Badger Meter Inc (BMI) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Badger Meter Incorporated Earnings Conference Call.

My name is Geisha, and I will be your operator 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 this conference.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Rick Johnson, Senior Vice President, Chief Financial Officer.

Please proceed.

Thank you very much, Geisha.

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

I want to thank all of you for joining us.

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

Certain statements contained in this presentation, as well as other information provided from time to time by the Company or its employees may contain forward-looking statements that involve risks 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 onto the second quarter results.

Yesterday afternoon after the market closed, we released our second quarter 2011 results.

When we spoke to you in April, we referenced the fact that our business can be termed lumpy, and the first quarter reflected that.

I'm pleased today to announce that sales for the most recent quarter were a record for any second quarter, and our earnings were at near-record levels.

The success of the most recent quarter was driven by increased sales in our specialty application products, which more than compensated for lower sales in our water application business.

Let me talk about some of the details.

Sales for the three months ended June 30, 2011 increased just under $1 million or 1.2% to $75.1 million, compared to $74.3 million during the same period last year.

These results include approximately $1 million of sales of our newly acquired Remag products, whose sales are included as part of the specialty application product line.

Water applications represented 78% of the sales for the past three months, compared to 87.2% in the second quarter of last year.

Water application sales were down nearly $6.1 million for the last three months to $58.7 million from $64.8 million last year.

The decline was due primarily to lower sales of AMR and AMI products, as well as lower sales of commercial meters.

Sales of ORION-related products declined 21%, while sales of Itron-related products declined 15%.

Commercial meter sales declined 26% over the second quarter of 2010.

We believe all these volume declines are a continuation of many factors that we discussed on our last conference call, including concerns over municipal spending, slower housing starts and the introduction of our new ORION product, which is scheduled for full release in the third quarter of this year.

We believe all of these factors combined are delaying purchasing decisions, particularly introduction of our new product, which is causing utilities to take time to evaluate the new technology.

Specialty application products represented 22% of sales for the three months ended June 30, 2011, compared to 12.8% for the same period last year.

These sales increased $6.9 million in the second quarter, or almost 73% to $16.4 million from $9.5 million last year.

As I noted, this included $1 million for Remag, which is only in this year's numbers.

The remainder of the increase is due primarily to the sales of radio technology to natural gas customers for connection to their gas meters and higher sales of valves, both domestically and internationally.

With respect to the sales of radio technology to natural gas customers, the contract that we have with Duke is the primary reason for the significant increase year-over-year.

We've also seen nice increases in Cox Flow Measurement on a quarter two over quarter two basis.

We acquired Cox in April of last year.

So this is the first quarter with a full year-over-year comparison.

Gross margin, as a percent of sales, was 36.2% in the most recent quarter, compared to 36.4% in the second quarter of last year.

We've been noted for several quarters that copper prices would be a headwind this year, and you might expect margins then to be impacted more significantly than it appears at first glance.

Actually they were.

The small net change you see between years is really the net impact of a decrease in margins due to the higher copper prices, offset by the price increases we put into effect, both last June and more recently on January 1 of this year, and the positive effects of most residential meter production now being done in Mexico.

The product mix also positively affected margins.

We had a higher percentage of specialty products, which have higher margins than water application products.

Selling, engineering and administration expenses increased just under $1 million or 6.4% over the same period last year, due in part to Remag expenses being included for the first time.

In addition, we are seeing higher amortization cost of various intangibles and software, as well as higher cost associated with technical support for the Company's products.

As we move toward more fixed network applications, the needs of technical support have increased and we have staffed appropriately.

I should also remind you that last year's second quarter results included a one-time pre-tax credit of $740,000 for the fair value of land received in settlement of claims against a building contractor for our new Mexico plant.

The effective income tax rate for the quarter was 35.7% compared to 37.8% last year.

The primary reason for the decline is lower estimated state income taxes.

As a result of all of this, net earnings from continuing operations were nearly $7.8 million or $0.52 per diluted share, compared to $8 million or $0.53 per diluted share last year.

Our balance sheet remains solid.

Receivables are higher than they were at year-end, simply because of the slight seasonality that is built into our business.

Inventories have declined from the December 31 and March 31 levels, and we continued to pay down debt.

Cash generated from operations was nearly $18 million for the six months ended June 30, compared with approximately $10.5 million for the first six months of 2010.

The slight decline in earnings was offset by favorable working capital changes.

