and water industries.

We believe that we can find synergies that drive shareholder value through such acquisitions.

So even after a weaker first quarter we continue to believe that Badger's long-term prospects continue to look good; the underlying fundamentals that drive the need for our products -- water shortages, sustainability and conservation -- have not changed and will not change in the near future.

With that we'll be glad to take your questions.

(Operator Instructions).

Ryan Connors, Janney Montgomery Scott.

Good morning, guys.

I wanted to focus on the issue of pricing for a minute and really get your view on it on an industry-wide basis.

I know historically you've been a price leader in times of elevated commodity cost.

It's our understanding that that's the case this time around as well.

Presumably sometimes that doesn't make you real popular in the market.

Can you just give us some perspective on where you believe your competitors are in terms of making their own pricing moves and a little more color around what kind of traction you're getting and just the industry-wide pricing dynamic, any color would be appreciated there?

Well, Ryan, I would say over the -- especially over the past year we've been pretty aggressive on pricing.

We did a price increase June 1 of last year.

We normally wait a year between increases, but when copper popped through the $4 a pound level we felt we were forced to go out on January 1 and increase again.

And we did that.

And unlike our competitors, we do our price increases pretty vocally.

We let everybody know we're doing them.

And as a result we believe that most of our competitors follow us, they watch what we do and then they follow.

And at this point we don't have any indication that they didn't follow.

Now obviously they don't send us their price list, they don't announce price increases, they're very quiet about it.

But if we bid on a project last year and we won it by $0.10 and if we bid on it again this year with a higher pricing and we won it by $0.10 that tells us that our competitors followed.

So we always look at the bid caps that come in from the cities to see where our competitors are and it does look to us like they are also increasing prices, which they have to do.

I mean copper has gone up dramatically and oil prices and resins and everything has gone up and we've had to pass that on.

So we see our competitors following.

Okay, so you don't believe there's any dynamic of you losing some volumes in the quarter because you're out there with price increases and others are not?

No, not that we could put our finger on.

Okay.

The second issue I wanted to touch on is just I wanted to get more color on this dynamic of people, customers waiting for AMA.

You talk about it in general terms, but is there any way you can give us any additional color on that?

I mean, basically trying to quantify, get some feel for whether that's a potentially significant driver, what happens here in the quarter or whether that's just more of a negligible factor?

Ryan, this is Rick.

The issue there is that's hard to quantify simply because there were so many other factors in the first quarter.

I mean this whole idea of municipal spending slowing down just until we get our arms around it.

So is it because of that or is that also an excuse to use because we know you have a new product coming anyway and this -- we can use that as an excuse to cite -- wait until we get a new one.

So I think it's a combination of all of those.

And a lot of the evidence that we have of that is more anecdotal.

In other words, we announced it in early February, but word had seeped out in the community even before that, that we were coming out with a new product.

So I mean, to a certain extent it's a psychological factor.

I want to see what's new before I decide what to buy.

The initial reaction from those who have heard about it is very favorable.

We're very excited about being able to release this on a limited basis in the second quarter and we have high hopes for it in the future.

But beyond that there's not a lot of color to add at this point.

Okay.

Well, I'll step out.

Thanks for your time, guys.

John Quealy, Canaccord Genuity.

Hi, good morning, Rich and Rick.

First question, can you help us reconcile government spending slowdown concerns, housing starts -- these are issues that have been with us before the quarter and they'll stay with us for several quarters here on out.

So could you give us a little bit more anecdotal what do you think drove the performance in the channel or maybe not in the direct sales force this quarter?

And then also, I'm interested about -- your comments about business coming back in the April period.

Again, is it -- how do we reconcile both of those factors?

Well, you're right that the housing slowdown has been with us, although it keeps hitting new lows.

And I do think there's a double blow to our industry with the housing slowdown, and that is that a lot of utilities rely on new connection fees to support their overall operations.

So not only are you not selling that meter directly into a new house, but the utility is seeing a hit in their revenue stream which affects other areas of the utility including the purchase and the installation of water meters -- the replacement of water meters.

So I think housing slowdowns is really hitting us a little bit more than what it has in the past and we are hoping that if that turns around industry wide we should see a pickup.

Municipal budgets -- municipal budgets have also been with us.

Last year was distorted dramatically, as you know, by the stimulus package where the government was giving out stimulus money, some utilities were waiting.

We had a weaker fourth quarter of 2009 and first quarter of 2010, then a very strong second and third quarter as that money was put out there.

