Badger Meter Inc (BMI) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Badger Meter's second-quarter 2012 earnings conference call.

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

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

We will facilitate a question-and-answer session towards the end of the presentation.

(Operator Instructions).

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

I would now like to turn the presentation over to your host for today's call, Mr. Richard Johnson, Senior Vice President, Finance and CFO.

Please proceed.

Thank you very much, Lacey.

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 on to the second-quarter results.

Yesterday afternoon after the market closed we released our second-quarter 2012 results.

Net sales for the three months ended June 30, 2012 increased $6.9 million or 9.2% to nearly $82 million compared to $75.1 million in the second quarter of last year.

The increase was due primarily to the inclusion of Racine Federated sales in the second quarter.

You will recall that we acquired this company on January 31 of this year.

Racine Federated's sales in this year's second quarter were $11.9 million.

And while not reflected in last year's financial statement, we can tell you that Racine Federated's sales are up over what they were last year when they were a stand-alone company.

Let's review second-quarter sales for each of our product groups.

Our municipal water sales decreased $1.4 million or 2.6% from $54.4 million in the second quarter of last year to $53 million in the second quarter of this year.

These sales represented 64.6% of sales for the most recent quarter.

This decrease was due principally to lower sales of residential meters sold with technology which was partially offset by higher commercial water meter sales.

Sales of our ORION AMR technology-related products decreased 25.9% due to lower volumes of product sold.

Sales of the ITRON-related products decreased 3.3%.

In the second quarter ORION-related products outsold ITRON-related products by a ratio of 1.8 to 1.

Manual residential meter sales increased slightly due to higher volumes sold.

Commercial meter sales increased 24.9% in this period over the same period in 2011 due to higher volumes of product sold.

Sales of GALAXY fixed network related products decreased 6.9% on slightly lower volumes.

We believe the net overall sales decline in municipal water was a function of the quarter's particular sales mix and factors affecting market conditions, including continued municipal spending concerns that have been delaying ordering decisions along with slower housing starts.

Also customers are still evaluating our next generation of the ORION product, which may be further slowing buying decisions.

There is no doubt in our minds that concerns still exist about the overall state of the economy which affects short-term buying decisions by our customers.

Sales of industrial products represented 26.3% of sales for the second quarter.

These sales increased $9.4 million or 76.5% to nearly $21.6 million from $12.2 million in the same period last year.

Racine Federated contributed the majority of this increase with sales of $9.1 million in this category with the remaining legacy product lines netting to slightly higher sales.

Specialty application products represented 9.1% of sales for the second quarter.

These sales decreased $1.1 million or 12.9% to $7.4 million from $8.5 million during the same period last year.

Included in this product grouping was $2.8 million in sales from Racine Federated which mitigated the overall decline in this group.

The principle reason for the decline in sales was the reduction in the amount of radios sold into the natural gas market.

Last year's second quarter included significant sales of radios to one particular natural gas customer that did not recur this year.

We also saw slightly lower sales of valves.

The gross margin percent for the quarter was 36.8%, an increase over last year's second quarter of 36.2%.

This net increase was due in part to the addition of Racine Federated whose products had higher margin and lower cost for our meter castings than last year.

Working against the margin percentage for the quarter was the product mix with lower sales of the municipal technology product and lower sales of radios into the natural gas business.

Selling, engineering and administration expenses for the quarter increased $3.9 million or 26.1% over the same period last year.

The increase was primarily due to the acquisition of Racine Federated and the amortization of the intangibles acquired with that acquisition, which were not included in the results last year.

Interest expense for the second quarter was slightly higher than last year as a result of borrowing funds to pay for the acquisition and our stock repurchase program.

I might add that the stock repurchase program was completed in the second quarter.

As you saw in our press release, we acquired approximately 888,000 shares at an average price of just under $34 a share.

Provision for income taxes as a percent of earnings before taxes for the second quarter was 33.1% compared to 35.7% last year.

The decrease was due to the recognition and tax expense of a favorable state income tax audit outcome for prior years.

