Badger Meter Inc (BMI) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter-one 2015 Badger Meter, Inc.

earnings conference call.

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

(Operator Instructions).

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

I would now like to turn the call over to Mr. Rick Johnson, Senior Vice President of Finance and Chief Financial Officer.

Please proceed, sir.

Thank you very much, Laura.

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

I want to thank all of you for joining us.

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

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

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

Let me reiterate some of our guidelines.

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

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

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

Now onto the first-quarter results.

Yesterday after the market closed, we released our first-quarter 2015 results.

The first quarter proved a little tougher than we expected.

Sales were approximately $100,000 higher than the first quarter of last year.

This is the net result of higher sales of municipal water and specialty products and lower sales of flow instrumentation products.

Let me review each of these sales categories.

Municipal water represented 70% of sales in the first quarter of 2015 compared to 68.4% in the first quarter of 2014.

These sales increased $1.4 million or 2.5% to $58.5 million in the first quarter of 2015 from $57.1 million in the first quarter of 2014.

Looking at the detail for municipal water, higher sales of residential products were offset by lower sales of commercial meters.

Some of the increase in overall sales is attributable to the fact that we had incremental revenue of $3.9 million associated with National Meter and Automation, which we acquired last October.

Most of that is attributable to residential sales.

Total sales of residential meters and related technology increased 11%, primarily due to higher volumes of products sold with technology.

Much of the increase was international, primarily Mexico, in this particular quarter.

Commercial meter sales decreased over 30% in this period compared to the same period in 2014 due to lower volumes of products sold.

Remember that in the first period of 2014 commercial meter sales were up 62.4% over the first quarter of 2013, so the first-quarter sales in 2015 for commercial water meters returned to more normalized levels.

Flow instrumentation products represented 27.3% of sales for the first quarter of 2015 compared to 29.1% in the same period last year.

These sales decreased $1.5 million or 6.2% to $22.8 million from $24.3 million in the same period last year.

Most products within this group saw increases in total sales due to higher volumes on slightly lower pricing.

However, while sales of products sold in euros increased compared to the first quarter of 2014, the strengthened US dollar had a negative impact when those sales were translated into US dollars.

We estimate the impact of this foreign exchange on revenues to be approximately $1 million for the quarter.

In addition, we had a significant decline in sales into the oil and gas market due to lower purchases by a major customer.

Specialty application products represented just 2.7% of sales for the last three months compared to 2.5% in the same period last year.

These sales increased $200,000 or 9.5% in the first quarter, to $2.3 million from $2.1 million last year.

We saw increases in sales of both gas radios and concrete vibrators.

Again, this is not a significant component of the business, but we are seeing increases there.

Gross margin as a percent of sales was 36% in the first quarter compared to 34.7% in the first quarter of 2014.

Much of this increase was due to the incremental revenue of National Meter.

The increase was also due in part to lower overall costs resulting from favorable capacity utilization, less expensive raw materials, and favorable exchange rates on parts sourced from Europe.

But these were offset somewhat by lower flow instrumentation prices; unfavorable exchange rate effects on sales, and, ultimately, margins; and the product mix, where we had a smaller percentage of flow instrumentation sales, which carry higher margins.

Selling, engineering, and administration expenses for the first quarter of 2015 increased $1.7 million or 8% to $23 million from $21.3 million in the same period last year.

The first quarter of 2015 included $2.3 million of charges associated with National Meter.

We also had higher software licensing fees and higher health care costs in this year's first quarter.

What didn't recur this year were the charges totaling $1.7 million in the first quarter of 2014 for due diligence and other transaction costs related to a potential acquisition that ultimately was not pursued.

The effective tax rate for the quarter was 37.2% compared to 37.4% in the first quarter last year.

The first quarter of 2015 included a discrete charge of $77,000 associated with a federal tax audit.

We are currently estimating the annual effective tax rate, going forward, at approximately 36.1%.

As I said earlier, overall it was a tough quarter.

Without National Meter we would not have had the overall increase in municipal water, although residential sales still would have been up.

However, the decline in commercial sales and the lower flow instrumentation sales contributed to lower earnings for the quarter.

Earnings for the quarter, then, were $4.2 million or $0.29 per diluted share compared to $4.6 million or $0.32 per diluted share last year.

Our balance sheet remains relatively unchanged from year end.

Debt as a percentage of total capitalization was 26% on March 31.