With that, I will now turn it over to Rich Meeusen.

Rich?

Thank you, Rick, and thank all of you for joining us today.

We are pleased with the second quarter's results, particularly following the weaker first quarter.

These results demonstrate the value of our diversified portfolio of products, allowing us to generate strong sales and earnings from our specialty products, as we continue to see some weakness in our water markets.

As Rick explained, many of our municipal water utility customers are constrained by tight budgets or uncertain funding, which is holding up the roll-out of water technology projects.

Lower housing starts not only result in lower meter sales, but also reduced water utility revenues from connection and service fees.

As a result, we are seeing utilities delaying new projects in their service territories.

We also believe that some utilities, both current customers and non-customers, are slowing their decision-making processes as they evaluate our new AMA product offering.

We believe that these showdowns are temporary.

Ultimately, all water meters must be replaced at some time and the adoption of meter reading technology can reduce cost and improve service levels.

As such, we believe that the fundamental drivers of our business continue to bode well for our industry, and we expect to see some of these headwinds turning around in the future.

We also expect to continue to see strength in our specialty products.

The combined effects of improvement in municipal water industry and continued growth in specialty products could continue to generate strong increases in both sales and earnings for us.

Also, we are excited about the full roll-out of our Advanced Metering Analytics products.

As many customers have already ordered pilot units of the new ORION SE radios and we expect to begin shipping the Analytics software within the next month.

The combination of the ORION SE hardware and the AMA software will give water utilities unprecedented capabilities to manage their water systems.

I'd also like to mention the value being delivered by our two most recent acquisitions.

Cox Flow Measurement acquired in April of last year and Remag acquired in February of this year are both delivering sales and earnings in excess of the levels we had expected when we acquired them.

We have been able to find significant market synergies for their flow products, when combined with Badger Meter's own flow technologies.

We are continuing to look at other potential acquisitions in the flow measurement industry.

Finally, I would point out that we continue to invest significantly in our R&D programs.

We are developing additional sizes and features for our solid-state water meters, both the E-Series ultrasonic meters and our magnetic meters.

We are also continually investing in enhancements of our meter reading technologies to maintain our technology leadership in the industry.

With those few comments, we'll welcome your questions.

Thank you.

(Operator Instructions) John Quealy, Canaccord Genuity.

Hey, good morning, guys.

Good quarter there.

Just a couple housekeeping first, and I'm sorry if you said this, but did you comment on how much the gas business was specialty?

And second on that, where are we on the Duke contract in terms of completion levels?

Duke is up substantially year-over-year.

I mean gas, in general, is up, but most of it is due to Duke.

We did not disclose the dollar amount, we probably won't.

But it is up, it is up three to fourfold over last year.

And we're probably in about the middle of the contract at least.

Okay.

[Part of which is] depending upon their installation rate.

So I'm reluctant to say exactly where on the timetable we are.

Okay.

And then secondly, with regard to AMA and the new radios coming out, you talked about some people piloting them.

Is this going to be a concept where you're going to stop supporting some of the legacy SKUs and you're just going to be pushing the new products, or can you give us a little bit more detail about the go-to-market strategy?

Is it just going to be a premium priced product versus the existing line?

Right.

We already phased out our oldest radio technology, which was TRACe, that we had introduced almost 20 years ago.

We phased that out several years ago when we had ORION coming in as strong as it was.

The new versions -- the new products that we're coming out with are backward compatibles, so they work with the old system and we intend to continue to support ORION, what we call ORION CE now, which is ORION Classic Endpoint.

We intend to continue to sell that to customers who want a good drive-by product, and we also intend to continue to sell and support GALAXY.

So we do not see ORION SE as causing a phase-out of either of those products.

Okay.

(inaudible) the market that that want us to continue with drive-by for the next several years.

So I mean, we -- I agree with Rich.

We're not going to be phasing that out.

The nice thing about both ORION CE and GALAXY is that the way we've configured ORION SE, it's very easy to upgrade your system even with a mix system, where you got some of the old and some of the new, the reading software can read both and can handle both and can bring them altogether into one system.

So it really is designed to be able to migrate very easily.

And I'm sorry, just one last one on the details.

In terms of price capture, you talked about raising prices, obviously the June period, et cetera.

Can you comment about how many distributors or SKUs have been covered at this point with the new pricing?

Well, all of them.

When we do a price increase, it runs across the board to all distributors and to all products, too.

