Badger Meter Inc (BMI) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2012 Badger Meter 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. Rick Johnson, Senior Vice President of Finance and CFO.

Please proceed.

Thank you, very much, Lacey.

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

I want to thank all of you for joining us.

As usual, I'll 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 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 in our future earnings.

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

Now on to the fourth-quarter results.

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

Net sales for the three months ended December 31, 2012 increased $13.6 million or 22.4% to $74.3 million compared to $60.7 million in the fourth quarter of 2011.

The 2011 numbers do not include Racine Federated, which, if you recall, we purchased earlier in 2012.

Racine Federated sales in the fourth quarter totaled $10.1 million.

The balance of the increase is due to higher sales in our municipal water business.

Let me comment briefly in each of our sales categories.

Municipal water sales increased $5.3 million or 12% from $43.9 million to $49.2 million in the fourth quarter of 2012.

These sales represented 66.2% of total sales for the quarter.

This increase was due to higher sales of residential meters with technology, as well as slightly higher commercial meter sales.

Sales of residential meters sold with technology were nearly 15% higher than the fourth quarter of 2011, due primarily to higher volumes of products sold.

Annually-read residential meters sales also increased by a similar percentage, although the dollar impact is obviously much smaller.

Commercial water meter sales increased just 1.2% compared to a very strong fourth quarter in 2011.

Before I talk about industrial flow product sales, let me just note that we have decided to again include sales of our valves in this product grouping.

As we integrated Racine Federated during the course of 2012, we realized that valves had very similar characteristics to the rest of our flowmeter products.

As a result of this change, the only items in specialty products are sales of radios to the natural gas industry, as well as Racine Federated's legacy Wyco Group, which sells concrete vibrators.

So with that in mind, sales of our industrial products represented 30.1% of sales in the fourth quarter compared to 22.8% in 2011.

These sales increased nearly $8.6 million or 62.1%, to $22.4 million from $13.8 million last year.

As we've been saying throughout the year, almost all of Racine Federated's sales are included in this group.

Their fourth-quarter sales in this product grouping were $8.2 million.

The remainder of the increase was due to higher sales in most of our remaining industrial product lines.

Specialty applications represented 3.7% of sales and were down only $200,000.

This is the net effect of including the concrete vibrator products in the fourth quarter of 2012 and not in the fourth quarter of 2011, offset by lower sales of radios to the natural gas industry.

You will recall that in 2011 we had substantial sales of radios to one particular natural gas customer.

The gross margin in the fourth quarter improved to 38.8% compared to 31.9% in 2011.

There are several factors contributing to this increase.

The Racine Federated products generally carry higher margins than the corporate average.

In addition, the overall higher volumes drove better factory utilization.

Finally, we did see some stability in the metals market during 2012, and on a quarter-over-quarter basis, we had slightly lower costs in that area.

Selling, engineering and administration expenses, our so-called [SMEGA] expenses, for the quarter totaled over $20 million compared to $17.4 million last year.

The increase was due primarily to the acquisition of Racine Federated and the amortization of the intangibles acquired with that acquisition, which were not included in the results in 2011.

Also, because of our improved performance this year, we are seeing higher employee incentive costs.

We took a non-cash charge for pension in the fourth quarter.

Last year, we had a one-time non-cash charge for pension curtailment in connection with freezing our pension plan.

This year's non-cash charge was due to the actual rate of withdrawals from that plan occurring faster than the assumed withdrawal rate.

And let me remind you that this so-called charge was already reflected in the Company's balance sheet as part of other comprehensive income, which is a component of our net equity.

We are simply required to pull it out of equity, put it through the profit and loss statement and put it back into equity.

Pension charge was approximately $1.1 million and had an almost $0.05 per share negative effect on the income statement during the quarter.

Our interest expense was slightly higher in the fourth quarter of 2012 compared to 2011 simply because we are now carrying debt due to the acquisition of Racine Federated and the $30 million stock repurchase program earlier in 2012.

Given the current low borrowing rates, however, the difference between years is only $200,000.

The effective tax rate for the fourth quarter was 35.8%, which is lower than the 39.6% in the fourth quarter last year, as we were closer to our annual estimate for 2012 of 35.5%.