Cash generated from operations was $6.8 million compared to only $600,000 for the first three months of 2014.

We talked on our last conference call about the inventory buildup at our Mexican facility as we moved some product lines.

Because of this, we did not see the significant increase in inventory values that we normally have as we gear up for the busier part of the year.

We also saw no significant increase in receivables as we did in the prior year.

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.

As Rick said, this was a tough quarter that followed a record-breaking year.

The combination of the harsh weather in the upper Midwest and Northeast, the weaker euro, weakness in the oil and gas sector, and generally slower construction activity all combined to negatively impact our sales.

On the other hand, margins improved as we benefited from the National Meter acquisition and lower copper prices.

Unfortunately, these benefits were not sufficient to offset the headwinds.

When I look at the coming quarters, I'm optimistic.

Although the weakness in the oil and gas sector is expected to continue to impact us, we also expect that most of these other factors will not.

The weather effects should abate.

Construction activity is expected to pick up.

Lower copper prices should continue to benefit us.

And although the euro may remain weaker, it has little net effect on our business as lower euro-based sales, when translated, are offset by lower euro-based purchases.

Also, our new products are gaining market share and we expect to see continued benefit from them as we move forward.

Sales of our E-Series meters increased 47% in the first quarter of this year when compared to the first quarter of last year.

And sales of our ORION SE meter reading system increased 26%.

Sales of our newest meter reading technology product, the BEACON Advanced Metering Analytics system, tripled sequentially from the fourth quarter of 2014 to the first quarter of this year.

We introduced BEACON a little over a year ago, and as many of you know, this product is unique because it's a managed system that includes cellular endpoints, making it both easy to install and very cost-effective.

During the first quarter I spent time meeting with some of our salespeople, distributors, and BEACON customers.

The reactions that I received were extremely encouraging, with many utilities making the decision this year to start a full BEACON implementation.

I expect that we will continue to see strong growth in our BEACON sales.

We have several R&D projects underway, with plans to introduce several new products at the American Waterworks Association conference in Anaheim, California, in June.

And before you ask me what those products are, I'll tell you that our VP of Sales and Marketing, Kim Stoll, is sitting next to me, and she'll stab me if I tell you, so I can't.

We are also continuing to invest in the E-Series metering line, our ORION radio systems, and the BEACON software.

On the flow instrumentation side of our business, we also continue to develop and introduce new products that help our customers monitor and control their fluid resources.

Over the past month, there has been a great deal of attention from the news media regarding the drought conditions in California.

Although those conditions have existed for several years, the imbalance of California's water supply and demand is now reaching a point where significant attention and action is required by both governmental agencies and the general public.

Governor Brown has declared a drought state of emergency, and ordered state agencies to execute a statewide water conservation campaign targeting a 25% reduction in water usage.

This situation, while tragic for the state, does represent an opportunity for Badger Meter.

There are more than 235,000 homes and businesses in California that are not metered.

Those residents pay a flat rate for water, regardless of the amount consumed.

We know from experience that most homeowners will use 15% to 20% less water if they have to pay for what they use.

There are calls for accelerated meter installation programs in many California communities, and Badger Meter is well positioned to provide these meters.

Further, our BEACON meter reading system includes a consumer portal that allows homeowners to monitor their daily and even hourly water consumption on their home computers or mobile devices.

This software includes sophisticated tools that help encourage water conservation.

We are in discussion with many California water utilities that have shown an interest in our BEACON system.

So, in summary, let me say that while this was a disappointing quarter for our Company, we are still confident in the basic drivers of our business and we remain optimistic about the balance of the year.

And with that, I will open this up for questions.

(Operator Instructions).

Kevin Bennett, Sterne Agee.

First, real quick on the oil and gas exposure in flow instrumentation -- can you guys just remind us about your exposure there?

The oil and gas sales represent -- well, I think about less than 5% of our total sales.

So it isn't a very large exposure.

But when you are comparing -- especially our first quarter, which is typically our lowest quarter in total sales -- when you're comparing it quarter-over-quarter, a significant swing can have an impact on us.

Got you.

That makes sense.

And then, Rick, for you, the $2.3 million of higher SG&A from National Meter, is that more of a one-time recurrence, or will we see that -- is $23 million the new run rate for SG&A going forward?

Well, the $2.5 million is the run rate for National Meter.

And again, you've got to back off some of the $1.7 million we had in there last year.