And my last question, so we've heard in the channel that you folks are pitching business in some locations with big system integrator firms like IBM, for example.

Can you comment on how the platform sale evolves with AMA and going in with a player like IBM on the systems and integration side, what you're thinking there?

Yes.

And we've worked with systems integrators in the past like Johnson Controls and companies like -- and Honeywell.

With IBM, they are -- IBM is promoting their Smart City concept, and we have been chosen as a player in that with them.

At this point, we are running beta tests where we are integrating our AMA system and our Endpoint into the larger IBM Smart City system.

We don't see any immediate sales coming from that.

Like I said, it's beta test at this point, but we think it is something that could position us very well for the future.

Thanks, guys.

Steve Sanders, Stephens.

Hey, good morning, guys.

Good quarter.

Thank you.

First, maybe a follow-up on AMA.

I know you talked about a full roll-out in the third quarter.

Are you building a meaningful pipeline there?

Or should we start to see that move the needle in the third quarter, or is it more a fourth quarter and going into '12 before you think that has a significant impact?

Well, I think it's more fourth quarter and going into '12.

We have a lot of customers who have said, send me 50, send me 100 of them, I'm going to put them out there and [triumph around].

Now, some customers will use this system for one billing cycle and then say, yes, we like this, we're going to go through it.

Others will say, no, we want to use it for four or five billing cycles, which could be six months before they make a decision.

The other thing to understand is that some of this AMA, although we have a higher selling point and we also make more money in the software, because it's a much more powerful software product, but some of it is where customers say instead of buying the ORION CE or the GALAXY, I'm going to buy the AMA.

So there is some cannibalization of the existing sales as they switch over.

Where we think the product will do very well is in the pitch to the customers who have struggled with whether they want to go with a drive-by or a fixed network.

And we have a lot of customers that have delayed making a decision, delayed moving to technology.

We know that less than a third of the water meters in North America have any kind of radio technology on them.

And we think a lot of those customers who have said, I don't know whether to go drive-by or I don't know whether to go fixed network will look at our AMA system and say, well, now I don't have to make that decision.

It's one product that can function either way.

And I think that could move a lot of customers off the dime.

But I think you're probably looking at fourth quarter into next year.

Okay.

And then sticking with the water business, if we kind of think about the industry, I think ballpark half of the endpoints are with what would be considered the large utilities, maybe 35% or 40% are kind of mid-sized, and then the balance are the smaller customers.

Is the behavior or the ordering patterns kind of different across those various segments?

You're right about how -- our industry is very segmented and for those who aren't familiar with it, there's about 52,000 water utilities in the United States, what they call -- what the EPA calls community water systems.

About 400 represent 40% of the customers or the meters that we sell.

The next 4,000 represent another 40% and the remaining 48,000 represent the last 20%.

So it's a very segmented industry.

And that's why we go to market through both direct sales and through distributors.

Generally, we find that the customers act pretty homogeneously across all of those segments, that buying decisions are driven by the same sorts of things and there isn't a big difference in segments that one segment will adapt one technology and another segment may adapt another.

We find it's pretty consistent across segments.

Okay.

Okay.

And then two quick follow-ups.

First, just maybe a general update on the pipeline for gas AMI projects, specifically some of the bigger deals.

Do you feel like your competitive position is good on those?

And then second, just kind of a general commentary on market share.

Any meaningful shifts going on as you see it either on the meter side or on the AMR/AMI side?

Yes.

Well, starting with the gas, we do have additional projects in the pipeline.

Many of them small, some very large.

And although I'm not willing to list what those projects are, I'd do that as soon as my competitors list all of their projects for me and I don't think they're going to do that.

What I will say is that we have proposals out there and we are in meaningful discussions with additional gas companies that might be interested in the system, especially now that Duke has -- we've had such a success in working with Duke.

Also, there's a possibility -- we're only doing a portion of Duke's territory.

So there's a possibility for follow-on work there, too.

So that's on the gas side.

On the question of whether we've seen any meaningful shifts in market trends, we have not yet gotten the market data out of the first quarter.

Clearly, I would expect with our weaker first quarter we might have seen the whole market drop down and there could have been some shifts.

But in the second quarter, as we've seen things coming back a little bit, I don't think overall we're going to see any big shift in market trends.

Okay.

Thanks very much.

Yes.

Michael Cox, Piper Jaffray.

Thanks a lot, guys.

Congrats on a nice quarter.