As a result of all of this, net earnings for the quarter were $5.5 million compared to $1.2 million last year.

On a diluted per-share basis, earnings were $0.39 compared to $0.08 last year.

For the year as a whole, sales increased $56.7 million or 21.6%, to $319.7 million from $262.9 million in 2011.

Racine sales for the 11 months that they were included in our results were $41.3 million, with the difference through the growth in our core business.

We saw higher municipal water sales, which were somewhat offset by lower sales of radios to the natural gas utilities.

Remember, we always view the sales of these radios as incremental business that will somewhat hit or miss.

Our core business, and excluding the impact of Racine and the gas radios was up 11%, which we believe reflects the return to more normal buying patterns by our municipal water business as compared to 2011.

Selling, engineering and administration expenses for 2012 were up $15.5 million compared to 2011, of which $13.6 million was due to the Racine acquisition.

Excluding Racine, these costs were up 3%, which is due to higher employee incentives due to improved performance over 2011.

Net income for the year, while not a record, did increase to $28 million compared to $19.2 million in 2011.

Earnings per share were a record at $1.95 compared to $1.27 per diluted share in 2011.

The reason for the discrepancy between net income and earnings per share is the effects of the stock repurchase program.

This program had an impact of approximately $0.02 per share for the fourth quarter and $0.08 per share for the full year.

Our balance sheet remains solid.

Despite borrowing for the acquisition and stock repurchase program, our debt is already decreasing.

At year-end it was 28% of total capitalization.

For the year as a whole, the Company generated approximately $34.8 million of cash from operations compared to $31.3 million in 2011.

Our projections show that we should continue to generate good cash flow in the year ahead.

With that, I will now turn this over to Rich Meeusen, Badger Meter's Chairman, President and CEO, who will have some additional comments.

Rich?

Thank you, Rick.

As Rick mentioned, the fourth quarter came in about where we expected, except for the unusual $0.05 non-cash charge for the pension adjustment.

Overall, we are very pleased with the year, especially with the 11% increase in our core business when you exclude the Racine acquisition and the gas radio sales.

After a weak 2011, we saw our markets return to strong growth in 2012 and we expect to continue to see that growth in 2013.

Over the past several months, we've released several new products and product upgrades that we believe will help drive that growth.

We introduced two larger sizes of our E-Series ultrasonic meter for the utility water market, which now gives us a full range of offerings for that meter.

We did the same with our industrial Oval Gear meter, completing development of larger sizes to fill out that product line.

We also released a new high-resolution electronic encoder that is compatible with all of our mechanical water meters, as well as many of our industrial meters.

Our Racine group completed development of a new Coriolis mass meter that we have recently introduced into the market.

And most importantly, we introduced new versions of our two-way ORION water meter fixed radio network and the related automatic metering analytics software, which incorporate both improved performance and new features.

We believe all of these new products, plus more in development, will keep Badger Meter's position as a technology leader in our markets.

Recently, we encountered a new market opportunity that many of you may have heard about.

As you know, the North American water meter market is served primarily by a handful of companies, all of which have been in the market for decades, some like Badger Meter for over 100 years.

Several weeks ago one of these companies, Elster AMCO Water LLC, notified their customers and suppliers of their plans to discontinue the production of mechanical water meters for the North American markets.

They intend to end production at their Mexico facility in the first quarter this year and to close their Ocala, Florida location at the end of June of this year.

Since we estimate that Elster has a US market share for water meters of approximately 8% to 10%, this decision could have a major impact on the market opportunities for both Badger Meter and our competitors.

We are currently evaluating this opportunity and developing marketing and sales strategies to assist water utilities as they transition from Elster.

This could represent a positive opportunity for growth in our core business.

On another topic, we have now owned Racine Federated for a full year and have been very pleased with the results.

Racine has outperformed our projections, and we expect to continue to see strong results from that operation.

We have also now fully integrated Racine into Badger Meter, and that integration has gone very well, generating significant synergies.

In conclusion, let me say that we are pleased with our performance in 2012 and we are very optimistic about our potential in 2013 and beyond.