But the reality is, I think we had $2.5 million in the fourth quarter, $2.3 million in this quarter.

So virtually all of their expenses are considered SG&A because they don't manufacture anything.

Got you.

So there weren't any one-timers in that quarter, in the first quarter?

No.

Okay, thanks.

And then, Rich, last question from me.

On BEACON, and more specifically in California, can you elaborate on your comment about some utilities fully installing the platform?

I know we've talked about in the last few quarters about the trial packages.

Any more commentary around that would be great.

We've got a list now of about 40 -- over 40 utilities that have made the commitment to BEACON.

And they average -- they run everything from a small utility to a larger one -- but they average, I would say, about 7,000 or 8,000 services per utility.

So you are probably talking about somewhere between --.

Well, now you want me to do the math for you (laughter).

I'm sorry.

You're probably talking about between 0.75 million and 300,000 services that we have, where utilities have said, yes, we're interested.

Now, that doesn't mean that we'll do them all this year, but they are going to do them over a period of time.

Got you, okay.

Thank you, guys.

Richard Eastman, Robert W. Baird.

Rick, was the National Meter revenue, just under $4 million for the quarter -- was that on the light side, or is that just reflective of seasonality?

Just curious how that, again, flowed into the numbers here for the quarter.

And I want to clarify: that was incremental revenue; that was not their total revenue.

Their total revenue was in line with what we've seen in the past.

Okay.

That is the additional margin on the product that we normally would have sold to them in the past, plus some of the additional products they sell, as well as their installation services.

So, Rick, let me try to shed some light on this.

Obviously National Meter on a standalone basis has a much larger revenue that gets eliminated when we add the two companies together, because they're reselling our products.

Right?

Yes.

And the incremental revenue Rick is talking about is a combination of the markup they make on the products we sell them and on other products that they might sell.

So the $3.9 million is essentially the gross margin contribution, correct?

No.

No, it's the sales contribution.

It is the sales contribution?

Okay.

So it's the incremental sales contribution, okay.

The incremental revenue.

Their total sales for the quarter were actually about $9 million.

But then you have to eliminate what we sold them, which was about $5 million, and it left about $4 million as incremental.

Is that making sense to you?

Yes.

And is there any reason to assume that that math changes a great deal here quarterly?

Is there any seasonality in their business?

There is seasonality in that they are in the same business we are in, so they tend to have a weaker first quarter and a weaker fourth quarter, and their second and third are the stronger quarters.

Okay, okay.

And then can I ask on the gross margin side of the business, given where copper prices are, and has there been any competitive pricing within the meter market relative to the competitors, some that maybe have a different cost component on copper?

No, we haven't seen it.

And bear in mind that it's a little tricky because, first off, one competitor, Mueller, primarily sells plastic meters.

So they really aren't even competing in the brass market.

Obviously, Neptune only sells brass meters; they own their own foundry, so they really don't want the market to move to polymer meters.

And Sensus has moved more towards pushing their iPERL, which is a plastic meter.

So really, the only major competitor we have in the brass area is Neptune, and we have not seen pricing pressure yet.

Okay, okay.

And then just one question on the industrial flow side of the business.

Again, we did kind of -- maybe we sized our oil and gas exposure at, say, $10 million to $12 million a year.

If we do it that way, when you say it was down significantly, was it down 100%?

No, no, no.

Okay, so it was maybe a $1 million or $2 million drag on the quarter, year-over-year, in terms of revenue?

Rick, it was a little over $1 million.

Okay, all right.

And again, that probably is going to be kind of a normal trend through the three quarters here, going forward.

Yes, I mean we're obviously taking some actions to try and get whatever we can back.

But the fact of the matter is, when our customers -- when the whole market is down on activity, it's hard to jump around to a -- it isn't like it's one customer and you can jump to another.

Yes, okay.

And then just on the municipal side, the water side, the commercial business -- obviously the comp was out there out there for all to see.

You had a massive, 60%-plus comp year-over-year.

But again, given that the commercial stuff here is weather-related, some defers on the construction side due to weather, one would assume that business comes back as the weather clears here in second and third quarter.

That's not a lost share.

That's not lost business.

That sits in backlog until you get the thumbs-up to ship?

Yes, it's not lost market share or anything like that.

It's just that we always refer to business being lumpy.

It's the general lumpiness of it.

Over the long-term, commercial generally follows residential.

