Badger Meter Inc (BMI) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter one 2014 Badger Meter earnings conference call.

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

(Operator Instructions) As a reminder, the call is being recorded for replay purposes.

And now I'd like turn the call over to Rick Johnson, Senior Vice President Finance and CFO.

Thank you very much, Carolyn.

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

I want to thank all of you for joining us.

As usual, I will begin by stating that we will make a number of forward-looking statements (technical difficulty) call today.

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

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

Let me reiterate some of our guidelines.

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

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

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

Now on to the first-quarter results.

Yesterday after the market closed we released our first-quarter 2014 results.

Sales were a record $83.5 million, as compared to $71.8 million in the first quarter of 2013.

I will clarify, that record is for a first quarter's sales.

This represents an increase of $11.7 million or 16.3% over the same period last year.

This increase was driven by higher sales of municipal water products and flow instrumentation or industrial products.

Let's look at each of these categories.

Municipal water sales increased $10.9 million or 23.3% to $57.7 million in the first quarter of 2014, from $46.8 million in the first quarter of 2013.

These sales represented 69.1% of sales for the most recent three months.

Sales of residential meters increased 17.6%, while sales of commercial meters increased 62.4% over the first quarter of last year.

The lion's share of this increase was due to increased volumes of products sold both with and without technology.

We should also note that last year's first quarter was an unusually weak quarter, which we attributed in part to the winter weather.

For some of us, this year's winter was not much better; in fact, it may be considered a little bit worse.

However, the particular mix of customers that we have in any given quarter can also have an impact on our sales.

So while weather probably did have an impact on certain parts of the country, much of the sales increase that we saw in the first quarter was due to customers in states that were not as impacted by weather.

Flow instrumentation or industrial products represented 28.4% of 2014 first-quarter sales compared to 30.6% in the same period in 2013.

These sales increased $1.7 million or 7.7% to $23.7 million, from $22 million in the same period last year.

This sales increase was due to higher volumes of products sold in most of this category's product lines.

Specialty products are a small part of our business as they represented 2.5% of the first-quarter sales.

These sales decreased $900,000 or 30% from the first quarter of 2013.

The decrease was due to lower sales of gas radios, offset by an increase in the sales of concrete vibrators.

Gross margin for the first quarter as a percent of sales was 34.7%, very close to the 34.9% that we saw last year.

The slight decline was due to product mix.

While municipal water sales were up in all categories, the increase was higher for manual or local-read meters, which carry lower margins.

But the increased volume did help us with better capacity utilization within the plants.

Selling, engineering, and administration expenses for the three months increased $900,000 or 4.7% from the same period last year.

Included in this year's expenses were charges totaling $1.7 million or approximately $0.07 per diluted share related to due diligence and other transaction costs related to a potential acquisition that ultimately was not pursued.

Rich will have more to say about this in a moment.

Excluding these charges, selling, engineering, and administration expenses were down compared to last year due primarily to lower product development costs.

Last year our development expenses were higher as we were investing in products that we have since released into the market.

The effective tax rate for the quarter was 37.4% compared to 35.1% last year.

Last year's first-quarter effective tax rate included one-time effects of tax law changes that were signed into law early in 2013.

Without those changes the tax rates would have been comparable between periods.

As a result of all this, net earnings for the quarter were $4.6 million or $0.32 per diluted share, compared to $2.9 million or $0.20 per diluted share for the same period in 2013.

There were no significant changes in our financial condition.

In the first quarter, despite the increase in net earnings, we did not generate as much cash from operations as last year, as the increase in earnings was more than offset by increasing receivables and inventories.

We view this as a temporary situation and expect to continue to generate cash for the remainder of the year, which will be used in part to pay down debt.

At March 31, debt as a percent of total capitalization was approximately 27%.

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

Rich?

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

Two months ago on our year-end earnings call I noted that the first quarter of 2013 was weaker than normal due to unusual weather impacts throughout the quarter.

But I indicated that we were optimistic about the first quarter of 2014, since we were seeing sales and orders return to a more normal pattern.

As Rick discussed, this held true through the first quarter, resulting in a very solid performance.

One particular area of solid growth has been our E-Series ultrasonic water meters.

Not only did we start shipping these meters to our new customer in the Middle East during this quarter, but we also had strong domestic sales, resulting in total sales during the quarter of almost $4 million for this relatively new product.

With the recent introduction of additional sizes of these meters in both stainless steel and polymer, we believe that we will continue to see strong growth in this product line.