With that, we'll take any questions you may have.

(Operator Instructions) Richard Eastman, Robert W. Baird.

Rick or Rich, just to question.

It looks -- the core business, stripping out RFI, looks like sequentially maybe it was down a little bit more than historically one would expect.

Was there anything that impacted the fourth quarter in the core business that was unusual, either destocking or just kind of a lack of year-end spend or -- did that step off the page at you?

When you say down, you must be talking about sequential quarters, right?

Correct, from the third to the fourth.

Seasonally, it is down generally, but here, it is down more than usual.

And I just -- is that somewhat of an anomaly or is there a reason for that?

I knew somebody was going to ask this question.

We did not have any big orders from Mexico in the fourth quarter of 2012.

So that wasn't in there.

But actually, it wasn't in there for the past couple years.

You've got to go back 3, 4 years before you see that impact.

So I guess we call it the normal seasonality.

So we are up 15% in that municipal water business Q4 over Q4.

Yes, okay.

And Rick, can you just repeat the percentage of revenue in the fourth quarter for the utility and nonutility water business?

Sure.

Municipal water sales were 66.2% of total sales for the quarter at $49.2 million, and industrial was 30.1% of sales, which was -- let me find my eyes here -- $22.4 million.

Okay, all right.

And then just one last question.

On RFI, again, revenue there, again, maybe that is seasonality, but revenue there looked a little bit light.

Is that on track from a growth perspective as you head into 2013?

In the fourth quarter, the product lines formerly associated with RFI were down about 1.5% to 2%.

Okay?

We don't read anything into that of significance.

Some of it was just timing.

We didn't get the stuff out the door at year-end.

But we are optimistic about where that business is going in 2013.

Okay, okay.

Great.

Thank you.

I'll get back into queue.

Thank you.

Chip Moore, Canaccord.

Good morning.

Thanks.

Was hoping you could talk a little bit more about the competitive dynamics with Elster AMCO getting out.

What are you hearing, are you seeing an influx of inbounds, people worried about stranded assets and things like that?

Yes, and we have had some of Elster's customers contact us, because obviously they know after June 30 they can't get Elster mechanical meters anymore, and they are going to have to replace it with something.

So some of those that we've had a strong relationship with have already contacted us and we are working with them to help them through the transition.

We also -- we are also putting together strategies on how to approach this, because everybody pretty much knows who -- customers are out there.

This is a fairly fixed market as far as the number of utilities and who they are.

So it's pretty easy to figure out how to go about this and help these customers transition as they go through this period.

Obviously, we have a significant opportunity here, but our competitors also view this as a significant opportunity.

So I think we are all going to be out there trying to work this opportunity as best we can.

Fair enough.

Yes, and it's safe to assume you'd expect to capture a share in line with your current share?

We fully expect to.

And as I said, we've already captured some significant customers that had chosen Elster meters in the past, had liked those meters, and now have come to us and said, well, we would like to go with Badger meters.

Okay, and then maybe you could talk a little bit about some RFP potential, particularly on the East Coast, whether it is this year or next, for some larger size municipalities.

There are always the ones out there.

We don't like to talk about individual opportunities, because then we get tied up in that going forward, and you never know what is going to happen with those.

A lot of times what sounds like a big opportunity suddenly gets pushed out and pushed out and the delays come about.

I will say we are at the table for all of them.

Yes.

Okay.

Especially with one less player out, there that is going to change the bidding dynamics, too, and could have a favorable impact overall on pricing in the industry.

Okay, that's helpful.

And just lastly, on the gas side, any updates there?

We are hearing of a few things out there.

Just wondering what you are hearing.

Again, it is the same thing.

There are opportunities out there.

We don't make specific comments.

I used the term hit or miss.

We hit a big one for a couple years there with Duke.

Everybody knows it is Duke, it was a large customer.

We will continue to sell to several small gas utilities.

But we are looking for that opportunity, but again, it is not part of our core strategy.

It is just kind of an offshoot because we've got the radios that can work on the gas meters.

Okay, thanks a lot, guys.

Ryan Connors, Janney Montgomery Scott.

Good morning.

Thank you.