So it's hard to compare this year to last year on the municipal budgets when everything got distorted by the stimulus money.

I think this year the municipalities are looking at their budgets, they're recognizing that they don't have the stimulus money coming in and they have to make corrections.

And we're seeing -- we saw some of those corrections.

We also -- we normally don't talk specifically about short-term forecasts and the second quarter in particular, other than to say how we feel about it optimistically or whatever.

But as we looked at the first half of this month, the first half of April, we did see an uptick in our backlog; we saw some very strong order entry and we saw some strong margins.

And all of those things combined caused us to say we really need to tell the investment community that we are seeing a stronger second quarter as we move into it.

So I thought that was an important statement to make.

Obviously we don't want to quantify it and give you any specific details and a half a month doesn't make the entire quarter.

But at this point we're pretty optimistic.

We saw a very -- an unusually weak first quarter and we're seeing signs that it's trending and turning around.

And my final two questions -- if we go back to the price issue, I think on the last call there was a discussion of about the lagging impact on the July 1 increases that it almost takes perhaps three to four quarters to get fully penetrated and yet here we have another one in January 1.

So can you comment a little bit about when we should be at full penetration of both of those, we should be able to see that in the results?

And then lastly, Rich, can you give us a little bit of background on Obama signing in that legislation on lead-free and some annexes to NSF that we're going to have to deal with in '12 and '14?

If you give us some background in Badger's plan to comply, that would be great.

Thanks.

This is Rick.

I will talk about the lag factor.

We are seeing some effects -- the price increase effects that we see in the first quarter are really from the price increase we put into effect last June 1.

And the generic answer to your question is generally you see very little impact in the quarter following a price increase; you see maybe a modicum of effect in the second quarter; it takes the third and fourth quarters before you see the full impact because you're dealing with bids and quotes and the like.

So any price impact that we saw in the first quarter is really from the one that -- from last June 1.

And we are seeing some that's helping offset the continued increase in copper prices in particular.

And, Rich, do you want to talk about the (multiple speakers)?

Well, I think you should also point out that we did some statistical studies, John, and found that after about a quarter we're getting about half of a price increase.

So the January 1 increase, we should see about half of that impact in the second quarter.

By the time we get to the fourth quarter it's all in -- we're seeing 100%.

So you're right that it takes three or four quarters, but after about three months you're getting about half of it, so that's in there.

Let's talk a little bit about lead in the water meters.

For those who aren't familiar with it, we sell two types of water meters or two types of brass, one is called 81 brass, it's got lead in it.

The lead that's in it meets the Safe Drinking Water Standards and it's been used for hundreds of years in America.

We also sell a second type of brass called -- that we call EnviroBrass, it's a lead-free brass that meets the requirements of certain states that want a lower lead product like California, Vermont, states like that.

Now more and more states have been implementing rules saying we want lower lead and we are able to sell both without any problem whatsoever.

President Obama signed some legislation, as I said, that I believe by 2014 will put a national standard for lead.

And we have the brass that complies with that standard, we will have no problem whatsoever.

We have the advantage right now of being able to sell both types -- the old type and the new type -- and there are some states that want the 81 brass and some states that want the EnviroBrass.

We can make -- our foundry can make them both and we can easily sell them both.

After my comments last time one of our competitors, Neptune came out and said well, Mr.

Meeusen is right that our foundry can only make EnviroBrass, it can't make the older type of brass.

And then they went so far as to say we would not even allow the other type of brass in our foundry, kind of implying that the other type of brass is inferior.

The truth of the matter is they can't handle two types of brass.

We can handle two types of brass, they can only handle one and that's why they don't allow the other type in their foundry.

Right now about half of the states still buy the old 81 brass and, like I said, it meets the Safe Drinking Water Standards Act, there's no problem with it, and about half the states are requiring the newer brass -- half the customers are requiring the newer brass.

When we get to 2014 we will simply switch over entirely to the newer brass and there won't be a difference.

I should also point out that we also sell polymer meters which have no lead whatsoever.

And those meters are gaining in popularity, we think it's a great option.

Even the new EnviroBrass, even President Obama's new standards will still allow some lead in the brass, there's always going to be lead in the brass.

The nice thing about the polymer materials is that there is no lead whatsoever and a lot of utilities are now starting to look at that.

John, does that answer your question?

Yes, no, sorry.

That was great, guys.

Thank you.

Richard Eastman, Robert W.

Baird.

A couple questions.

Did we see -- in the first quarter you had mentioned that local read meters were up -- I don't know if you put a percentage on that.

Could you?