As a result of all of this, net earnings for the second quarter of 2012 were $7.4 million or $0.52 per diluted share compared to $7.8 million or $0.52 per diluted share last year.

Per share amounts are similar despite different net income amounts due to the effect of the stock repurchases I just referred to.

There have been no significant changes in our balance sheet since our last conference call other than the impacts of the completion of the stock repurchase agreement.

Our debt to capitalization ratio at June 30 was 32.7%.

Cash generated from operations for the first six months of 2012 was approximately $14.1 million compared to $17.8 million for the first six months last year.

The increase in receivables and inventories was the main reason for the decline.

With that I will turn it over to Rich Meeusen, our Chairman, President and CEO.

Rich?

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

Although we continue to see some slowness in our municipal water metering markets, on an overall basis we were pleased with the second-quarter results.

Increases in some of our industrial metering lines as well as the strong performance at Racine Federated helped to offset the impact of lower gas radio sales since the wind down of the large Duke Energy contract that we enjoyed in 2011.

Our municipal water meter sales were relatively flat compared to last year's record second quarter, but were nonetheless improved over the weaker sales we saw in the second half of 2011.

So in total we were fairly pleased with the quarter.

And I will remind you that our quarters tend to be lumpy and, although the second quarter looks a little unusual, if you look at the year to date numbers for our Company, on a year-to-date basis our sales are up about 19% and our earnings per share are up about 27%.

So we are very pleased with what we have seen so far for the first half.

Let's talk about a few of the factors I mentioned starting with the Racine Federated acquisition.

With five months of ownership completed we are very pleased with Racine on several levels.

First, their financial results for 2012 are exceeding both last year and our internal expectations.

Secondly, the integration itself is going very well as we continue to capture the many synergies that we knew would come with this great Company.

At this time we have completed the integration of the sales and marketing functions so that we have one sales force offering combined product lines in the market.

Our engineering, manufacturing and international operations have all begun to coordinate their efforts to achieve appropriate synergies in those areas.

We have also completed some aspects of the administrative integration and expect to continue that progress through the balance of the year.

Regarding the gas meter radio sales, we knew that the large Duke contract would benefit us in 2010 and 2011, but that contract ended last year.

At this time we have not booked any large follow-on contracts with any other major customers for gas, although we continue to sell lower volumes of gas meter radios to a large number of smaller gas utilities.

We are continuing to pursue opportunities in this market but do not expect to see a major contract this year.

The municipal water metering market continues to be impacted by concerns over municipal financing and lower levels of home construction.

We are also seeing municipal bankruptcies in California and lower revenues at some water utilities that have implemented water usage restrictions as a result of summer droughts.

Although we do not expect to see these factors significantly improve in the short term, we do expect to see more normal buying patterns in the second half of 2012 as compared to the second half of 2011.

As a result we continue to be cautiously optimistic about the remainder of the year.

We also continue to see good market acceptance of our new products including the E-Series solid-state water meter, the ORION SE radio and our advanced metering analytics software.

We believe that these new products will continue to position us for strong growth in the future as the overall market improves.

With that we would welcome your questions.

(Operator Instructions).

John Quealy, Canaccord Adams.

Hey, good morning, it's Chip Moore for John.

Was wondering if you could break out the Duke contribution in last year's quarter?

In the second quarter of last year we had about $4 million more in gas sales than we had this year, most of it was Duke.

Okay, and so if you normalize for Duke and then the Racine contribution this quarter it looks like sales were down maybe about $1 million year over year.

Is that the right organic number to look at?

It sounds about right.

Okay.

Although you know we don't comment on your models.

Right.

Moving on, I guess what changed during the quarter?

Obviously a lot of vendors were talking about a return to more normal conditions, what did you guys see during the quarter that sort of changed on the muni side?

I don't think we saw a major shift during the quarter.

We knew that the second quarter of this year compared to the second quarter of last year was going to be a tough comp, we knew that coming in.

And again, I don't think we saw a major sea change.

We knew that as we moved into this year there was still concern over the municipal financing.

We were still seeing some municipalities being reluctant to jump into a major program in this kind of environment.