I wanted to -- not to beat this topic to death on Elster, but to the extent you're able to or able to comment, any insight into their rationale for exiting the market and any comment on that?

Sure.

And obviously, we have to be careful what we say here.

But I will say this.

Obviously, Elster is a much larger company.

So I don't want people to think that Elster North America is the entire company.

Elster North America is a subsidiary of a much larger, worldwide Elster that is in the electric meter and gas meter and water meter business.

So they've got a broad range of products.

They were recently sold.

Their new owners must have looked at it and decided that the North American water meter operation was not giving them the returns they wanted.

Because if it was giving them the returns, they obviously wouldn't shut it down.

So you can conclude that since they made the decision to shut it down, it probably wasn't giving the returns they wanted, and they just made that decision.

We were a little surprised by it.

I think the whole market was a little surprised by it, but it does represent a good opportunity for all of us.

So you are not aware of any specific contract gone bad or anything like that that drove -- caused --

We are aware that Elster was having some production difficulties during the year.

For example, they had won the award at Cleveland, I think it was, but we've been shipping meters to Cleveland all year because Elster has been having some difficulty supplying that contract.

So that is the only one in particular that we know of.

So I think they've had some issues there, but beyond that, I really don't know.

Okay, and sticking with the competitive environment, on the other side of the spectrum, not necessarily a new player, but one of the smaller players in this space sort of seems to be really emphasizing their meter business and talking about some pretty big growth rates off of a low base.

I wonder if you can comment on the impact of that on -- you mentioned positive impact on pricing with a player being removed and Elster, but whether that creates the opposite dynamic.

Well, in other words, will somebody else step in there and try to grab a lower-priced segment of the market?

Is that what you are (multiple speakers)?

I'm referring to Hersey.

They seem to be -- management there seems to be talking a lot about trying to aggressively grow the meter side of the business, and emphasize that, not only with Wall Street, but presumably trying to grow the financials.

And I think they just talked about doubling revenue, obviously off a low base.

So one of the potential conclusions is that they are using price as a lever to grow that share.

Are you aware of any of that or have any comments there?

We are aware of what is happening out there.

We are aware that Hersey won a sizable contract from one of our other competitors.

We are aware that that contract alone is probably going to give Hersey some capacity issues.

They are going to have to scramble a bit to expand capacity.

So I'm not sure I would conclude from that that they are necessarily going to go out there and be overly aggressive in the market on pricing, if they've already got some capacity issues.

But Mueller owns Hersey.

Mueller's other business lines have struggled in this economy that we've had over the last three years.

But Hersey is a good story for Mueller and apparently has been doing well.

So they are going to highlight it.

And then one last question about another company, and that is there has been a leadership change at ITRON in the recent past here.

So any comment on what that could mean, if anything, for your resale relationship there and/or the competitive dynamics?

No, we have not seen a change in our relationship with ITRON.

We have a good, strong relationship.

We are very pleased to be able to resell their products to the customers that prefer an ITRON-Badger solution.

And as a result of some of their leadership change, we have not seen any change in our relationship.

Great.

Well, thanks for your time this morning, guys.

Glenn Wortman, Sidoti & Company.

Good morning, guys.

You are up against a very difficult comp in the March quarter in the municipal water business.

Can you just comment on order trends here early in the quarter?

You mean the first quarter of 2013?

Yes, yes.

I would say we are pleased with the way we see the quarter shaping up thus far, but remember, it is early in the quarter yet.

I mean, you're right, we are halfway through, but we've really seen January and about a week of February, and there is a lot of time to go yet.

So it is hard to really draw any conclusions in our industry at this point.

Things can pick up strongly in the last month, things can drop off.

Thus far, though, I will say that we are pleased how with how the orders are coming in.

Okay.

And then it sounds like we are returning to maybe a more normalized market here in the municipal business.

2012, your municipal sales were up low double digits.

Setting aside any impact from Elster, in your view, what level of sales growth does say a more normalized market imply for perhaps the industry in 2013?

I don't think our story changed on that one.

I think we're still talking high single digits, low double digits.

And the only thing that concerns me in 2013 right now is, again, the government, in the sense of the effects on muni financing as the government in Washington starts playing games again with the budget and deficit talks and all that, because they keep saying that could affect the markets.