Thank you.

Thanks.

My first question is on the SG&A.

On a quarter-over-quarter basis, it dropped down I guess versus Q1.

I was just wondering if you could comment on any factors there that drove that decline?

Well, one of the factors is employee incentives and [loosely translated] annual bonus.

Given the -- generally when we get to the end of the first quarter, we're so optimistic about the remainder of the year.

But we were -- we were under last year.

Now we've just finished another quarter, we're under last year.

So in essence, what you're seeing is we've adjusted our annual bonus amounts.

We've lowered them significantly.

And so you see that pick up in the second quarter a little bit from Q1.

But other than that, there have been no significant changes.

Don't forget, last year's second quarter included that one-time gain on the settlement.

Sure.

Okay.

And --

Let me add something there.

I don't want you to interpret the reduction in the annual bonus as a statement that we are not confident about the rest of the year.

Oh, yes.

We still think the rest of the year is going to be a good year.

It's just that I'm not sure that we're going to overcome the weaker first quarter by the end of the year to having a year that's totally up, and that's what's reflected in the bonus.

In our Company, bonuses are only paid if we increase earnings over the prior year, and so that's what it reflects.

Okay.

That's helpful.

Of the inventory increase of that percentage, could you comment on how much of that is related to higher copper prices?

Off the top of my head, I really can't and we probably won't disclose it.

It's a minor amount.

Part of the problem is we're still carrying.

We still have the long lead times for electronics.

We were talking to our purchasing people earlier this week.

We're still upwards of 26 weeks out when we order radio boards and the like from getting it.

Copper is probably not as big a piece because those -- the copper inventory turns more frequently.

It's probably our fastest-turning item that we have.

I mean, there's some in there, but I can't quantify it off the top of my head.

Our castings move from smelter to foundry to us pretty quickly.

So there isn't a lot of copper in the pipeline.

But you have to understand these radio boards we're buying, which are a much higher dollar item than brass.

Those are coming over from overseas and a lot of the vendors in electronics are still looking at 20 or 26-week lead times.

I mean, they are long lead-time items.

So we have to cover ourselves by carrying some extra inventory there.

In fact, our purchasing people said they'll start feeling better when the lead times go down to 20 weeks.

Okay.

It's going to be an issue in the near term.

And one question on the Duke project, if I could.

You had indicated that you're halfway or at least halfway through that.

And I would assume that's just for the initial 400,000-meter project.

And --

Correct.

Yes.

Could you comment on maybe if there is a potential for a follow-on or what sort of total size this could potentially become?

Yes, as I mentioned, there's always an opportunity, because the 400,000 we're doing is only a portion of Duke's territory, and certainly the project is going well.

I think Duke is happy.

We're very happy with it.

And I think there's -- there could be an opportunity for more work, as Duke looks at the rest of their territory.

But we really can't talk about what that potential might be at this point.

Okay.

Thanks a lot, guys.

Yes.

Richard Eastman, Robert W.

Baird.

Just a quick -- a follow-up on that Duke question.

But -- so we've seen the shipments accelerate meaningfully there.

I mean, to be up three to four times versus last year's second quarter, there's pretty accelerated pace of shipments then, ah?

No, I'd say last year in the second quarter we were just really getting underway, and now we're at kind of normal shipment rates.

Okay.

So that project still is likely to ship through '12 and into even a little bit of '13?

Well, for sure through '11 and into '12.

We're not quite sure of the timing yet and a lot depends upon Duke's pace and I mean, this is not something where it's been pre-scheduled and we know the firm's shipping dates.

We're kind of working with them and getting their schedule.

These are things that -- and this is true even on the water side.

We historically work with customers.

[I always talk you] back to 2001 when Houston said they were going to do their city over two years, it took them five to do it.

Okay.

The best laid plans always get changed and we've had customers that have accelerated projects.

We had customers that stretched out.

I don't want to sit here and try and speak for Duke.

Okay.

But we're working with them and we're meeting their expectations.

Okay.

And then when you talk about the water piece of the business, I guess, by calculation was down about 10% year-over-year.

And when you --

Yes, that's about right.

Yes.

And when you kind of mentioned ORION off 21%, Itron off 15%, I think you said commercial was off 24% or 26%.

Yes.

What was up there?

I mean is it like the local read meters or how do we average to a minus 10 with those numbers -- those pieces?

That's a good question.

Rick, you've asked a really good question.