And also is that increase on the local read meter side a function of distributors taking product that they pre-ordered prior to the price increase?

This is Rick.

First of all, yes, I can put a percentage.

It was probably up about 20%, but the dollars involved generally are not that significant because more of the dollars are AMR and AMI related.

Your question is a little bit hard to answer.

Yes, it could be for some pre-deliveries; it can also just be a function of that lumpiness we talk about, that the orders are -- we just happened to receive a batch of local read meters or because of budgets they're not doing AMR and they're ordering plain vanilla manual read meters.

Okay.

Rick, this is Rich.

You have to remember that still about half the cities in the United States are buying manual read meters and that includes large cities like Indianapolis that are buying the manual read meters.

So when they place orders we can't control the timing.

They may order a block of manual read meters and that -- at any time.

And that's one of the things that makes our business so lumpy.

Well, it just seems a little bit contradictory to your comment about weather impacting sales, because I would think that the local read meter deployment and installations would certainly be impacted by that.

No question, weather wise it's still going to take -- whether it's a meter with technology or a plain vanilla meter, you're still going to take a pipe wrench and go into someone's home.

So I'm not arguing with that.

It's just a function of the order mix for those sales that we did have that are weighed a little bit more heavily with local read meters in this quarter.

Yes, yes.

Is there any way to just get a sense of how weather impacted the quarter?

I mean, those I would think -- can you gauge that deferral?

Because if I look at your revenue sequentially it's well down from a normal seasonal pattern and would weather be $4 million or $5 million of deferrals?

Is there any way to gauge that?

Rick, we're not even going to attempt to put a number on it.

I mean, you hit it on the head, there's always been some seasonality in our business.

I go back 10 years and the second and third quarters were always stronger than the first and fourth.

And we stopped talking about the seasonality in the first quarter when we had a couple of years in here where we had some outstanding sales in the first quarter and kind of scratched our heads because we were questioning about the seasonality.

I guess I've never gone back and looked at whether they were mild winters.

Winter is always with us.

We are stronger a little bit more in the Midwest and the Northeast, and so that's always been an issue that we thought has impacted our seasonal sales.

This was -- well, first of all winter is continuing today if you look outside here in Wisconsin.

But I think it's hard to quantify but we know it's had an impact.

I mean, our own plant down in Tulsa, Oklahoma was shut down for nearly a week because they had so much snow.

And so you think about those issues and you can always tell when it snows in the Northeast because it's on the nightly news and nationally.

But they had a number of stories this year where they had a long winter out there.

And, Rick, we really got hit with difficult weather for several weeks all the way from Tulsa to Bangor, Maine.

It was a swath across the United States.

And during that period of time we saw customers just say don't ship anything, we can't even get it in here; don't even bother shipping.

So there was an impact -- there was a significant impact, but to try and quantify it is really difficult.

Sure, sure.

And then just one thought on this AMA platform and the introduction now and commercial availability of that product.

Can I just ask, your go-to-market strategy there, I think at one point you mentioned that that product would have some premium price for the functionality and I don't necessarily think of that product and that platform being -- appealing to the same customer bases as the ORION product and maybe even -- well, maybe Galaxy, but more so the ORION product.

So when you say customers were out there maybe holding off, are they still evaluating the two platforms given the price differential?

Is that what (multiple speakers)?

I wouldn't think that the same customers that would be interested in the AMA platform would necessarily hold up an ORION purchase.

Well, I'm not sure I agree with that.

Last year the sales of fixed networks in the water industry, according to the Scott Report, jumped from about 8% in 2009 to 15% in 2010.

And I would say that almost all of our customers at some point are looking at the benefits of some sort of fixed network and two-way fixed network, anyone that's moving to technology or considering moving to technology.

So, yes, there will always be a place for drive-by, there will always be customers that simply want a drive-by.

But everybody wants to look at what the two-way fixed network will offer and what the AMA platform will offer.

And so as we roll that out I think it is causing customers to stop and take a look, even the ORION customers.

And even those that aren't interested necessarily in the software clearly are interested in the backup for the network.

So if your tower gets hit by lightning and the radio doesn't hear back from the tower it will switch back into a mobile system.

So I mean having that feature alone is -- they're taking a look at it.

And, Rick, our VP of marketing, Kim Stoll, just flashed me a hastily scribbled note reminding me that the AMA system and the whole ORION SE system that we are offering, the new system works as both a drive-by and a fixed network.

So because of that you're going to have customers who are interested in drive-by also looking at AMA as a drive-by product.