But eventually, this will resume and we will have normal buying patterns.

I mean, that's what we saw in 2011.

By the time we got into 2012, the angst over local budgets had died down quite a bit, and we saw the return to normal.

And I think we are seeing that in 2013.

So we anticipate -- we are hoping for a good 2013.

And probably the significant drivers in 2013 are going to be continued slow growth in the economy, a pickup in housing -- which helps all of us; that's a significant impact, some of our new products and then the impact of Elster's decision to shut down.

Okay, and finally, I think I probably ask this quite a lot but, but gross margins, another impressive quarter there, 38.8%.

Do you think there is more upside here?

How do you think about gross margins in 2013?

I think in 2013, it will be more volume-driven, because we will have -- the comps for the most part will have Racine in them year-over-year, so we will have the effect of the higher margins from those sales.

So a lot is going to depend on, obviously, metal costs and where that's going to go, and a lot is going to depend on factory utilization.

Okay, all right.

Thanks for taking my questions.

Brian Rafn, Morgan Dempsey.

Good morning, guys.

Rich, talk a little bit about -- you talked about Elster AMCO, and you kept talking about their core North American business being mechanical.

Is that kind of a low-end meter?

And is there any aptitude to be able to take those Elster customers to a higher technology, a radio -- an RFI or a radio meter?

It is a good question, Brian.

And let me start by saying that Elster's decision only affects their North American mechanical meters.

They also sell electronic meters, and they also sell radios, and they did not comment on that at all in their letters and their releases., so I'm assuming they are going to continue to sell those.

So it is really the mechanical that ends.

We believe there is an opportunity for us to sell our meters with connectivity to whatever radio technology Elster is offering, much like we do sell our meters with connectivity to the ITRON products.

We also believe that there is an opportunity that as those customers come over to Badger who are not on a radio, we may have a good opportunity to move them up to a radio-based system also.

Okay, okay.

Give me a sense -- you talked about the new E-Series meter, the Ultra Source, you talked about the Oval Gear, and they were higher sizes.

As you guys look at building out new meter products, niche new models, is it tending to be in the larger end of the meter scale, or was that just kind of an anomaly here in 2012 that those are both larger size?

That was just timing.

Generally, when we develop a new line of meters, we start with the smaller ones and we work up.

And Brian, I can tell you why the engineers probably have a really good reason as to why it makes sense to do it that way, but I -- I couldn't tell you.

Okay, when you bought Racine Federated, you made a comment, Rich, that you said we now have, I think, 12, 16 meters.

When you look at the integration of Racine Federated, how is your ability at Badger to drive new product designs at Racine Federated with the types of meters -- types that they have?

In other words, from maybe what they might have done on a legacy basis in product development and what you can kind of bring to that.

You're right, Brian, there is a big opportunity there.

For example, when we acquired Racine Federated, we acquired differential pressure meters, we acquired certain types of ultrasonic meters.

We acquired the project that they were working on for the coilless [mass], so we now have that.

So they have different types of meters -- a vortex meter that we didn't have.

All of those are technologies that we did not have.

So we now have the opportunity to put Badger's very significant R&D capability behind those product lines and move them forward, more so than what Racine as a much smaller company had the ability to do.

So yes, we are investing in those product lines, we will continue to invest in them, and we will continue to bring out new products to the market along those lines.

Rich, could you kind of give me maybe a 30,000 foot view -- if you look at just on a volume basis, what might be the install as a percentage on volume for meters with radios today?

Not maybe what's in-field installed, but what you're kind of doing today year-by-year.

About 55% to 60% of the meters we ship today have radios on them.

Okay.

And if you look at the US, I think you've talked 64 million meters.

What might be the in-field install today?

Because you always kind of look at where water is, where gas is, where electric is Where might the infield be across the US?

According to the estimate that Dr. Howard Scott does in his Scott Report, it is around 30%.

Around 30%, okay.

If you look at -- and you talked a little bit about municipal budgets getting a little better.

I'm sure -- tax revenues up; you are seeing it bounce up, I think 315,000 in new home starts.