In addition to meters, our recent introduction of the ORION cellular radio and the BEACON Advance Metering Analytics system have been met with a great deal of enthusiasm by our sales force, our distributors, and our customers.

I will remind you that this new system enables us to address hard-to-read metering locations through cellular technology; provides the utility with a powerful cloud-based software analytics platform; and enables our customers to provide timely consumption data to end consumers, to encourage water conservation efforts.

Sales are in the early stages, with small numbers being shipped for customer evaluation and training purposes.

However, the performance in the field is excellent and sales inquiries are strong.

I will go off script for a moment here, which makes everybody in the room extremely nervous, and say that I just got off the phone about 10 minutes ago with our VP of Business Development, Greg Gomez, who is in the Middle East right now with Horst Gras, our VP of International Operations.

They are visiting the customers who are buying the E-Series meters; but they were also demonstrating the BEACON Advance Metering Analytics system.

Greg indicated that several of the customers in the Middle East are very excited about BEACON's ability to allow the end consumer to see their water usage and to encourage those consumers to conserve, because obviously in the Middle East water conservation is a major focus.

So he was very optimistic about our opportunities over there.

Finally, let me address the charge in this past quarter related to our acquisition activities.

We worked very hard during the quarter on a potential acquisition and completed more than half of the due diligence work before we made the decision to not move forward with the acquisition.

Anytime a company becomes involved in a potential acquisition, especially where significant due diligence costs are incurred, there is a risk that the management and the board will feel compelled to complete the acquisition process, regardless of what is uncovered in the due diligence process.

I'm very proud of the fact that Badger Meter's management team and Board of Directors have maintained the discipline to walk away from a potential acquisition at any point in the due diligence process if we feel that the acquisition is not in the best interest of our shareholders.

We will continue to pursue strategic acquisitions in the future, and we will also continue to carefully vet those opportunities to ensure that they result in increased shareholder value.

With that we would be very glad to take your questions.

(Operator Instructions) John Quealy, Canaccord Genuity.

Hey, good morning, guys.

How are you?

A couple questions.

Thanks for the updates on several initiatives.

But on BEACON, can you talk about domestically what you're seeing about order potential?

I know I think at DistribuTECH there was chatter that it's been out to about a dozen customers, doing some testing on this.

Yes.

I can give you a couple data points on this.

We've only had it out for a few weeks, as you know.

Obviously to make a sale we are required to -- there is training involved and a scheduling of training and everything else.

But we have quoted over 60 BEACON systems already in just the last month or so that it's been out, which we view as a very positive sign.

Everything from small systems to very large systems we have quoted.

Also we offered a starter kit because, unlike our other systems, the beauty of the BEACON system is that you can literally go out and put in one or two units and use them.

And it doesn't require you to put devices up on telephone poles; it doesn't interfere with any of your other meter-reading operations.

So we offered starter kits for a fee that included 10 units plus software and a training session, a webinar training session.

We have already received orders for over two dozen of those starter kits.

So we are very optimistic about what we are seeing.

We feel that it's getting good market acceptance very early on.

Part of that is because it is so easy to look at this.

You can imagine, if you order a new drive-by system, putting 10 out there really doesn't test it.

In a new fixed-network system you've got to put devices up on towers.

But this is a very system for utilities to get into, and we think we're going to see a lot of utilities putting in small numbers, testing them for a few months, and then following on with major orders.

John, did I lose you?

I might have lost John.

Richard Eastman.

Yes, good morning.

Hey, Rich, I just wanted to double back for a minute on this E-Series sales in the quarter, this $4 million.

Can you just give us a sense of how much of that is against that $6 million order you had in the second half of the year?

And maybe just with the mindset of how much traction and what is realistic to assume for sales of that E-Series meter in the US over the next maybe 12 months, can it move the needle?

Yes, Rick; and hopefully I won't talk so much that I'll lose you like I did John.

Maybe you just put him to sleep, Rich.

I don't know.

Yes, he may have dozed off on us.

Oh, John, has dialed back in, so he must've lost the line and come back in again.

So John, I apologize for whatever happened there.

Rick, in answer to your question: yes, we did about $4 million of E-Series.

About half of it was that major customer in the Middle East and about half of it was domestic applications.

I think we're -- it's hard for me to say exactly a dollar amount we're going to sell during the coming year.

Obviously we have a budgeted expectation.

But I think we are going to see a very strong growth trajectory on this, because a lot of customers have made the small purchases over the past year or so and have had them out there and testing them.

And thus far these things are testing very well.