When a city switches out, they not only switch out residential; they switch out their commercial meters also.

So it's a bit more a function of timing more than anything else at this point.

Okay.

And that business, just in general, should look something like -- for the full year, should look something like non-res construction type of forecast, correct?

Yes.

Yes.

I mean, something like that?

Exactly.

Yes, it should.

That's the trend, okay.

Thank you.

Brian Rafn, Morgan Dempsey Capital Management.

Going back, looking just at (technical difficulty) obviously Boston got 17 inches of snow.

The Eastern seaboard got killed with snow.

Back to Midwest, back to 2014, we had Ice Station Zebra with all those polar vortexes.

From a weather basis, can you look and maybe (technical difficulty) Rich, was weather about a push in both fairly difficult first quarters in 2014 and 2015?

No, I would say not, because the cold doesn't impact on us as much as snow does; groundcover on snow.

Because when there is snow, it's difficult to find the pits where the meters are.

And so the utilities simply slow down sending their teams out, because it's just not an easy thing to do.

Also, for the meters that are in basements, tracking snow in the basements, they don't want to do it.

So, snow has a bigger impact than cold.

The first quarter of 2015 is more like the first quarter of 2013, which was a very heavy snow quarter.

In fact, if you remember, I remember distinctly sitting here a year ago, talking about the fact that our customer mix weighted more West of the Mississippi last year at this time than normal.

And so now we (multiple speakers).

Okay, okay.

Good, yes, I appreciate that.

Given the drought conditions in California, some of which could be self-inflicted, are there any large, national city, national (technical difficulty) potential contracts -- yes, I'm thinking -- and I don't know; Los Angeles, San Diego, Sacramento, San Francisco, or any of the second-tier cities in California amongst the 235 (technical difficulty) that you talked about, unmetered?

Well, the short answer is in California specifically, no.

In New Mexico, we did get a contract with Santa Fe right now --.

Right, we have a large contract in Santa Fe --.

And they have the same issues, by the way.

For BEACON, and it's because they have concerns about wanting to manage their water usage.

I will say, though, in California -- because the BEACON software was developed in California.

And at the time we bought that startup who was working on that software, they were basically using many of the large California utilities as their beta sites for that software.

So, we do have very strong relationships with those utilities.

And we have a lot of interest from those utilities as to what this software could do for them -- the entire system could do for them.

And so we are moving forward in those discussions.

Okay.

And then just one final one, guys.

With the integration of National's sales as a distributor, you guys talked about having a lot of relationship with over the years, very much a legacy relationship.

Are there any other maybe top-tier distributors that might be watching that integration, and might now be at a point where (technical difficulty) might be looking to follow in, or is that -- these things just one-off?

No.

Brian, I think your first analysis was right.

Once we did that, and we did it very well and we treated the sellers very fairly, other distributors expressed an interest, and we are in conversations with other distributors.

So it's not really a one-off.

It really is a strategy that we developed where we wanted to start with National Meter, because it was our largest distributor and had very good systems in place; and then look at whether or not we could roll up other distributors who might be interested in getting involved with us, to where we could put them under the National Meter umbrella.

So we are in conversations, and that is moving forward.

Okay, guys.

Thanks much.

(Operator Instructions).

Richard Verdi, Ladenburg.

I did have to jump off the call here for a second, so forgive me if you have already addressed this, but I have a question surrounding copper.

And I know in the past, you don't speak in depth or give in-depth details surrounding that issue.

But I do remember that a couple of years ago, Rick, you had mentioned that when there's a change in the price of copper, it takes about three to five months for that impact to be realized on the P&L.

And I'm wondering if that is a still accurate time frame?

And if so, at this point in time, are we closer to three months or five months?

No, I would say it's -- our inventory as a whole turns out about four times a year, so three months is still a reasonable assumption.

If anything, it might actually turn a little bit less than that because (technical difficulty).

Okay.

Housings are the things -- we're hearing a noise.

That's why we're pausing here.

But if anything, it might change a little bit less.

Housings turn a little bit more than some of the other inventory.

Okay, thanks.

That's great color.

And the other issue is with new construction build.

I know there's been a lot of success with that in the past, but we're also entering a time where it's been 10, 15 years and meters need to be replaced.

And I'm just wondering if you could give a little bit of color on how much of business Badger Meter is seeing that's new construction, and how much is replacement.

And on top of that, if there is significant replacement, how much of that is the meter and how much is the radio?