We're back in the 800,000.

Was there any weather -- certainly milder in 2012.

Did that affect at all by extending maybe installations, seasonality?

Hurricane Sandy had a little bit of an impact on us, because at the start of the fourth quarter, at the end of third, because we have a little higher market share in the Northeast than we do in the other areas of the country.

So that had a little bit of an impact, although a lot of those utilities recovered fairly quickly.

But some of those sales that we would have normally had in the fourth quarter might spill into the first quarter.

The only time when weather was a significant (inaudible) was I believe the first quarter of 2011, because the snow was so bad -- I mean, it was snowing a foot of snow in Oklahoma or whatever, and that was clearly cited as a reason.

The normal snowfall that we get every year generally is not a reason.

Okay, and then one question.

Rick, what was the -- you talked about the Treasury purchase.

Do you not have the share count as to what you bought back?

888,000 shares.

188,000, okay.

No, 888,000.

Okay.

And then you got a CapEx number budget-wise for next year, 2013?

Brian, that is 888,000 shares.

Oh, 888,000 -- got you, got you.

And our CapEx, we've historically said that our projected CapEx going forward would be around our depreciation and amortization.

So we don't see that changing anything significant.

All right.

Thanks, guys.

Good job.

Richard Eastman, Robert W. Baird.

Just two more things.

Rich, just on the ORION SE kind of software, AMA software upgrades, could you just give a little bit of color around what those upgrades are intended to bring to market, and may be why real quick upgrade on the software here with the introduction of the product just about a year ago?

What do we solve there?

The upgrades on the radio, the hardware itself, run a pretty wide gamut, from handheld devices to make installation easier, to repeaters, that if you have hard to read -- every time you do one of these systems in a city, there is somebody living on the very outskirts of the city and it's hard to get a reading out of them, or somebody in a metal building or something, where you are having trouble getting the signal.

So repeaters, directional antennas, things of that sort, are being developed and released to help us get better coverage to the city.

So that is kind of the hardware side of it.

On the software side, it is more analytical tools.

It is more ability for the utility to analyze their customer usage patterns and to identify leaks and identify issues.

Okay.

And has the uptake on that product, at least from kind of a pilot standpoint, has it continued to be high?

I would say we have gone from a handful of customers testing it to a significantly larger number, and we have quite a few good-sized cities that have deployed this system.

Okay.

And just a question on gross profit margin.

If I kind of play around here with the math a little bit and make an assumption on RFI and what its contribution was, it looks like maybe core gross margin was close to 37%.

And so I'm questioning whether, as we move into 2013, other things equal, like metals prices, for instance, and maybe even mix, but is there 100 or 200 basis points of opportunity in that core gross margin on volume alone?

Would you have any feel for that, Rick?

I would say that if we saw a good jump in our volume, like a double-digit jump or -- a double-digit jump, maybe even a 15%, 20% jump, you could see 100 or 200 basis points being added on.

Okay.

So your utilization just on the meters alone is low enough that you could get 100 to 200 bps there.

And there is no --

That is why we are excited about the market dynamics and the opportunity with Elster's decision and everything else, to add some volume to our system, as we help those Elster customers transition to hopefully our products.

Although I understand the opportunity on the volume side there, and just kind of thinking about metals prices are pretty stable here, copper is pretty stable, my guess is we do not see a price increase here early in the year, given the jump ball on that volume.

Is that fair?

That's correct.

I would agree.

There is no price increase that we are contemplating right now.

Yes.

Okay, great.

Thank you.

(Operator Instructions) John Quealy, Canaccord Genuity.

Just a couple quick questions.

Guys, can you frame -- I know you talked about housing potentially benefiting in 2013.

But can you add that to where we are with no lead migration in the next couple years in terms of maybe an underlying or sustainable demand?

Or how you think -- excluding the Elster news and some competitive dynamics -- just the underlying trends in the endpoints, can you talk a little bit about -- do you think it is above growth from the last couple years or less or what?

There is two different topics in there.

One is housing, and the other is no lead.

No lead doesn't necessarily drive changeout of meters.