They are performing exactly as we had told our customers they would perform.

The beauty of the E-Series meter, for those of you who aren't familiar, is that it's an ultrasonic meter; it's solid-state, meaning it has no moving parts, so it does not wear out and lose its accuracy like a mechanical meter does.

Also, because there's no moving parts any grit or anything that might get in the water is less likely to damage the meter.

So it's a very good -- it's a very well-performing meter, and we do think it's going to have a strong growth trajectory during -- over the next four quarters as we go forward.

This is Rick.

If I just can add, to the extent that we sell it domestically, it's selling to customers who normally would have purchased mechanical meters and are moving to solid-state meters.

So there is a (multiple speakers)

Yes, I understand.

Again, I know from commentary you've made in the past the ASP purchase price on this is higher.

Is the margin better than your typical brass local-read meter?

Yes, I think it's a little bit better.

Okay, all right.

So there's no trade-off.

Could you just maybe address the gross margin here?

Again, just continues to be maybe a little bit disappointing and maybe sluggish relative to some of the variables that go into that number, namely volumes.

I would've thought we would have seen some improved performance, especially sequentially.

I mean, we did $2.5 million more of sales and our gross margin actually declined $50,000.

So what is your patience level there, your timing there?

How should we start to model that going forward here?

Rick, I'm going to let Rick Johnson answered that question, but I want to go back to one thing so there's no confusion.

On your question on E-Series margins --

Yes.

-- and I said margins are a little bit better, I'm talking about margin percentages.

So obviously if you got a higher selling price, margin dollars are even better.

So there's no confusion there.

Okay.

(multiple speakers)

I will try to give you a little color.

Again, you go back to last year was difficult quarter for us; we know that.

So even just looking -- you're talking sequentially, I'm talking Q1 over Q1.

There are some additional warranty charges in there that do impact margin maybe 0.5% here and there in this current quarter.

There are some FX charges in there; we continue to buy our radio boards out of Europe.

There is the increased cost -- if you remember, last year we were still selling about half the brass was standard brass and the other half was Bi-alloy.

We are now at 100% Bi-alloy.

And yes, we did increase the prices to cover for some of that.

But in terms of the cost, those costs of the Bi-alloy is a little bit higher.

But Rick, it's the same issue.

Clearly volume helped the margin dollars, okay?

But when we got to the end -- and to a certain extent there is some pricing pressure out there that squeezes a little bit, and it's a particular mix of customers we have.

So right now we are not reading anything in particular in this.

Your question as to how to model it going forward, we continue to push to get into that 36%, 37% gross margin range.

I made the comment in my comments that there was a little bit heavier mix of local-read meters in this particular quarter, and so that impacted it.

I am literally looking at like a dozen items that could impact margin.

None of them -- other than volume pumping it up -- none of them really jump out at me as a major factor.

But taken as a combined set, it did have that little dampening effect on the margin.

That is -- again, if we just -- there are so many variables that go in there; I think we understand the variables.

But just with volume going forward, can the incremental gross margin -- it seems to me it should be 40% or 50%.

Now, again, I'm thinking incremental as in quarter to quarter.

Well, I am confused by the question, Rick; so let me make sure.

You're saying you think the gross margin itself ought to be 40% to 50%?

Or are you saying the gross margin on (multiple speakers)

I am saying the incremental gross margin.

So, incremental dollar of sales, the gross margin on that should be north of 40%.

Yes.

You are right, because once you are adding work to a factory that has capacity, there is an additional gross margin that you gain.

So you are absolutely right; when we add an extra $1 million of sales into a factory that has excess capacity, we could pick up a margin north of 40% with no problem whatsoever.

We understand that.

That is one of the reasons why we went aggressively after some of Elster's low-margin business.

Because we knew, even though that margin was low, we could put it into our factory.

And our factory is running at about -- most of our plants are running at about 70%, 75% capacity.

So we could easily put it in there without adding equipment and pick up a higher margin than what Elster had.

Okay, but again --

But Rick there are so many other factors.

No, I understand.

I can double back to you.

It's just -- I'm just looking fourth quarter to first quarter; and again you had a decremental on higher sales.

Now I know, Rich or Rick, you're addressing year-over-year, and I understand that.

But it's still a bit surprising that from the fourth quarter to the first quarter with $2.5 million more of sales our gross margin went down by $50,000.

So that was what I was trying to reconcile.

But just one other question, and I can double back.

But can I just ask?

These due diligence charge, this due diligence charge in the quarter, can I just ask you approximately some range of revenue in the acquisition that you were looking at?

