Badger Meter Inc (BMI) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter 3 2015 Badger Meter earnings conference call.

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

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

We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes, and now I would like to turn the call over to Rick Johnson, Senior Vice President, Finance and Chief Financial Officer.

Please proceed.

I do apologize, ladies and gentlemen.

We will be back with you shortly.

I will reinsert the music until we start.

Thank you.

Apologies for the technical error, ladies and gentlemen.

Again, welcome to Quarter 3 2015 Badger Meter earnings conference call.

(Operator Instructions) As a reminder, this call is being recorded for replay purposes and now I would like to turn the call over to Rick Johnson, Senior Vice President, Financial and Chief Financial Officer.

Please proceed, sir.

Thank you very much, Tracy.

Good morning, everyone.

Welcome to Badger Meter's third-quarter 2015 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 interest of our shareholders.

Now on to the third-quarter results.

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

Much of what I am going to share this morning is very similar to what we said in our second-quarter conference call.

We continued to experience what I termed last quarter as underwhelming growth.

Once again, sales were an all-time record for any quarter, but they were not at the level we anticipated.

Because we built our cost structure anticipating higher sales, we also did not perform as well on the bottom line as we anticipated.

We will get into those details in a moment.

Our takeaway for you today is that we are still confident that our long-term prospects and our position within the industry is solid.

So let's talk about some of the details.

Overall, sales for the third quarter of 2015 increased $3.1 million or 3.2% to $99.4 million compared to $96.3 million during the same period last year.

The increase is the net result of higher sales in municipal water products, offset by lower sales of flow instrumentation and specialty products.

Sales of municipal water meters and related equipment and technologies represented 76.9% of sales in the third quarter of 2015 compared to 72% in the third quarter last year.

These sales increased $7.1 million or 10.2% to $76.4 million from $69.3 million last year.

The increase was due primarily to incremental revenue associated with the purchase of National Meter & Automation.

You'll recall that we purchased National Meter on October 1 of 2014.

The remainder of the increase in municipal water was due to higher sales of residential and commercial products, particularly in Mexico and the Middle East.

We spoke last quarter about an alliance partner's product issues, which are causing a delay in our sales as our partner addresses these concerns.

At that time, we anticipated those sales would be resolved early in the third quarter.

Unfortunately, the delays in product availability continued through most of the quarter.

We estimate that these issues have delayed sales totaling $6.3 million year-to-date with $4.5 million of that in this most recent third quarter.

The good news is that we believe these issues have been resolved and any delayed sales will be caught up over the next several quarters.

Flow instrumentation products represented 20.4% of sales in the most recent quarter compared to 24.9% in the third quarter last year.

These sales decreased $3.7 million or 15.4% to $20.3 million from $24 million in the same period last year.

As we have seen throughout most of this year, the decrease is due to the effect of the strengthening US dollar on sales of products sold in euros.

The third quarter impact on this was approximately $1.4 million.

We also continued to have lower sales to our oil and gas customers due to the weak economic conditions in that sector of the market.

Finally, the general softness in the overall economy has impacted sales of several other flow instrumentation product lines.

Specialty application products represented just 2.7% of sales in the most recent quarter, compared to 3.1% last year.

These sales decreased $300,000 or 10% to $2.7 million from $3 million last year.

The two primary -- I'm sorry, the two primary specialty product lines, gas radios and concrete vibrators, both had sales declines.

Gross profit as a percent of sales was 36.3% compared to 37.9% in the third quarter last year.

The decrease was due to product mix with increased sales of municipal water versus flow instrumentation products, which have higher margins.

This was offset somewhat by the incremental gross profit related to National Meter, lower metal costs and favorable net exchange rate on parts sourced from Europe.

Also in this quarter, we took a one-time charge of $850,000 to write down gas radio inventory as sales in recent years have not met anticipated demand.

Our selling, engineering and administrative expenses in the third quarter increased $2 million or 9.8% to $22.5 million from $20.5 million last year.

The majority of this is associated with National Meter.

We also had higher health care costs and software licensing fees compared to last year.