Okay, all right.

And this is still -- we're still going to market with some premium price on this?

Yes, we are.

Okay.

Okay, great.

Thank you.

Steve Sanders, Stephens.

Good morning, guys.

First, just to follow up on April -- I don't want to read too much into the first few weeks.

But your comment about making some margin progress, is that primarily mix or are you actually thinking you'll make incremental progress 2Q versus 1Q against copper?

I believe it's beyond mix; it is some progress against copper.

We are seeing the impact of the June 1 price increase from last year now fully moving in and the January 1 partially moving in.

Okay.

Okay, and then the gas business had obviously very strong growth in 2010; it was nice to see those numbers broken out.

And it sounds like from Rick's comments that the gas business had a good first quarter as well.

Does it still feel like this is going to be a growth year there?

Yes.

Yes, Q1 over Q1 was up substantially and it's due primarily to the Duke order.

But we're also selling gas radios to smaller, much smaller gas utilities.

Okay, okay.

And then I guess it's not possible to accelerate the availability of AMA; your schedule is kind of set at this point?

I mean, God knows we'd certainly like to, but the fact of the matter is we are wrapping up beta testing and we are now starting to make it available to customers who are taking it on a pilot basis.

So generally roll outs of this type in our industry take time and we're very cautious.

We're not selling -- unlike the electric industry, we're not selling a product that's expected to last seven years, we're selling a product that is expected to last 20 years.

So we want to be very careful and make sure we do it right.

Okay.

And then on the pricing, should we assume that it would be July 1 before you would take another increase?

Or maybe I missed some comments on that.

Would you consider doing it before then?

Yes, Steve, I think it's going to depend a lot on where copper goes.

If copper stays where it is down in that $4.20 to $4.30 range we may reconsider whether to do anything.

But if copper goes up over $4.50, and a lot of people are talking about $5 copper by the end of the year, if that happens we're going to have to react.

And I'll throw oil into that mix too.

Because that affects a lot of the purchase parts even in transportation, it affects the purchases of our resin and the like.

So I mean it's commodities in general; we always tend to focus on copper, but we do have to focus on a few other things too.

Right, and then last question.

I think we've seen that Cleveland is having a few hearings, I know the project is approved.

But is there anything new there that you can share with us?

Yes, we won the bulk of the Cleveland meter business.

Cleveland had made a decision on technology with another company, but then went out separately for the meters and I believe we won about 80%, 90% of that business.

Okay.

And it looks to me and I would like your interpretation that the project is approved, it is ready to roll, these hearings that are dealing with some of the price increases don't look to be driven by the water system, they look to be more driven by other costs at the water utility there.

Is that your interpretation?

That's my understanding.

I don't think there are any particular concerns with this project.

Okay, okay, very good.

Thank you.

Eric Stine, Northland Capital Markets.

Hi, everyone, thanks for taking the questions.

I hate to stick with margins, but I'm just curious.

Your comments seem to indicate that first quarter was the bottom or at least that you're hopeful that there's second-quarter improvement.

I know on past calls you've talked about that that January 1 price increase captures copper at about $4 and/or above that.

So I'm just trying to reconcile the two looking forward.

I mean, did you indicate that it's more mix and how should we think about that for the remainder of the year?

Well, I think you're right that the January 1 price increase we had kind of pegged $4 per pound copper as where we were shooting when we set that January 1 price increase.

If we run and as we went through the first quarter there were some blips in copper where it got closer to the $4.50, it's now settled down around the $4.20.

But we're also able to offset some of that with the movement of production to Nogales and some other efficiencies that we've seen.

So the way to think about it for the remainder of the year is -- while we're in the current copper range, I think we're going to see some pretty good margins coming out of that price increase and the previous ones.

If that copper jumps again or if oil continues to go high we're going to have to reconsider that.

And, Eric, the product mix, I mean the technology sales being down so much, that has -- we've always said we don't make as much margin on local read meters as we do in the technology.

And then also specialty products carry higher margins, so that product mix is a huge thing in there.

As specialty products, the specialty applications continue to grow with the economy and if we get the technology sales back up we should see some improvement in the margin.

Okay and that's helpful.

And that's a good segue to the specialty segment within that.

I'm wondering if you can just provide a little more color in the improvement you've seen in the natural gas business.

I know on past calls you've talked about working with close to 50 utilities and just discussion of how maybe the number of end-customers has grown over the last quarter or two?

And then just talk about how those other customers compare to the size of the Duke contract?

I can answer that last one first.