How big was that?

Yes, and we talked a lot about this and figured we would get a lot of questions on the size of the acquisition, on whether it was domestic or foreign, and whether it was in our industrial area, our water meter area.

We decided that we would tell you it's bigger than a breadbox, but we're not going to play 20 Questions because we really don't want to narrow it down.

I would say it was a significant acquisition that we were chasing.

Because obviously the due diligence dollars in my opinion became significant.

But that is all we are really saying.

We've actually signed a confidentiality agreement, so we are not going to say anything more.

Well, there was a piece of business that transacted in Mexico.

But it was quite small; and I'm going to just presume that is not what you were looking at.

This was a significant opportunity.

Okay.

Okay, thank you.

John Quealy, Canaccord Genuity.

John, you must have dozed off on us.

Yes?

You're the one call I don't doze off on; there's always the risk that you say something -- so I don't doze off.

Anyway, sorry about that.

So my follow-up on that question on BEACON was: is this not cannibalizing the existing drive-by platform at all?

Just help us frame it, because it seems a good solution and it seems like it is getting decent traction at least initially.

John, what I would say is obviously it is going to cannibalize some drive-by and fixed-network.

But I view this as a really positive thing.

The most recent estimate by IMS is that in the US or in North America about 43% of the meters now have radios on them, so we still have a long way to go.

One of the major issues in getting utilities, those other 60% of the utilities, to switch from manual meter reading where somebody walks door-to-door to some sort of automation is the fact that we have been offering, we and all of our competitors, have been offering drive-by or fixed-networks as alternatives.

And both of those have limitations.

The problem with most fixed-networks is that you always -- city boundaries are not a perfect circle.

If they were, life would be so much easier for us.

You always have houses out in those hard-to-read areas, and so you're talking about a lot of infrastructure to get coverage.

Even the best fixed-network system, you are still going to have some meters that won't report.

It's very difficult.

We have all struggled with this.

But with a cellular system, pretty much every house that is on a municipal water system has cellular service.

Obviously there are houses in the north woods of Wisconsin that don't have cellular service, but they also aren't on a municipal water system.

So we feel that this is a solution that is really going to help.

Then the second thing that this does, I don't want you to overlook the value of the conservation tool here.

A lot of the water utilities are now going through what the electric utilities went through in the 1980s, which is they have -- they are being pressured to find ways to help their customers conserve.

And with a tool like this, when your cellphone can tell you exactly how much water you are using, can warn you that there is a likely leak, that is a very powerful tool.

So I think, I am hoping that what BEACON really does is, rather than cannibalize a lot of our existing sales, it's going to move a lot of those 60% of the utilities off the dime, where they have been sitting back and waiting for a very compelling reason to go to automation.

And this I believe is the reason.

Okay.

Then just two more questions.

First, we talked about this concept of an Elster drag as you, I guess, make whole, get overhead absorption on your side, and keep those customers' prices under previous agreements with Elster.

When generally does the bulk of that run off, so it's no longer a drag, if you will?

I think we're going to -- well, there's several factors here.

One is those contracts that we took over since June 30 of last year mostly run through 2014.

A few of them might run into early 2015.

I'm looking at Kim Stoll, our VP of Sales here, to see if she will nod at that statement.

There are a few that go into early 2015, but most of them run off through 2014.

Now when they run off, we will go in and work very aggressively to try and get some price relief.

Will we successfully get prices on all those contracts back up to what our averages are?

Probably not.

We may achieve it on some.

I don't think we will achieve it on all.

So those Elster customers who got very used to paying a submarket price for their meters, they're going to be hard to convince, and it's going to take time to convince them over time to move up.

We will have a first shot at it when their contract ends; but we will go after it.

Let me enhance that.

We have already had conversations with most of those customers and prepared them for the fact that we cannot sell at those prices going forward.

And for the most part, while not exactly receptive, I think most of those customers understand that.

Because they understand Elster is no longer around.

Right.

But on the other hand, can you go in and convince a customer that on the renewal they should have a 20% price increase?

Probably not.

On the other hand, could you get a 10% price increase?

Yes, you could probably do that.

So it may take a couple rounds for us to get those up to where we want.

I don't want you to think, John, that those customers are going to jump on renewal.

Yes.

No.

So this leads to my last question.

So copper took a pretty good digger here at the end the recent past and whatever.

You got, 45-, 60-day inventory turns and things like that.

Rich, Rick I think mentioned a little bit of price pressure in and around there.