All of these items were offset somewhat by significantly lower employee incentive compensation costs as we adjusted accruals to reflect our recent performance.

The provision for income taxes as a percent of earnings before taxes for the third quarter was 37.5% compared to 34.9% for the same quarter of last year.

If you recall during the second quarter, we had a discrete credit of $228,000 that was reflected as reduced tax expense.

In this quarter, we had a discrete charge of approximately $200,000 as we adjusted our 2014 estimates to the tax returns actually filed.

Without the discrete items, we are currently estimating an annual effective tax rate of approximately 35.7%.

As a reminder, the rate will always vary because it depends on the amount of estimated annual net income.

With the lower than anticipated sales, the lower margins and higher selling expenses, we reported lower earnings than last year.

Earnings for the third quarter were $8.3 million or $0.58 per diluted share compared to $10.2 million or $0.71 per diluted share in the third quarter of 2014.

We continue to generate cash from operations.

In the first nine months of 2015, we generated $27.7 million compared to $28.2 million last year.

Capital expenditures for the first nine months of this year were $12.9 million compared to $8.8 million last year.

And finally, our debt as a percent of total capitalization is now less than 23%.

With that little bit of background, 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 disappointing quarter for us.

The continued weak dollar, the depressed oil and gas market, and the delayed sales caused by the unavailability of radios from our alliance partner all contributed to weaker than expected revenues.

However, there are two important points to consider.

First, we believe that none of these factors have caused us to lose any market share.

Secondly, the product availability issues now appear to be behind us.

We do not believe that we have lost any potential sales associated with these opportunities.

As we are able to acquire product from our alliance partner, we expect to catch up on the sales over the next several quarters.

Another positive during the quarter was the market acceptance of our new utility products.

Unit sales of our E-Series Ultrasonic water meter increased 70% over the same quarter last year, and 35% over the second quarter of this year.

Unit sales of the ORION cellular radio, which was first introduced last year, increased more than fourfold over the third quarter of last year and 18% over the second quarter of this year.

Both of these products are performing well, and allowing us to capture new accounts in the utility markets.

As we complete the first full year of ownership of National Meter, we are pleased with the results.

National Meter generates significant value for our shareholders while allowing us to efficiently reach more current and new customers in the Western states.

And the recent acquisition of United Utilities, although much smaller than National Meter, permits us to do the same thing in the Eastern United States.

We intend to continue our strategy of making targeted acquisitions in our distribution channel in the coming years.

We also continue to see strong opportunities for sales of our E-Series water meters and radios in various Middle Eastern countries.

Many of these countries have an installed base of older water metering systems and are looking to modernize their systems over the next few years.

Currently, we are looking fulfilling a contract in Kuwait which contributed over $3 million in sales just this quarter and we expect to ship over 8 million for the full year.

We have pilot projects running in other Middle Eastern countries that could result in significant sales in 2016 and beyond.

We are also starting to see the California utilities move forward on their conservation programs, many of which will incorporate our BEACON advanced metering analytics system and the EyeOnWater app for the homeowners.

I think there is one more important item to note here.

While net income has decreased 13.6% over the first three quarters of this year, compared to the same period last year, our EBITDA has decreased only 5%.

This is due to increased depreciation and amortization as a result of our recent investments in acquisitions and software development.

But while we continue to struggle with a lackluster US economy, the higher dollar, the weak oil and gas industry, and some short-term supplier issues, we believe that the bigger picture remains strong for Badger Meter and we are well-positioned to take advantage of these opportunities.

With that, we will take your questions.

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

Rich, could you just kind of fill us in a little bit on National Meter, what their third-party sales were in the quarter and the profit impact to you in the quarter?

Their third-party sales were about $5 million for the third quarter.

Okay, all right.

Incremental.

Incremental, that is over and above the sale of the Badger Meter products.

Yes, so it was $5 million, though.

That is a good number.

And then I noticed on the -- I noticed the inventories, they were up about $4 million.

Is that basically just staging product for Itron shipments?

Some of that is a product that we made but could not ship, because we did not have the radios.

So you're right on that, but some of it was also product that was produced because we were expecting a stronger quarter than what we had.