As the lead rules change, they don't require the utilities to go out and rip out all the old meters and put in new ones or to change out at a faster pace than what they've historically changed out.

So lead requirements generally talk about forward, that's future purchases.

And Badger Meter, we have -- all of our products meet the new lead requirements.

We don't have an issue.

Our competitors, as much as some of them would love to convince you that they have some kind of competitive advantage, every company in the marketplace has meters that can meet the lead requirements.

So I don't see that as a dynamic that is going to impact us one way or the other.

Housing starts, on the other hand, can have a significant impact.

If housing starts return to normal, whatever normal is -- and that is a lot of discussion right now -- there was a time when we were doing 1.5 million new housing starts or even 2 million a year, and now we are down -- we dropped all the way down to that 0.5 million, and we are up to 800,000.

As we return to a higher level, if Badger even continues to capture our 30% market share, that can have a significant impact on our potential sales.

I think the other thing you're seeing in the market in housing is the fact that even if it is not single-family housing being built necessarily -- let's say it's apartment buildings -- the trend in a lot of municipalities is to individually meter all of those apartments, which is -- 20 years ago, they put one master meter in the basement.

Now for a four-family, they will have four meters.

No, that's fair.

Speaking of Master Meter in another context, I don't know if you talked about this earlier, Landis and Gyr kind hooking up with those guys.

I thought Master was more geographically segmented, so maybe southwest in this country.

Can you talk about the entrance of Landis sort of trying to do some comm side in water?

Let's back up something.

Rick used the term master meter not referring to the company Master Meter.

He said they would put a master meter in the basement of an apartment building which would read all of the units.

So he meant a generic large meter.

But you then --

Which could be a Badger meter.

Which could be a Badger meter, right.

But you brought up Master Meter and Landis, and I got to tell you, I'm not sure what you're referring to, John.

We have not seen any strong drive by Master Meter in the market, and we haven't seen Landis coming in at all in the water meter side of our business.

You caught me by surprise with that one.

I'll do some research, but I don't know of anything that is happening out there.

We certainly haven't seen it.

Okay, and then just a couple quick follow-ups.

I thought -- I could be wrong -- with that Mueller deal, was that a composite deal, do you know?

Composite deal, I'm not sure what you mean.

So when Hersey won that larger deal, was it -- the materials was the composite meter?

Was it polymer meters that Hersey won?

No, I don't believe so.

I think they were brass meters, but I don't know for sure.

And how is your mix right now in terms of RFPs, in terms of the composites and the brass and the E-Series, sort of trending like they were last year?

Sort of trending like -- it is consistent.

Okay, then lastly, just update us where we are with [the] relationship.

I know that has been sort of deemphasized, especially with the move towards AMA and fixed.

But if you could just bring us up to speed there.

Thanks.

We continue to buy our ORION CE endpoints, and we now have two version of ORION, the ORION CE and the ORION SE.

The SE is the new one, which we do not buy the radio boards from Diehl.

But the Orion CE, Diehl still makes those radio boards.

So we still have a good relationship with Diehl.

They are a supplier.

They are making the radio boards for us.

We don't do R&D development, new radio development.

They are not working on the latest versions of ORION.

But we still have a good supplier type relationship with them.

Perfect.

Thanks, guys.

Brian Rafn, Morgan Dempsey.

Question on the -- you guys were talking about this -- there has been some demand on the residential side in apartment, duplex construction, condos.

Do you get a situation where you have a master meter, like Rick was saying, in the basement that read all of the units, and then you go for kind of a legacy swapout?

Can you then -- do you then see that master meter going to -- broken out and segregated into individual meters, or is that master meter generally on a legacy basis the old read all the units?

The rule of thumb is we are really talking new construction going forward.

Okay?

Because nobody goes and retrofits a four-unit apartment that has one meter in the basement.

I won't say master meter anymore -- but just one meter.

They don't go and retrofit and put four separate meters in, sometimes just simply because of the construction.

They may have different -- you might have to -- you would need -- it's a sub-metering routine, and we are really not much into sub-metering because it just generally doesn't pay for a landlord to do that.

Okay.

And then as -- you guys have talked certainly the buoyancy of the municipal markets coming back a little more to norm.