So all else equal, we should still see some ability to grow the gross margin, if you're getting some good news on copper; maybe give a little bit on price.

But I can't imagine that you are going to be much more negatively impacted on price.

Or is that not a fair assumption?

No, I think it's a very fair assumption.

First off, it takes about 60 days or 90 days -- they're telling me 90 days -- for a copper price decrease to move through our system.

Because it's first seen at the smelter; then it's seen at the foundry; and then it has to move to our inventory and out to the customer.

So it's about 90 days.

So, you're right.

Copper did take a drop, and if it stays down we are going to see some benefit of that coming through.

The other thing that is happening is that, when you compare to a year ago -- and I know we keep talking a year ago, you guys like to compare sequential quarters.

But a year ago the benefit of lower copper was offset by the fact that there was a mix of cheaper copper, the 81 brass, which we no longer have now.

As we move through this year, that year-over-year comparison goes away, because by about the middle of last year there was no more of the 81 brass and it was all Bi-alloy.

So you're absolutely right, though.

We are anticipating some margin tailwinds from the fact that copper has recently dropped.

And I'm a cynic.

I mean, the price increases come within 90 days.

Decreases are like gasoline prices when oil goes up.

It just takes a little bit longer.

So we have been really pressuring the foundries to give us those decreases.

Yes, Rick tends to believe the worst in everybody.

That's correct.

So he assumes that when prices go up they immediately pass them on to us, and we have to squeeze to get -- and to some --

There is a hint of truth to that.

To some degree he may be right.

All right, guys.

Thank you.

Ryan Connors, Janney Montgomery Scott.

Great, thank you.

I have a few questions, guys.

I guess first off, just more of the housekeeping type question; then a couple bigger-picture items.

First off just, you discussed the gross margin in pretty good detail there.

But just can you give us an outlook for the SG&A line?

I know there's been a number of moving parts there with the R&D rolling off but maybe variable comp heading up and this charge.

So what is the outlook for the trajectory we should look for there, and the moving pieces?

Ryan, what I will tell you is that our engineering costs, which are a major part of our -- what Rick calls SMEGA, sales, marketing, engineering G&A.

Our engineering costs have historically less than 5% of our sales.

They have been anywhere from the 4.5% to 4.8%.

Last year we consciously allowed them to go over 5%.

It was what I euphemistically referred to as the surge.

We did that in order to get BEACON to market.

We felt we had a very compelling product that would generate great shareholder value, so we put a surge into engineering, we spent the additional money, and we got that to market very quickly.

As I've told my engineering guys, when the surge is over it's time to bring the troops home.

So in 2014 we believe that our engineering expenditures should drop below the 5% level and we should be able to gain from that.

We should have some pick-up there.

Our other SG&A costs, I think you're going to see them maybe a little bit higher with inflation.

Also the fact that we didn't pay any bonuses last year, because at Badger Meter if earning don't go up we don't pay bonuses.

So that -- this year if earnings are higher, we will be factoring in some bonuses.

You will see that impact.

But beyond that and absent unusual one-time events like the $1.7 million on the acquisition, absent that, you should not see much of a rise in SG&A.

I think the only thing is we always are watching.

There are non-cash charges, and it's this pension accounting.

You saw that last year, I think, in the second and third quarters and simply from the fact that we froze the pension plan a couple years ago.

We are more likely to have some of those charges later in the year, depending upon the payouts from the plan.

It is some convoluted thing, but it's always a non-cash charge.

In fact the balance sheet is properly stated.

This is the thing we always talk about.

We just pull it out of equity, run it through the income statement, and back in.

So likely you might see those later on in the [year].

Okay, that's great stuff.

So the bigger picture, first off just to follow on the BEACON and the ORION SD discussion, you've mentioned several times, Rich, about conservation being a key selling point and the ability to help drive a conservation program.

That seems to be a recurring theme in the customer testimonials that we have listened to.

You mentioned Greg reporting that back from the Middle East in real-time.

So to what extent does that make that somewhat of a niche solution that is more applicable to the Middle East and to parts of the Southwest in the United States and so forth, and limit the addressable market there?

Because it seems like that is a big talking point for that product.

Ryan, I think to some extent -- and I know you're very familiar with the water industry, as I am.

I think to some extent you might be underestimating the significance of the new focus that we're seeing on water conservation, not only around the world but all across the United States.

Milwaukee, where we are today, is in the world's largest water basin.

We have over 20% of the world's freshwater right outside our back door here in the form of the Great Lakes.

And yet even here people are saying we need to conserve.