Yes, fair enough.

So when you speak to -- in the press release you do talk to about the performance was not as anticipated.

It does strike me that if you would have shipped the -- call it $4.5 million or $6 million now of backlog on Itron, the residential utility side of the business would have looked pretty good, right?

I mean it would have been up maybe 6% or more.

So is your disappointment in the quarter related to the industrial flow business and also essentially the profit line?

No.

My disappointment is primarily related to the fact that at the start of the third quarter when we did the second quarter conference call, I believe that these supply issues were eminently behind us and we would be able to ship that $6 million in the quarter.

Or at least a piece of it.

And I am disappointed that I was wrong, that that did not come about.

We knew there was going to be -- we know oil and gas was still weaker.

Oil and gas is not going to turn on a dime.

And we have done some digging into the oil and gas impact, because I am probably going to get that question so I will head it off a little bit.

I've said in the past that oil and gas was less than 5% of our sales.

Really, oil and gas has been about -- last year was about $1 million a month of sales, and we are doing about $0.5 million.

So it is down about 50%.

So we knew that was going to be bad for the quarter.

We knew the euro wasn't going to get much stronger in the quarter.

So the flow instrumentation side pretty much did what I expected.

I was disappointed that we were not able to catch up on the utility side.

Okay.

And we have the $6 million, and just -- I mean just for modeling purposes or, thinking about it, half of that in each of the next two quarters just to capture that catch up.

I think we used the word several for a reason (multiple speakers)

Well, my people did not want me to give the impression that we were going to be up to catch up $6 million in the fourth quarter.

Because that is a lot, and obviously we said in the past that is not like putting products on the shelf at Walmart.

Plumbers have to go out and twist pipes to install our products.

So that can only be done so fast.

So I am hoping it gets caught up over the next couple of quarters, Rick.

Yes, yes.

It could go another quarter beyond that, but I am really hoping the next couple.

And aside from the catch-up on that situation, which is really more of an event here, does the business feel like --?

It is pretty lackluster.

But does the business feel like a typical fourth-quarter kind of seasonality that aside from the catch-up we will have that typical seasonality to the overall business as we go from Q3 to Q4?

I would think -- I would expect so, with a little bit of a positive impact from the catch-up.

Yes.

I got you, okay.

All right, thank you.

Chip Moore, Canaccord.

Maybe dig down into industrial.

A bit more with oil and gas down 50%.

But it sounded like you have seen some slowdown maybe extend a bit beyond that to process markets.

I guess what have you seen sort of September/October, and where do you see that bottoming out?

Well, we had a meeting on it yesterday and our flow instrumentation people really feel that we kind of hit a bottom in the June/July period and that we are starting to see things come back now.

Not much in oil and gas, but I am talking about more in the process side of the business.

Yes, okay, that is helpful.

And then on United Utilities, just impact, purchase accounting, etc., how should we think about that in the next few quarters at least?

Yes, this is Rick.

Total purchase price is about $3.3 million.

It is really -- it was $300,000, $400,000 of, I suppose just pointing at -- I could read the actual words, but it was about $800,000 in receivables, $400,000 of inventory, probably only $100,000 of fixed assets and the rest of it is intangibles and goodwill, which is yet to be allocated.

Okay, perfect.

And then just along the lines, you talked about next few years going after some more distributors.

Do you have a pipeline of targets or anything near term there?

Yes, we have a pipeline of targets and we are in conversation, but nothing will happen yet for this year.

Okay.

And then just lastly on Middle East, I think you talked about some pilots.

Can you maybe expand on the opportunity there?

Yes, in most of those Middle East countries, they have the old Kent meters that you find pretty much around the world in any country that used to be part of the British Empire, Kent being the British meters.

In the Middle East what we are seeing is pretty much all the countries wanting to modernize and pull out the Kent meters and replace them with something more modern.

So what is happening is we are in there competing against several of the European water meter companies that are also selling into that area and we've seen some really good response to, in particular, our metal E-Series meters.

One of our competitors has a solid-state meter, but it is only offered in plastic.