I think we are slowly seeing it loosen up, we saw that through the first quarter, we even saw it into the second quarter.

But I don't view this as a huge change.

Yes, we fell a little bit short of where you guys had us, but we really didn't expect to be able to beat last year's very strong second quarter, which was an aberration.

Again, if you look at the year to date numbers we are pretty pleased with where we are.

But when we look at being up 19% on sales and 27% on earnings, that really does represent an increase pretty much across everything in our Company except the gas area, which we knew was going to come to an end.

Okay, fair enough.

And I guess lastly on pricing, maybe you can talk about the competitive environment.

With one of your competitors being acquired does that firm up the environment at all assuming maybe they were acting a little more aggressively?

And I am assuming you are talking about the Elster acquisition?

Right.

Yes.

And frankly we didn't see much change in how Elster was operating as a result of that acquisition.

They went from one ownership group to another.

So we have not seen a big change as a result of that at this point.

But generally the competitive environment out there is tight and it has been getting tighter over the past year as more and more -- more and more of our competitors are trying to fill their capacity -- their available capacity with whatever they can get their hands on.

So, yes, I would say pricing is getting tight for us.

Okay, thanks a lot.

Richard Eastman, Robert W. Baird.

Rick or Rich, could you just talk maybe a minute or two about the gross margin?

At 36.8% -- I'm thinking about the gross margin sequentially and being down 110 basis points sequentially.

When you really should have benefited from RFI being in the whole quarter -- copper prices lower at least a lag for you, euro is lower versus the dollar -- core business was actually up a little bit, a couple percentage points per our math.

And then in the first quarter you had a little bit of RFI kind of step up on the inventory.

So how was it that your margins declined sequentially with what I would think would be some pretty positive tailwinds?

Well, I think the answer to that question -- and probably it answers a little bit of the last question also -- is, we don't want to read anything into one quarter, but this was also a function of the product mix this quarter.

I mean we had actually higher sales -- higher volumes of local read meters, all right, which is a function of the particular orders in this quarter, which didn't necessarily contribute a lot to revenue but contributed -- I mean it happened to be the mix with this particular quarter and you know we make lower margins on that.

That is probably also one of the drivers that we've seen in this quarter.

Okay.

Now wouldn't that be a benefit given the volumes are up from an absorption standpoint -- or that wasn't enough to overcome it?

Yes, but the margins -- Rick, the margins made on local read meters with no technology are -- and we don't disclose specific margins, but they are significantly lower than the margins we make when we sell meters with technology.

And so that shifts to where we had certain customers who are still on local read who placed some large orders and wanted them that really did drive -- did have an impact on that overall margin.

And a lot of the -- they are handing me cue cards here.

A lot of the sales were connectivity where we're actually selling the meters to connect with someone else's meters.

And again, it has the margin equivalent of plain vanilla bare meters and yet it is still driving -- and that is affecting the margin.

Okay.

And is there -- maybe a little bit of reference to the previous question when you talked about price and just things being competitive.

Is there any price degradation reflected in the gross margin this quarter?

Not really.

No, okay, so no price (multiple speakers).

For the most part the changes we are seeing were volume driven -- both good and bad.

Okay.

And could you also provide, just for this quarter at least, just the RFI -- Racine Federated's SG&A number?

No, you know really it's got to the point where it has gotten so co-mingled now.

We did that in the first quarter and I think we really did it in the first quarter because I think people were expecting a bit of a loss from RFI in total and we actually put a little money in the bottom line.

But the truth of the matter is, as Rich alluded to, we have merged the sales forces.

Their people are selling some of our stuff, our people are selling their stuff, people are still remaining on separate payrolls legally until the end of the year.

But it has gotten to the point where we've blurred the lines.

And it gets to the point where now we will talk about the top-line, we will talk about margins in general, but we reiterate back, we really don't talk about specific product line profitability.

Okay.

And then there was a reference -- I think, Rich, you made a reference to muni markets and we've all seen a number of bankruptcies in California.

There was no suggestion there that there is a receivable issue related to that, right?

That's just a --?