Because there is also a water-energy nexus: even if you have plenty of water you are generating -- you are using a lot of energy to move and clean that water.

So I am finding people in all communities, people located on rivers and lakes, are focused on water conservation.

And to the extent that BEACON can help their community achieve water conservation goals, I think we're going to see that happening all across the United States and all around the world.

So I don't view it as a niche play.

But then I would also remind you that BEACON itself is more than just about water conservation.

To us, that was an additional feature we were able to provide.

Once that information is up in the cloud and through a cellular system, getting it back down to iPads and iPhones was a very easy thing.

And that is a nice thing to provide.

But really BEACON offers so many tools for the utility to analyze their water usage, and to identify where potential leaks are, and to deal with load management -- all of those wonderful things that they will be able to do with BEACON.

It goes far beyond just conservation.

It also goes to allowing the utility to focus on what they do best, which is managing their utility, and that is really a key factor also.

So, I don't want you to think conservation is the only selling point.

I think it's a selling point that we're hearing a lot of interest in.

Maybe we have even underestimated how interested people would be, based on Greg's comments from the Middle East.

But there is a lot more there than meets the eye.

Okay.

Then one more just revisiting a topic that was a hot topic last year.

I haven't been hearing as much about it, but just the state of the municipal customer base and the municipal end-market in general.

I mean, you're posting some pretty strong numbers and growth in that end-market, which many people are still saying is in trouble, given pension issues and so forth.

I mean, do you read that as a recovery in that end-market?

Or is there something else going on there?

No.

And Ryan, I know that you do a lot of research into the health of the municipalities.

And in fact I rely on some of it because it's pretty good -- surprisingly good (laughter).

Blind squirrel finds a nut once in a while.

I couldn't leave you with an open compliment like that, Ryan.

But the fact is, I also think what we are seeing is that the municipalities can cut back on water meter replacement for a while, but at some point they have to go back to it.

So you have a bad winter, maybe the municipal budget get used up filling potholes and salting roads, and so they decide for six months we're just going to cut back on water meter replacements.

At some point those meters are getting old.

They are becoming inaccurate.

They lose their accuracy with time.

Revenue is being lost, and the utility has to go back to it.

So remember that the water meter is the cash register of the water utility.

As Rick Johnson, our CFO, loves to say: even a restaurant going out of business keeps an accurate cash register by the door.

So no matter how difficult a city's pension obligation are or other budgetary constraints are, they want to have accurate cash registers.

And at some point they will start that replacement.

I think that is what we are seeing.

I think we're seeing them come up and say: we have got to get back into these replacement programs.

You know, Ryan, one other comment on the first-quarter sales.

One of the things that we are kind of getting anecdotally is that we introduced BEACON in the first quarter -- in fact we introduced it at our sales meeting in January.

Now granted, training didn't take place till mid-March on it, all right?

But we have a lot of people saying, they just paused for a while.

Okay?

So they have record sales for any first-quarter despite the fact that, if we had not introduced BEACON, maybe sales would've been higher.

Now, we can't guarantee that; but we have had anecdotal instances where cities are just thinking about it.

The lack of infrastructure associated with this is very attractive to some people also.

Great.

That is great stuff as always.

Thanks, guys.

Glenn Wortman, Sidoti & Company.

Good morning, guys.

I am blanking if this had come up on past conference calls, but with the introduction of the E-Series meters and it holds the accuracy longer, do you think that would lengthen the replacement cycle, if these meters really catch on?

No, Glenn.

The reason I say no is because in our industry meters are warranted for 20 years; batteries generally last 20 years; and the average replacement is about 15.

There are some utilities that will replace earlier than the 20 years, and some that go the full 20 years.

So we run an average of about 15.

I don't see accuracy stretching that out much.

It certainly can't go beyond 20; because by then batteries die and the product has to be replaced.

If anything, there are some utilities that maybe stretch a little bit beyond the 20.

And I think once they go to electronic metering, the 20 becomes kind of a hard wall for them.

Okay, all right.

Then just to ask the acquisition question a little bit differently, can you maybe just comment on what types of businesses you might be interested in, going forward?

We still -- there are really two distinct buckets of acquisitions that we see as potentials.

One are smaller strategic acquisitions, primarily in the one-third of our business that is flow instrumentation or what we are always calling industrial metering, and acquisitions like we made in the past with Cox and Remag and companies like that.

Those are smaller acquisitions.

We are not looking at any large companies there.

We're talking maybe south of $10 million, maybe as high as $20 million, something like that.