You've gotten scrambling --

[You're right].

We got everybody, I'm looking for [25].

Hold on just a second while Rick --

[Handing me] pieces of paper at once, [Rick, stand by].

Yes.

I mean local reads were essentially flat.

Okay.

Some might actually do it, [I don't know].

Well, we had GALAXY up also.

GALAXY was up.

Our impeller business was up.

Okay.

So that other water stuff in there was up?

In our water -- our electromagnetic business in water was also up.

Okay.

And you have to understand what's happening with the large commercial meters.

There's a shift in the marketplace from what we traditionally call commercial meters, which was the turbine meters over to the electromagnetic meters.

So when we say the commercial meters were down, we're not including the magnetic meters and a lot of that is replacing the turbine business.

Okay.

So we had a pickup in large MAG meters used for water, used by water utilities.

Yes.

And then also a pickup in the impeller business, which is used more for irrigation purposes.

Okay.

And MAG meters, it's typically more wastewater, right?

No, MAG meters -- a lot of the MAG meters are used -- are being used now for freshwater and it's a replacement for the turbine meters.

Okay.

The utilities are finding that as a very efficient product and especially with the introduction of our battery powered MAG now, that's providing some utilities the product that they really want.

Okay.

And then, Rich, could you just maybe clarify kind of how the Cleveland contract has shaken out?

You guys won a big chunk of the meter piece and after that was announced and we kind of calculated that out, Sensus made a bunch of noise about their portion -- excuse me, Elster made a big -- a lot of noise about their portion kind of -- everybody kind of seemed to be claiming more volume than what was available there.

Yes, you're right.

And I looked at the bid tab and it was pretty clear the total project for meters, this doesn't include radios, the total project was about a $12 million or $13 million project.

They actually got $8.6 million of it.

So I was just as shocked as you were when Elster announced that they got the majority of it, because I mean -- I went to a Catholic school and studied math, so the nuns didn't teach me math that way.

But that's what they claim.

Okay.

Our number is $8.6 million and I think if you look at what Cleveland announced, the total project for meters is about $12 million or $13 million.

Okay.

All right.

So on a per-meter basis, you got say 300 of the 450 or something like that?

Yes.

I don't remember what the meter numbers are, because there's a mixture of large meters and small meters, but I know we got about 75% of the dollars.

Okay.

And then is there -- in your contract on that business, are there embedded copper price escalators?

Or is there an adjusting -- is there an mechanism to adjust prices based on copper prices?

I honestly don't recall on the Cleveland one.

Okay.

As a general statement, we're putting the escalators in contract.

Yes.

Okay.

There is occasionally resistance by our customer here and there.

We can't speak specifically to this contract.

Right.

But generally, the most we're going to do is fix pricing for six months or something like that, and if they want to go beyond that we want an escalator in there.

Okay.

But I really -- Rick, I honestly can't tell you.

I don't recall what the Cleveland contract is.

Yes.

Okay.

And then you probably saw this, I'm sure this hit your radar screen, but there's -- there are some initial proposals out there for kind of fiscal '12 US appropriations for not only the EPA, but also the SRFs?

Right.

Kind of a dramatic, we just I think tried to stimulate it with $1 billion and we've now taken the $1 billion back out.

But given SRFs and metering is a spend that you can tuck under SRF funding.

How do you view that?

Is that as bad as it sounds, or is it causing municipalities to again pause here while we see what the real availability as a funding or --?

Rick, this is Rick.

In the first place, I'm not sure how much of that stimulus money we ever really got.

Yes.

We argued all along, it caused disruptions in the marketplace.

Understand, yes.

[We must] make sure that it actually resulted in substantially increased sales.

And therefore, the flip side here is to the extent they take some money away, meter reading is one of those things where it's not thought of as a typical capital purchase, all right.

And you probably heard me say this before, but even a company going out of business keeps the cash register by the door.

Even if you only have two weeks to stay in business, but the cash register goes out, you got to buy a new one.

We are the cash register for these utilities and water meters wear out over time.

Even in a down cycle, we can argue that [replace] your water meters, you'll get more revenue and it will help pay for the meters.

So there is a way to sell into these kind of markets.

But I'll argue that we didn't get as much of that -- we certainly didn't get anywhere near the $1 billion.

No, I don't think so.

Yes.

Yes.

But here's a thing, I mean when we were -- municipalities paused waiting to see if they could benefit from some of those stimulus dollars through the SRF program, at the same time will they now pause saying, wow, there's $1 billion coming out of that program?