The other -- I mean virtually every other customer on this gas side has been fairly small because Duke is the elephant in the room in selling radios into the natural gas.

And by and large most of the increase we saw quarter one over quarter one relates to Duke.

And there are a handful of other customers and beyond that I don't really -- I mean I don't have a lot (multiple speakers) sitting here.

Yes, Eric, I think the last time I looked at it, and I don't have the exact numbers in front of me, but the last time I looked at it we had 60 or 70 customers that we've sold gas product to since we introduced that product.

Duke is obviously the largest one.

But we are also -- we have some substantial bids that we're involved in for customers the size of Duke, for very large customers.

So there are other large projects we're chasing.

And meanwhile, every quarter we sign up some more small gas customers.

Okay.

Yes, that's what I was getting at, just the -- within that group are there other potentials that are the size of Duke?

Sounds like there are.

So that is very helpful.

And absolutely there are.

And we are in conversations with them, some of them are getting ready to go up for bid, some of them -- we have bids that have been submitted.

So we're involved in a lot of these.

Okay, thank you.

And then last thing just on the water segment.

Just thinking about linearity of revenues here going forward, should we expect any catch-up related to weather?

That things -- I mean is that part of the reason for your optimism, things getting pushed into the second quarter?

I'll try and take this one.

Go-ahead.

You jump in.

The problem when you say catch up is that there's a thought process that I was going to order this much in the first quarter, I'll order the first and second.

We seem to forget about installation rates.

You still have to take pipe wrenches into homes.

So what happens is it's not so much of a catch-up as much as if I was going to start the project on February 1, maybe now I'm going to start it on May 1 and I'll go with the normal pace from that point forward and I'll push out the ending date.

So I don't think it's something where you'll see what should have happened in the first will now be added to the second.

I think everything just gets pushed out.

Got it.

Okay, and then -- so you're definitely more hopeful about the second quarter.

But given the timing of the AMA launch, is it fair to say that you're more optimistic about the third given that the second quarter you still could have municipalities waiting for this new technology?

Yes, I think that's fair to say.

But we've seen strength coming into the second quarter, we feel good about that.

Like I said, our business is lumpy; things could go whatever direction.

But we do know that as far as new product introduction, by the time we get to the third quarter we should be humming with that product and we're pretty excited about its potential.

Okay, thanks a lot.

(Operator Instructions).

Glenn Wortman, Sidoti & Company.

Yes, good morning, guys.

Just the improvement you've seen in orders and backlog so far in the second quarter, is that year over year, sequential or both?

I'd say it's sequential from Q1 into Q2.

Last year's second quarter it was I believe a record, if I recall.

If not very close to a record.

So we have a very tough comp in that sense.

Right.

But when I looked at it, it does look like it's trending towards what we saw last year.

Okay.

So it doesn't take much to be an improvement over the first quarter, so I don't want to distort that for you and just say, yes, we're better than the first quarter.

But I would say based -- and again, I'm only basing this on two weeks of activity.

We are seeing order levels that we saw last year in the second quarter.

Okay.

And then second, what percentage of your residential meter sales are derived from new home construction?

You know what, that's something we can never know.

And the reason is when a utility calls and asks us to ship them meters, we sell them meters -- there's no way to know how many of those meters ago into new homes or how many of those meters are used for replacement.

There's no feedback process so it's impossible to tell.

All you can do is look at the number of new homes that are being built and make some estimates about how many of those might be on private wells versus how many of them are on water systems that require meters.

Okay.

And then just lastly, on the Duke order, can you just remind us how large that order was and at what point do you think that runs its course if you don't obviously win any additional business with Duke?

It's $20 million over three years, up to $20 million over a three-year period.

And we started shipping -- I'm looking around the room.

Anybody remember?

A little over a year ago.

A little over a year ago.

So clearly all of this year will include Duke and sometime into next year.

Okay.

All right, thanks for taking my questions.

At this time I'd like to turn the presentation back over to Mr.

Rich Meeusen for closing remarks.

Thank you.

As I said in my opening comments, the first quarter was difficult.

However, we're still very optimistic.

We see strength coming into the second quarter, we know that our new products are being met with a lot of excitement in the marketplace.

And I think as the economy improves, as housing prices improve, as we don't have the weather issue around us we're going to -- we're optimistic that we could see some strength coming back into the markets and that's what we'll be looking forward to for the rest of the year.

So with that I'll thank everybody for joining us today.

We thank you for your participation in today's conference.

This does conclude your presentation.

You may now disconnect, and have a great day.