But not huge acquisitions.

But the second thing we have to do as a company is keep ourselves open to major opportunities.

That if something significant came along that we would have an opportunity to jump on it.

We have a very healthy balance sheet.

We have a very good stock price, so a very good currency in our stock.

And we think we have a strong team here that could absorb a major acquisition.

When it comes to water meter companies, there aren't small ones.

They are all pretty much significant players.

And we have to remain open to opportunities that come along those lines.

Okay.

Thanks for taking my questions.

Hasan Doza, Water Asset.

Hi, good morning, gentlemen.

Just follow up on the two questions.

First, on the earnings growth, if I look at the Company the last two years, obviously last year was an earnings down year versus the year before.

And if I look at this year's first-quarter results of $0.39, adding back the charges, it's still down from your first-quarter 2012, which was a normal quarter versus the first quarter of last year.

So the reason I wanted to get your thoughts is that -- how do you think about Badger beginning to grow earnings again in their organic business?

Or do you think that at this point you really need a transformational acquisition to grow earnings?

Because the last couple of years we really haven't seen Badger grow earnings.

So I just wanted to get your thoughts on that dynamic of finally seeing earnings growth coming out of Badger Meter.

Well, okay.

So 2012 was a year of very good earnings growth.

And you are right; the first quarter of 2012 was a strong quarter.

I will also point out that the winter in that first quarter of 2012 was one of the mildest winters we have had in years.

Snow cover was 20% below normal, whereas last year was about 15% above normal and this year was about 9% above normal.

So that has a significant impact.

So 2012 was a very strong year of earnings growth.

2013 our earnings growth slowed down and dropped in that year.

So I don't think it's several years of lower earnings.

It's really we have had one year.

I think in 2014 we are optimistic and we believe we can grow earnings.

We have some very strong tailwinds, some very strong new products; we have copper prices very favorable.

Yes, we've had some pricing pressures, but I do think we can deliver in 2014 a very good year.

I wouldn't read much into the back that the first quarter was not as -- it was $0.39 and perhaps the Street was expecting $0.42.

In my opinion that is within the noise level of our business.

We always say we run a lumpy business.

Quarters are very hard to predict.

And a $0.02 miss, I don't read a lot into it.

Maybe you do, but I don't think it's that big a deal.

In fact a $0.01 issue (multiple speakers) only about (multiple speakers) $150,000.

No, I didn't really -- focusing on the $0.02.

I was really looking at the quarter-to-quarter earnings growth, and looking at the first quarter of 2012 as a more normal year.

But the bigger-picture question, to add your comment, Rich, is: do you feel the business as it is right now, you need an acquisition to really have visible earnings growth?

Given the volatility.

Is that -- that's kind of my second part of the question.

Right.

My direct answer to that is: I don't feel we need an acquisition to drive earnings growth.

What we need is some strong new products to put into the pipeline.

And what we need is our competitors to cooperate, if you will, or to help us by having difficulty in their own businesses.

And to be real blunt with you, I think we are at a perfect position right now.

Because whereas in the past it's taken as anywhere from three to five years to introduce a significant new product, in the last 12 months we've introduced two.

We introduced ORION SE a year ago, and now we have introduced BEACON, both very strong products, and we now have two of the industry-leading technologies on the market.

But the other thing that has happened is our competitors have made strategic decisions to narrow their product offerings.

They are either getting out of mechanical meters and only offering electronic meters; or they are getting out of metal meters and only offering polymer meters.

Badger Meter is the only company in North America that is still offering a full suite of electronic, mechanical, metal, and polymer meters.

So we feel that in our legacy markets, in our North American markets, we have the two perfect situations: very compelling new products at the same time our competitors are reducing their offerings.

Then when you add on to that that we now, for the first time, have significant opportunities to take our products globally, because we have a meter and a radio that works in foreign markets, that too could drive significant growth for us.

That is why we're so optimistic; and we're not factoring in acquisitions as a major growth driver.

My last question on the gross margin and just to understand.

As you are absorbing the Elster customers, you said most of the absorption will happen during 2014, meaning you are picking up these underpriced contracts mostly during 2014?

No, I don't think you've got that right.

Most of the pickups happened in the last nine months from June 30 to the end of the first quarter.

We have picked up we believe over 50% of Elster's customer base in that period of time.

What I said in 2014 is most of the contracts that we took over will be renewed in 2014, where we will have price improvement opportunities.

Got it.

Okay.

Thanks for clarifying it.

Appreciate it; thank you.