No, there isn't.

In fact, one of the biggest bankruptcies in California is San Bernardino; it's gotten a lot of press.

We have had sales to San Bernardino.

Their water department is separate, so they have assured us that they can pay for their meters.

But we don't have any big receivable from them anyway.

But I think what happens when something like that happens is the other communities around look at that and say, gee, I don't know if now is the time for me to launch a multimillion dollar meter change out or a new technology -- change to a new technology when all of these communities in California are having these problems.

So I think it is affecting the overall decision making process.

But, no, we have no receivable problems.

Actually we have zero receivables from San Bernardino.

Okay, okay, just want to make sure of the reference.

And then just one last question and I will jump out.

The nonutility water business I think you mentioned was $21.6 million in the quarter, was that right?

I've got to go find my notes here.

I mean that was the reference you were making I think, right?

Rick is checking here.

Okay.

And assuming that is right and your RF --.

Actually that was sales of the industrial products, right.

Yes, okay.

Which is what you call nonutility water, right?

Well, there is also specialty.

There is also specialty, Rick.

And actually, no, industrial doesn't include -- that doesn't include impeller sales and reg meters and all that.

I understand.

But specialty is separate.

(multiple speakers).

But in that, if I take out the RFI revenue contribution, which was the $9.1 million, then that business is up just a couple percentage points?

Yes, and we saw a variety of things.

Some of our what we call pure industrial products were down a little bit, mag meters were up a little bit.

I mean it was kind of a give and take, it netted out to about $100,000.

Yes.

Is there any, again, thought that given some of the spotty softness maybe on the industrial side, I mean any thought that we are late in the cycle or any macro commentary around those product sales?

No.

And actually I didn't give you a number, but I think Racine Federated's number second quarter this year we said $11.9 million.

Second quarter of last year when we didn't own them they had about $10.4 million in sales.

So they are showing double-digit increases year over year.

Okay, okay, great.

Hey, thank you.

Zach Larkin, Stephens.

First question, just a little bit more on the gross margins.

I think, Rich, last quarter you actually talked about kind of anticipating a mix shift leading to a sequential decline in gross margins, if I remember correctly, on the call.

I just wondered if there was anything different or outside of what you were expecting as we actually moved through and saw 2Q come through?

I think we were a little surprised at the -- at some of the large orders that we got for manual read meters or meters being connected to somebody else's radio.

We didn't expect quite that volume.

In fact, we had one large -- well, one large non-customer, I'll put it this way, that had chosen somebody else's meter and then at the last minute contacted us and said could you send us quite a few manual meters from you because they were having problems with one of our competitors.

And I won't go into details as to who that is.

But that kind of thing surprised us and that pushed the overall margins a little lower.

Thanks for that color.

And then, Rick, on the tax rate, I think it makes sense what happened in the quarter.

I think last quarter -- I know you guys don't give guidance, but kind of indicated 37% might be a reasonable number to think about for the year.

Have you -- let's take out this quarter, but would you change your outlook on what 3Q and 4Q tax rates might be?

No, it's still about 37%.

Okay.

Thanks very much.

Ryan Connors, Janney Montgomery Scott.

I thought we could just visit this topic of ORION versus ITRON resale for a moment, especially in light of the comments you have made to the last couple of questions there on manual read and putting other radios on your meters.

You said at a 1.8 to 1.0 ratio between ORION and ITRON sales.

As I recall that is one of the -- that is down quite a bit, that 1.8 to 1 from 3 to 1 not too long ago.

So how should we interpret that in terms of thinking about the competitive demand for ORION versus ITRON and obviously their margin dynamics there?

I mean, any thoughts you have around that would be helpful.

Yes, we are not seeing a shift in the market -- marketplace in our customers demanding more ITRON over ORION.

What we are seeing is that some of our legacy ITRON customers have decided -- have simply placed orders to finish out their implementation.

And so we are seeing that.

And there is a little slow down happening on ORION because of the new product introduction.

Rick mentioned that we have quite a few customers that are trying the new ORION product and they are evaluating it and anytime we introduce a new product we see a little bit of slowdown.