And in the middle East, with the temperatures that things reach, they aren't too thrilled with that.

So they are very interested in our stainless steel E-Series meters for those applications.

And like I say, we've got the project in Kuwait to use as a reference project.

That has gone very well, so we can take people over there and show them that.

And I think 2016 and beyond, we are going to see some good projects coming out of that.

Okay, fair enough.

Thanks a lot, folks.

Ryan Connors, Boenning & Scattergood.

I wonder if you could discuss the municipal market for us a little more.

Rich, when you talk about municipal volumes being up, you cited Mexico and the Middle East, which would imply that even excluding the alliance partner issue, things don't look so great in the US.

So can you just kind of reset us on the tone and order patterns in the municipal customer base in the US?

Ryan, we are hearing from the field salespeople that they are very positive and that they feel the tone is very good.

The other thing that is happening is, without naming cities, there are a lot of large cities that are now moving to RFP.

That can be a year or two before it turns into actual shipment, but some of the -- you people have always asked me about the elephants that are out there.

And for the last few years, they really have not been any elephants.

But now, some of the largest cities in America are starting to look at doing something pretty significant.

So that is a real positive for our industry as a whole.

I think the other thing that is happening a little bit is our introduction of cellular has slowed down the industry a bit because a lot of our customers and a lot of our noncustomers have delayed making decisions, wanting to run pilots on cellular.

The good thing about that is our cellular product is performing extremely well and so we think there is going to be a pent-up demand on that.

Okay, interesting.

My other question, Rich, had to do with copper and raw materials costs.

I know you've always downplayed that as a major driver of margins, but it does seem like there used to be a little bit more of a discernible influence.

As copper went down, margins would benefit and vice versa.

But now, it seems like that has really gone out of the window entirely as having really any correlation with what the margins are doing.

Can you talk about why -- what the drivers behind that change are and/or if there's -- or if that is not the right way to look at it?

Well, there are a few factors in here and one is that as copper declined, so did our sales volumes.

And so we had capacity costs that spilled in there.

So a benefit from copper was offset by unabsorbed overhead, if you will, because of the capacity issues, excess capacity issues.

So that is one factor.

There are some other large factors in here.

One of them is that there is in the United States more of a movement to classic, the polymer solutions, that people are getting more comfortable with them.

So we are just not buying as much or selling as much copper or brass product.

And then of course the other factor is that although copper has come down, nickel and zinc have gone up.

And so, to some extent, that bounces things.

That causes things to move over.

Also bear in mind that our E-Series, none of that is brass.

That is all stainless steel.

And stainless steel prices have not come down like copper.

So, as our -- as we move our customer base more over to stainless steel, we are not seeing the copper impact.

So you are right.

Something that really impacted us almost dollar for dollar, if copper moved so much, our margins moved so much in the past.

We are not seeing as big an impact.

Okay, well that certainly would explain it.

Thanks so much.

Richard Verdi, Ladenburg.

A lot of my questions have been answered here and -- but you know, there has also been a lot of discussion on the metering side.

So I was wondering, could you just talk a little bit about the accompanying software to the meters and the benefits it has had for those implementing that technology?

Software is a good question and an interesting topic here because, for many years, one of the discerning differences between a water utility and an electric or gas utility, primarily between the electric and water, was that electric demanded a much higher level of software for doing time of day billing and load management and all of that.

Whereas water did not have the software demand.

Many of our water customers primarily wanted to send a bill in, that was it.

Badger Meter ourselves, we ourselves changed the game a little bit when we introduced BEACON, which was the much stronger software suite and also provide all kinds of information to the homeowner.

So we have changed the game and the other companies are following us into a situation where software sales are becoming a little more significant and software investment is becoming more significant in all our companies (multiple speakers) to be able to support that.

So you are right.

There's no question that software is becoming a bigger piece of what we do.

Okay, thank you for that.

And how about the competitive landscape and alliances?

I ask this because I was at the NAWC Water Summit week before last, and not only was implementation of smart meters more heavily discussed than previous sessions, but also the technology, especially associated around metering software, which is more of a heavily focused theme.