Richard Eastman, Robert W, Baird.

Rich, from the very last comment, can we assume that in this first quarter that maybe your Elster sales were around $2.5 million?

No, you can't.

(multiple speakers)

But if we got half, $10 million of $20 million annualized?

Right, but what you financial guys love to do is draw straight lines.

Yes, that is what we do.

That's what you do; and you remember --

With all the information and all the data points that we collect, we have to draw straight lines.

Yes, yes.

So what you really need to do is put away your rule and get out a protractor (laughter).

So it's not $2.5 million.

It's somewhat -- it must be less than that.

Rick, I know where your math is going, because Elster was doing about $20 million a year in sales in North America in their water business.

They pulled out of that -- they mostly pulled out of that.

We feel that we have taken over 50%.

That would be about $10 million a year; and you divide that by 4 and you get $2.5 million.

Of course as you have now learned is our business is lumpy.

The first and fourth quarters tend to be weaker quarters, and the second and third tend to be stronger.

Whereas I do believe we will have about $10 million in sales this year, I don't believe it will come in at $2.5 million every quarter for the next four quarters.

Yes, okay.

So the first quarter was south of $2.5 million; the fourth quarter will be south of $2.5 million; the third and fourth will be north.

Yes, okay.

Just as we talk about price pressure, we've mentioned this in the trailing quarters as well.

And it just strikes me that Elster is out of the market, which I guess you could include their pricing as price pressure; but we knew that has been out there.

I can't -- you know Neptune doesn't cut prices, I don't think.

I'm not sure I would agree with that statement.

Neptune has a capacity issue.

They own their own foundry, Rick, and they are more vertically integrated.

So when they lose volume it really hurts them a lot more.

I believe that companies that have capacity issues tend to get a lot more aggressive in pricing, especially when so much of their business is a fixed cost.

We don't own our own foundry; so when our sales go down we don't carry all that overhead.

So their lost share -- so Hersey could matter, or Mueller could matter.

So yes, Mueller.

(multiple speakers) Water Products.

So we have been seeing some price pressure coming out of the Neptune area, where we haven't historically seen it.

Then -- so is any of the price pressure coming from non-US vendors trying to gain a little bit of share here on land?

No, not at all.

You know, Rick -- and I don't want people to get the wrong impression here.

Badger Meter feels we have an opportunity to take our meters and radios internationally.

On the other hand, I'm not going to open offices in Berlin and Paris and start knocking on doors.

That makes no sense for us because brand and channel still matter in our industry to a great extent.

So just as it's hard for those international firms to get into North America, because they don't have the brand and they don't have the channels, and the companies that are here are all over 100 years old -- we've all been selling for a long time -- we will run into the same problems over there.

However, we do have partners.

We have companies that will private-label our products and are private-labeling our products.

And then we have regional opportunities such as the Middle East where they are very open to buying American products.

Yes, I just wanted to check the box that what's not occurring is foreign vendors trying to gain a foothold in share in the US with price.

No.

We are not seeing that.

Okay, okay.

Just one last question.

Rick, on the receivables and inventory, that stepped up.

Is there any message there?

Anybody trying to get ahead of price increases?

Are you guys building to -- did you build anything on the inventory side in the first quarter for delivery later in the year?

I mean, general -- receivables are always low at year-end, so they are higher now because we had obviously record sales in the first quarter.

On the inventory side, again the end of the fourth quarter, you know it's increased since then.

We are going into our busy time, the second and third quarters.

We have got long lead times on certain products.

And to a certain extent why we did well: we were buying inventory according to a plan, and frankly we were a little short of our own plan.

Yes.

No, that's okay.

There wasn't any terms given on the distribution side relative to price increase coming up?

No.

No.

Okay, okay.

Very good.

Thank you again.

Thanks for that question.

We have no further questions at this time.

(Operator Instructions)

It doesn't appear we have additional questions, so why don't we wrap it up?

I will just say that I will reiterate that we are optimistic about 2014.

We think the first-quarter was not a record-breaking earnings quarter, but it was a good quarter and that we believe 2014 can be a strong year.

We are particularly impressed with the customer reception to the new BEACON offering and to the growth in sales that we are seeing in the E-Series meters.

Those are two very strong areas.

We also think we have continued growth coming in our industrial flow areas, as the economy improves and we see more industrial capacity added, where a lot of our sales are made.

So with that, I will thank you again for joining us.

Thank you, ladies and gentlemen.

That concludes your conference call for today.

You may now disconnect.

Have a good day.