So I think that is really what you are seeing.

You're not seeing a fundamental shift from one product to the other, and certainly we are not pushing people over to the ITRON product, we are encouraging people to try our new ORION product and they are.

But it takes a while for them to make a buying decision.

A lot of them will say, I'll put 50 of them out in the field and I will try them for six months or even a year and then I will let you know if I want to put in an order.

So, we are seeing a lot of that.

Okay.

And then one other question just has to do with this issue of -- hello?

We are here, we're listening.

You didn't finish your question, if you did we didn't hear the question finish.

Pardon the interruption.

His line just disconnected.

We will proceed to the next caller.

Carter Shoop, KeyBanc.

Linearity in the quarter -- when we talk about the water business -- the water business on the metering side, residential meters, we are talking about potentially some weather-related pull forward in the March quarter.

And then if you look at the sequentials, the March quarter versus the June quarter, that growth was I think a little bit disappointing.

Did the June quarter kind of start off stronger and then kind of tail off towards the end?

Or how would you characterize the linearity there for the quarter?

No, I think it is pretty much even throughout the quarter.

And again, I know we're trying to -- we have always said that it is hard to analyze one quarter standalone.

There is nothing that is giving us great shape right now internally that there is something wrong.

It is just sometimes a function of the timing of orders.

We talked about the mix, got a little bit more manual read meters in there than normal.

You weigh that all together and you get the results that we presented here.

Yes, we really had about a $26 million to $28 million per month for all three months.

So there really wasn't a big drop one way or the other.

Okay, that's helpful.

And then can you talk a little bit more about the new product introduction for ORION?

What are some of the key enhancements and when do you expect that to be ready to ship in volume?

Well yes, the new ORION is an interesting story.

We currently offer the ORION -- what we called the ORION CE, which is a classic endpoint which is a traditional drive-by product.

Meaning that the radio broadcasts about every 4 seconds a few hundred feet so it can be read by a car driving down the street.

We also alter a GALAXY fixed network product which broadcasts several times a day up to a mile so that the device can be read by a tower -- by a receiver up on a tower of some sort.

This choice between drive-by and fixed network has been a real stumbling block in our market, not just for us but for all of our competitors.

Because water utility managers tend to be pretty conservative and one of their biggest fears is that they are going to make a bad decision that they are going to be criticized for.

So very often when you go in and say, well, do you want to buy a drive-by product or a fixed network product they say, I don't know, and they end up doing nothing.

What we did with ORION SE and what makes it so unique is that it is both a drive-by and a fixed network.

That basically because it is a two-way radio you can install it as a drive-by product, it broadcasts every four seconds a few hundred feet and you can read it driving down the street.

And if a month later, a year later, five years later you decide you want to go to fixed network you simply put a device up on a tower, that device broadcasts a signal, all the meters hear it and convert over into a fixed network mode, broadcasting several times a day up to a mile.

That way the utility doesn't have to commit to one technology or the other, they know that they can move back and forth.

And even better, this technology also provides for the first time in the market drive by back up.

If the device up on the tower gets hit by lightning or knocked down in a wind storm and the water meter no longer hears that device answering it automatically goes back into drive-by mode so you can still get the reading.

So we think this is a real game changer among our customers because they are not going to be paralyzed with the decision network or drive-by.

We're actually selling a product for the first time that is both.

Okay, and there is a few or at least one competitor who has a similar product where you can switch from drive-by to fixed, correct?

Yes, there is except to make the switch you have to visit the house and go up to the radio and re-program it through a port on the radio.

Ours you don't have to do that.

Because of the two-way feature you don't have to revisit the house.

And so they don't have the drive-by backup feature and it is very expensive to gain access to all those houses in order to convert back and forth.

Got it.

When is that product going to be commercially available in volume?

That product is out in the market now, we finished all of our beta testing and we are selling it now.

Some cities have chosen it and are adopting it; other cities are just buying limited numbers and testing it out.