Well, I think the state revolving funds, the funding of the State Revolving Funds are something that the utilities keep a close eye on, and obviously we watch it, too.

But when I look at the discussions going on in Congress, I hear somebody saying, well, we need to cut money out of this.

But then I also hear somebody say, we need to fully fund these, we need to raise our funding.

We need to spend $40 billion to bring our infrastructure up to speed here in the United States that we got a major infrastructure problem.

So to me it's kind of like anything can happen there in Washington D.C.

lately as to what is going to happen with all of these funds.

And I think the water utilities are watching it the same way.

They may -- you have to remember that at the same time they're not buying as much pipe and fire hydrants and all that kind of stuff, too.

I do tend to think water meters and the replacement of meters tends to be a higher priority.

Where they might spend -- look at revolving fund money is more for making major change outs of the system.

Let's also remember, Rick, that these State Revolving Funds are primarily loans, not grants.

Yes.

So it's a source of money for the utility, but it gets to pay debt, and that's why it's called a revolving fund.

The money stays in there and it's available to future people.

Yes.

So the federal funding of it is not the lion's share of the money.

The lion's share of the money is what's getting paid back and reissued out there.

So I would think the real answer is this falls under concerns over municipal spending.

Yes.

It's all bundled into that.

Okay.

It all bundles into that.

All right.

Just one last question, sorry.

As you look at the business year-to-date, so we have six months under our belt here, year-to-date.

We had a better second quarter than first quarter.

Yes.

Do you expect that the first-half revenue is going to represent kind of your traditional mix of full-year revenue?

No, because I -- we still feel that the first quarter was an aberration.

Okay.

It was an unusual downward blip.

I mean, normally our first quarter and our fourth quarter are a little bit weaker.

Yes.

We did not anticipate that the first quarter of this year would be as weak as it was.

And so I still feel that the first quarter it was an unusual -- unusually low amount.

Okay.

And so we should have a skewed amount awaiting of revenue in the second half relative to previous years?

Well, don't look to me to comment on how you should do your models, Rick.

Well, you should talk me up, because I mean the waiting here year-to-date suggests a full year that's lower.

And I hear what you're saying, the ORION SE introduction can accelerate revenue.

I guess we took another price increase here.

So there's a few things that would suggest second-half revenues should be better.

So -- all right.

I hear you.

Thank you.

Eric Stine, Northland.

Hi, Rich.

Hi, Rick.

Congrats on the results.

Thank you.

Just going back to the natural gas for radios, in the past you've talked about, I believe, 50-plus customers that you're doing business with.

I was just wondering if you can update on that number and how that's grown.

And then maybe just quantify a bit, you talked about some sizable opportunities, I mean should we think of those in the same view as the Duke contract?

First off yes, we continue to have about 40 or 50 gas companies that are buying our product, and we would expect them to continue to buy going forward in small quantities.

Those are not -- they aren't the size of Duke; duke is obviously driving a major portion of the sales.

And we continue to have (inaudible) to a large number of these little utilities.

But, yes, there are some out there that we're talking to that are the size of Duke, and could be as big as that or even more.

Okay.

If you look out a year or two and given those trends, any thoughts on percentage of overall revenue that the specialty segment can grow to?

I'd rather not give that projection.

I really don't know.

Okay.

Fair enough on that.

I have my estimates, but it's not something I really want to put out.

But I will say that we are focusing on acquisitions, and if you look at the last two acquisitions, they were in the specialty area.

Organically, it's not going to grow to be a substantial -- with the -- take gas radios out of it, organically it won't grow.

It'll always be 10%, 15% of the business organically.

To the extent we do acquisitions on that specialty side, we grow that.

But I don't think -- I think water will always be the main focus of this Company.

Okay.

Fair enough.

That's helpful.

And just sticking with the specialty side outside of natural gas, I mean anything that you see in those product lines which could slow the momentum that you've had over the last few quarters?

No.

I mean, those product lines tend to move with our economy.

If the economy does a double-dip, goes back, it could have some negative impact.

But a lot of that is oils, chemicals, milk, beer, things that -- flow technologies that are used in a wide range of industries.

We have valves that are used in biomedical.

We have meters that are used on aircraft for fuel.

So meters that are used in gas pumps.

So we have a large number of products across a lot of industries that are driving that.