This is Rich.

That's a very, very difficult one, and we've wrestled with that for years; our industry has.

When we ship our meters to a utility, we never know whether they are going into new housing or whether they're being used as a replacement.

The utility has no methodology for reporting back, and neither do our distributors.

So we've never been able to say this percent of our sales goes into new and this percent of our sales --.

And the same is true for commercial meters.

Right.

And it's the same thing with commercial.

So it's really a hard thing.

The only way you can kind of do it is to take a look at the -- for example, the industry sells about 6 million meters a year.

So you could say, well, there are 1 million new houses built; and, therefore, say, 80% of those have been meters and the other ones have private wells.

And you could somehow make a conclusion that some percentage -- 20% or so, or 15% of the meters are going into new houses.

But it's really, it's that high level.

Okay, great.

This has been very helpful.

Thank you, guys.

I'm going to jump back in the queue.

Chip Moore, Canaccord.

Let me follow up a little bit more on your commentary about being a little more optimistic looking forward.

Maybe you could talk about cadence of orders, particularly March-April, and particularly where we've seen the snowpack melt.

By the way, Chip is in Boston.

We assume the snow has melted there, right?

Yes.

I still have a little bit in my backyard.

Okay, we appreciate that, Chip, the weather report.

If you look at what happened to us in the first quarter of 2013, which was a very heavy snow quarter and had a big impact on our sales; we had a very weak first quarter.

We followed that up with two record quarters.

At this point, when we look at our order entry, our backlog, we see no reason to believe that we won't have some strong quarters coming forward.

And so that's one of the things that makes us more confident about looking at the balance of 2015.

Obviously the weather shouldn't be an impact -- weather only really hits us in the first quarter -- but we're going to continue to benefit from copper.

The euro will probably remain weak, but it's pretty much a wash on us because of the purchases in the sales, and we know we're probably going to lose $1 million a quarter on the oil and gas.

But when we wash all those things together and we say, hey, construction should be improving, housing starts are continuing to improve, all of that, it says that we're pretty optimistic about the rest of the year.

Sure.

That's fair.

And one more on California; obviously great opportunity.

As these utilities look to evaluate these new systems, is there a potential for any sort of near-term delay on traditional replacement business, or how should we think about that?

We haven't historically seen that because if a utility is on a manual read system, they will go ahead and replace their meters.

And then when they go to an automation they will just pop the automation on top.

So it's generally -- a utility won't say, let's extend the lives of our meters because we haven't made a decision on automation.

We don't see that happening.

Okay, thanks.

John Rosenberg, Loughlin Water Partners.

This is a bit of a general question, but you mentioned California, which obviously represents an opportunity for Badger Meter.

Have you guys thought about -- or are there any thoughts about perhaps trying to sell into Brazil?

I know that COPASA does some business with Elster.

Do any of your new products perhaps -- would that be an attractive market for you?

And if so, why or why not?

Yes, and this is Rich, let me address that.

It's generally not an attractive market.

And the first reason is that most of the Brazilian utilities use a velocity -- a single-jet or multi-jet meter.

That's not a type of meter that we make.

It's not the type of meter that's used in North America.

It's the type that's used in Europe, and a lot of those come out of China at a very low price.

So that's the first problem.

The second problem with Brazil is that they have some pretty heavy tariffs for importing finished products.

So to be effective there, you have to have a partner to do a -- so you are shipping in parts, and they are doing a significant amount of the final work on the meter.

We found that a key success factor on our meters is the control we exert over the final assembly and test of the meters, and outsourcing that to a third party is pretty risky.

So for all those reasons, we have not focused on Brazil as a target for our water meters.

On the other hand, we sell a lot of our industrial meters down there, and we will continue to do so.

Okay.

Thank you very much.

Thank you for your question.

I would now like to turn the call over to Rich Meeusen for closing remarks.

Well, I want to thank you all for joining us.

This was a difficult quarter for us.

But as Rick constantly likes to remind you, we are in a lumpy business.

We have these quarters from time to time.

History will show you that when we have a bad quarter, driven by whether or other factors like that, we tend to bounce back.

And we're fairly confident that we can expect to see some good corridors coming forward.

So with that, I will thank you again for your support, and look forward to talking to you in the future.

Thank you.

Thank you for your participation in today's conference.

Ladies and gentlemen, this does conclude the presentation.

You may now disconnect.

Good day.