Okay, safe to say we haven't seen some of those customers -- a lot of those customers kind of holding off potentially resulting in a shortfall in 2Q, kind of rush forward in 3Q, we are not seeing a big pickup yet at least?

Well, I think we are seeing a slow and steady increase in sales.

Okay.

And that is what traditionally happens with our products.

Back when we introduced ORION 10 years ago that is what we saw.

Great, last question.

On the natural gas outlook for new wins, you guys sounded a little bit more cautious today than three months ago.

Can you talk to us a little bit about that?

Yes, you know one of our opportunities was follow-on work with Duke Energy.

Duke Energy has some issues going on, they've made some acquisitions, some things are happening in the company.

And so I think the idea of them expanding their program is on hold at this point.

I still think we've got that potential down the road.

But if you read the paper you know there is a lot of things going on in that organization and that could be slowing it down.

We also had an opportunity with another large one that we were moving along and they've decided to hold off, they haven't made any decision.

So again, we are just not seeing a big project coming down the road.

That's helpful.

Thank you.

(Operator Instructions).

Glenn Wortman, Sidoti & Company.

Just thinking about the product mix shift again towards the manually read meters from 1Q to 2Q.

Which quarter's mix is more consistent with what you would expect going forward?

Is there somewhere in the middle?

If you could just provide a little more color there.

Well, I think -- Rich used the word lumpy before.

It just happens to be the particular mix we got this quarter that we are selling manually read meters.

I think the move towards automation is still there and we said this publicly, more than half the meters that we ship in a given year now have radios on them, but this particular quarter we didn't sell as many with radios as we did last year in the second quarter.

I am not reading much into that.

I always said I am more comfortable where we're going to be in five years than in five months from now because of that lumpiness.

I mean nothing has fundamentally changed about our story; we are still comfortable that we have got the right products, the right mix.

And if we were losing market share, all right, I think we would be more concerned but we are not, we are holding our market share.

So this is just a function of something that is happening throughout the industry.

And, Glenn, I would be surprised if in the second half we continue to see the level of local read meters that we saw this quarter and if we continue to see the ITRON/ORION mix that we saw this quarter.

So I would say this quarter was a little unusual and it should go back to normal.

Okay, thanks.

And then just second, given the full quarter of Racine I would have thought SG&A would have come in a little higher.

Is the 2Q run rate a good number to use going forward?

Yes and no.

I mean we have not made all final decisions so we will have some additional acquisition type charges still coming because we haven't figured out exactly what we are going to do in all areas yet.

But it is probably a good approximation.

Yes.

Okay, all right, thank you.

Richard Eastman, Robert W. Baird.

Just wanted to double back for a second.

On the local read meters, when you say up slightly can we infer up low single digits or something like that?

Yes.

Okay.

And here is a question -- I was just confused by kind of a series of numbers here.

If I look at ORION sales, in the first quarter of 2011 I think they were down -- these are my numbers but I think they were down 30%.

And I look at the first quarter of this year and I think they were up 30%.

But then in the second quarter of 2011 they declined 20%-ish -- and I'm trying to reconcile how normal -- how is it that the second quarter of this year is down 25%?

That doesn't feel like a normal buying pattern.

Again two years in a row in the second quarter year over year ORION sales are down 20% or better.

Well, no one is volunteering an answer in the room (multiple speakers), no one is even nodding.

Don't you have an easier question you can ask, Rick?

I will come up with an answer.

All right, thank you.

(Multiple speakers) it's your model.

You know all I can say is we do have lumpiness to our business, it is really hard.

I wonder, Rick, if you look at six months versus six months if you would see a difference.

You might see it more normalized on a six-month basis than you do on -- when you try to look at individual quarters.

Which frankly we can have a situation where in the last week of the quarter we get a huge order for local read meters that we didn't expect or for ITRON-related meters or something like that and it can really move the numbers pretty significantly.

Yes.

Okay, all right, thanks again.

Bob Chernow, RBC Wealth Management.

Gentlemen, two questions here.

First, we haven't heard the copper question, which I always enjoy hearing.

On a more serious note, can you maybe discuss the problems going over at Duke Energy with the lack of new business coming from Duke and Progress?