And if you recall, I think it was in '09 we were down somewhere in the 30% range on some of those revenues.

And so last year when we came back and we were talking double-digit increases, people were saying and we're again -- we're in -- some of these were in double-digit increases.

But what we're doing is we're getting back to the '08 type levels.

All right.

And so therefore, I mean it is responding with the economy.

Got it.

Okay.

Just one last thing, bookkeeping.

Did you mention the ORION-Itron mix in the quarter?

We said ORION was down, let me just find the page here, ORION was down 21%, Itron declined 15%.

It was a ratio of 2.5 to --

2.5 times, (inaudible).

About 2.5 to 1, I think.

Okay.

Thank you very much.

Okay.

(Operator Instructions) Glenn Wortman, Sidoti & Company.

Yes, good morning, guys.

Good morning, Glenn.

Just two questions.

Was the full impact from the January price increase reflected in 2Q results?

No.

No, it takes up to a year to get it all.

Generally when we do a price increase, for the first three months, it doesn't have much impact, and then it starts filtering in over the next nine months after that.

But if you recall, we did put a price increase in effect on June 1 of 2010.

So there was minimal impact last year and I'd say the full impact of that price increase was reflected in this quarter.

Okay.

And then just second, over the last few years your gross margin has generally been above your historical average.

Can you comment on any structural changes to your business, if any, that would allow you to sustain these higher margins?

Well, we're looking at each other trying to figure out if we can answer this question.

Structural changes in the business, I guess the shipment -- the shifting of our -- of more of our production to the border, which we accomplished over the course of last year and we're now seeing the benefit of that was probably the most significant structural change we've made.

We had been moving small functions to our Mexico facility from Milwaukee over the years.

But last year, we made the big move of all of the small meter, the residential meter production down to the border, and that was pretty significant and had a big impact.

I would say that we obviously are constantly looking at our products and ways to rework them.

We have the Lo-Profile or LP meter, which uses about a third less copper.

That product does insulate us a little bit from the copper cost versus the other products.

But I think reality is the price increases, we're lagging with the price increases as the commodities continued to go up, all right.

And back in '09, we had that one year, what I call the benefit where we didn't do a price increase in the commodity spell --

Right.

And you saw higher margins, all right.

There continues to be volatility, particularly in that copper market.

If there's ever some stability there, I think you'll see margins stabilize.

And then we'll see the benefits, for instance, of the move, production down to Mexico will become more apparent.

But until we get that stability, I don't see that happening right now.

We're more in a reaction mode.

Even right now, copper is at --

$4.40.

$4.40.

And we've said all along that we have $4 copper built into our prices.

When we were talking to you three months ago, we were talking about -- we were considering another price increase.

Copper immediately went below $4 and so we didn't put one in place.

Now it's back on the table and it's back in the discussion mode again.

So this is something that we have to watch because these are fairly significant shifts from these costs.

Right.

And we are watching copper very closely.

The problem we have right now is, for every pundit who says copper is going to $6, there's another one that says it's going to $3 a pound.

And so nobody really seems to know which way it's going.

Nobody seems to know if the price is based on fundamentals or if it's based on speculation and it does have an impact on us.

Even though all of our meters are made with scrap, we don't use virgin copper on anything.

It's 100% scrap.

The price of scrap moves up or down with the price of virgin copper.

And so that is something we have to watch very closely and we have to be sure to react to it.

We will be considering another price increase, there's no question.

If copper stays up in that $4.40 range, we're going to have to do something.

Good.

All right.

Thanks for taking my questions.

No problem.

With no further questions in the queue, I would now like to turn the call back over to Rich for closing remarks.

You may proceed.

Great, thank you so much.

And as I said, we were happy with this quarter.

We still have some significant headwinds associated with the utility side of the business.

Municipal budgets are a concern.

Copper continues to be a concern, but we are pleased that in this quarter our specialty products came up as strong [as they didn't] offset a lot of that.

And fundamentally, we're very confident.

We're confident about the rest of the year.

We're confident going forward that the fundamental drivers of our business are going to continue to generate good sales growth for our Company and good earnings growth.

We're in the water business primarily and water is a increasingly scarce commodity.

More and more municipalities are beginning to recognize that they need to focus on managing their water systems.

We think the products we have, the brand we have are very strong and in particular, the new AMA software is going to help solve a lot of problems that these utilities are facing.

So we're very optimistic about the future.

So with that, I'll thank you all for joining us.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a great day.