What is your sense for some of the larger utility, water mains, most of the stuff we look at as kind of the obsolescence, the swapout, the 6% a year on some of the smaller meters -- what do you guys see -- as municipal revenues, tax revenues, economy perks up, what do you see on some of the larger utility stuff?

I think there is a lot of concern in the US about our aging infrastructure.

But most of that concern is about the pipes, both sewer and water pipes, and the amount of water lost to leakage and the amount of pollution caused by leakage out of the sewer pipes.

That is a big concern.

Most utilities have stayed up on the large meters.

You find very few utilities that allow their large meters to get so old that they start to lose accuracy or shut off, because those are their cash registers.

They need to know -- especially when they are using those large meters to sell water to other municipalities, they need to know exactly what is going on.

So we have not seen a deterioration in the infrastructure along the large utilities -- along the large meters, like they have along the pipes and the laterals.

Okay.

And then, Rich, you've talked in the past about market opportunities.

And there was a subsegment -- and as you see kind of the reflation in housing starts -- we bounced off 315,000 in January and February of, I think, 2009; we are back to 840,000.

There was like a 13-million unit -- I don't know if these were like rural or suburban, that had private wells and it was a potential to be metering.

How many of these other kind of niche segments might you get some call and demand for meters?

When the municipalities are just flat and things are tough, obviously, those kind of niche areas aren't going to go anywhere.

But as you get kind of a resurrection and reflation, how many of these little niche areas might start coming to life?

There are two major pieces of unmetered housing in the United States.

And one of them is there's an estimate that about 20% of the houses in the United States are on private wells, and therefore they don't have a meter.

And so that is one piece of it.

About 20 million homes.

There is also about 13 million homes that are on a municipal water system but don't have a meter because they are paying a flat rate.

So each of them represent a significant opportunity.

The 13 million homes, we have seen and are continuing to see more and more cities say, we've got to meter; we have to start charging people for what they use, so that they will be -- they will be better stewards of their water.

And that represents an opportunity -- cities like Chicago, the Central Valley of California, places like that, that are not fully metered, need to start metering and are indeed doing that.

On the 20 million that are private wells, generally what you see there is when the city runs the sewer system out to those private homes, they will also tend to put them on the city water.

And that represents an opportunity because then they install meters.

And that slowly happens over time.

New subdivisions go up, everybody is on a well.

10 years, 20 years later, sewage comes out there, city water comes out there and they start hooking them up.

But then there is also a push in some areas of the United States where water is very scarce to start metering private wells.

I know they are doing it on farms out west, where they are requiring the farmers to put on meters to measure their irrigation water and actually pay something for the water they take out of the ground.

All of those represent opportunities, but they all represent far-reaching opportunities.

These are -- we are talking the next several decades, as water becomes more and more scarce.

Yes, okay.

All right.

Thanks, guys.

Glenn Wortman, Sidoti & Company.

Just back to the impact on housing starts, in one of your investor presentations, you say that every 100,000 new homes built represents a $2 million sales opportunity for Badger.

Can you just walk us through the math there?

Sure.

If you've got 2 million homes at 30% --

100,000 homes.

I'm sorry, you've got 100,000 homes, at 30%, you've got 30,000 meters that you are selling.

If you assume that those 30,000 meters are sold with radios or a mix of radios and non-radios, like we have now, about 50-50, you are about $70 per unit.

$70 per unit on 300,000 homes comes out to be $2 million.

$2.1 million.

$2.1 million.

Rick is working it out on a calculator, while I'm doing it in my head.

So that is where we get it.

Does that make sense to your question?

Absolutely.

I appreciate it.

Thanks a lot.

At this time, we have no further questions in queue.

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

Thank you.

And I want to thank everybody for joining us today.

We were pleased with the quarter.

It came in about where we expected, but overall, we were very pleased with the year.

We are optimistic about what we are going to see going forward in 2013.

Between the new products, the opportunity that Elster's decision represents for us is significant and we think all of that could come together to give us a good opportunity in 2013.

With that, I'll thank you.

Thank you for your participation in today's conference.

This concludes your presentation.

You may all disconnect.

Good day, everyone.