Sure, Bob, this is Rich, let me start with copper.

Copper is running about $1 a pound less than it was a year ago.

Although in the second half of last year copper dropped pretty significantly, so that quarter over quarter comparison we are going to lose as we move forward.

But that $1 a pound doesn't necessarily translate into $1 a pound savings for us because we don't use raw copper in any of our meters, we use scrap copper, we buy scrap and we recycle it.

So really we end up getting anywhere from 40% to 70% of that drop, so $0.40 to $0.70 is really where our ingot prices are lower compared to last year.

So we do get some savings and it has benefited us and that benefit is then masked a little bit by the mix issues we have talked about on our margins but it is in there.

On Duke, you know as much as I do about what is going on in that organization.

They made a large acquisition and I am sure they are trying to figure out how to integrate that acquisition and expanding their gas program at this time doesn't seem to be as big a priority.

And the one thing, Bob, they acquired Progress down in Florida.

Progress has no gas [customers].

So right now a lot of what -- they are merging two operations and cultures and the like and probably that is a combined utility still, but the focus is more on the electric side.

And in fact it is probably the electric side that dictates whether we will ever get any more gas business, because ultimately the decision is made first about the gas meter and then we are kind of the follow-on with (multiple speakers).

No, (multiple speakers) the electric meter.

The electric meter, we are the follow-on with the gas .

Right.

Thank you.

Does that help at all, Bob?

Yes it does, thank you.

I was really referring to the tremendous turmoil where they fired the chief executive officer and so on and so forth.

So were we.

Yes, but like I say, you know -- all I know is what I read in the paper.

And so you know -- you probably know as much as I do or more.

Thank you.

[Steve Rousseau], private investor.

Just a quick question about your pipeline.

Is the potential pipeline of projects -- are they moving forward?

That's actually a good question.

The pipeline is active and it is probably as high as it has been in recent times.

The issue that we have with our pipeline is the ability to predict from it.

Because, if I tell you two years ago I could look at the pipeline and tell you that I would get 30% of those orders within three months now it might be six months, seven months.

In other words, it's like an accordion in terms of the decision-making time.

So while we have activity in the pipeline and we monitor it, it makes it difficult for us to do any kind of decent forecasting from it.

So that is the interesting part about this -- particularly the 60% of our business that sells to municipalities is that decision-making time frame is affected by factors outside of our concern.

Okay, it was the general state of the economy.

Rich made a point, he said they just sit there and they don't make a decision for three or four months.

That is something we can't control and that contributes to that lumpiness that we talk about.

Are you seeing any cancellations of the potential projects or was it just delays?

No, I don't think we're seeing any cancellation, it is just delays.

You will hear of a small cancellation here and there, but that happens all the time.

Okay.

Now last quarter you said that the backlog was up year over year or higher than it was this time last year.

Does that continue to be the case at the end of this quarter?

Our backlog has stayed fairly stable.

So I would say that we haven't seen a big jump.

We did last quarter, we saw a big jump and now it has stayed at the higher level.

Okay, thank you, guys.

Ladies and gentlemen, this concludes the question-and-answer portion of our call.

I would now like to turn the presentation back to Mr. Rich Meeusen, Chairman, President and CEO, for closing remarks.

Yes, I want to thank everybody for joining us.

And I will reiterate that I know as analysts it is tough to model our company because of the lumpiness that we see from quarter to quarter.

It works out a little bit better when you look at the longer period.

So even we scratched our heads a little bit on some of the fluctuations we saw this quarter and when we dug down into the numbers we found a lot of unusual things that just happened.

But when we look at the six-month numbers it looked a little more normalized.

And so we felt pretty comfortable when we realized that halfway through the year we've seen a substantial increase in our -- in both our sales and our earnings over last year that -- with sales up 19% and earnings per share of 27%, we felt pretty good and we are pretty confident that going into the second half that we are still going to have a fairly decent year.

So with that I want to thank everybody for joining us.

Thank you for your participation in today's conference.

This concludes the presentation.

You may all disconnect.

Good day, everyone.