So I would like to just hear a little bit about what that competitive landscape looks like, the alliances and maybe what the likes of Smart Utility Systems or other companies like that company.

Well, fortunately for us, our competitors still have issues and are in a little bit of disarray on certain things.

And they are basically two companies out there that are really selling a solid-state meter in North America, Badger and Sensus.

Sensus only has the plastic.

We offer both the plastic and the stainless steel.

Another -- the other major competitor, the other major player in North America, Neptune for metering, has just now introduced a solid-state meter about five years after Badger and Sensus introduced ours and they've only introduced it in one size, so they have to complete their line.

So, to that extent, we've got a little bit of jump on things.

On the radio side, I believe we've got a very significant jump with the cellular.

I don't think anybody has a cellular product that is even close to what we have and I think we are going to have that advantage for a while.

We are really going to press it.

And then on the software side, all the companies have software.

They've all got software.

They can do different things.

But the key to the software is the meter and the radio that is providing the data.

That is what is so very important.

And because we are cellular-based, we are able to get information much more easily to the homeowner, and that gives us an advantage on the software side with EyeOnWater.

So there are all those factors out there.

It is still a very competitive market for us.

There is still obviously price pressure and everything else.

But we have a good relationship with Itron, so basically when a customer wants Itron radios, very often they want to put those on Badger meters.

That is great for us.

And we also have -- we've also developed a good relationship with Elster, which was a competitor.

They now -- they no longer sell water meters in North America, but they have electric and gas.

And so we have an opportunity to work with them on projects.

So we have a few opportunities out there that, in the competitive environment, that are unique for us.

That's great color and a super update.

Thank you, Rich, that is it for me.

(Operator Instructions) Kevin Bennett, Sterne, Agee.

I am sorry if I missed this, but could you guys give a breakdown of your resi commercial municipal sales in terms of year-over-year -- I guess it would be a decline this quarter?

No, what we just said is most of the increase was associated with National Meter and that any other remaining increase is really due to higher sales in the Middle East and in Mexico.

You were talking on municipal only.

Municipal only, but we did not split residential and commercial.

I don't have that in front of me.

They were both up a little bit.

Okay.

(multiple speakers)

But I just want to clarify, Kevin, was your question about flow instrumentation versus utility, or was it about (multiple speakers)?

No, it was -- usually you guys break out that residential meters were up X percent in the quarter and commercial meters were likewise.

And I -- which is just in the municipal business.

They were up fairly consistently with each other.

They pretty much (multiple speakers).

Okay, got it.

And then secondly, Rick, in terms of the Itron issues we are having, what gives you confidence that we are finally past this?

Are you actually -- I think last quarter you talked about you were not even getting product from them.

Are you now getting product from them and so you feel good that we are going to start to recoup these sales?

Yes.

Our manufacturing people tell me that we are getting the products.

Where there were issues in the past with products that caused Itron to have to take some actions, we are now getting that product on a regular basis, so we no longer have that issue.

There are still some products that have long lead times, but that is common with any supplier.

Unique products that maybe require a little more attention.

But generally, where the issue was, that has been resolved.

We have the radios and we are now able to start shipping the meters again.

But obviously we can't just turn around and ship $6 million worth of product.

The customers have to be ready to take them and they have installation crews that can only take so many meters a week to install.

And so you have to ship at that pace.

In effect, what happened was that some of them had installation crews ready, let's say a month ago.

They have since disbanded them.

They have got to get them back together.

It is those timing issues that will really dictate when these sales get recognized.

Sure, that makes sense; just good to hear that we are actually moving now.

That is kind of what I was looking for.

And then last question on BEACON, I was wondering if you could provide an update.

I think last quarter you did 35,000 units or something like that, and how that was selling and progressing, and if -- I guess they were any big kind of orders out in California this quarter.

Well, BEACON is the software that is driving a lot of our products.

What I was commenting on in the past was ORION cellular, and on ORION cellular -- and I am getting some information here -- on ORION cellular, that is where I said we are up fourfold over last year.

We are on track to, I would say we've done -- we are on track to do well over 100,000 units this year, which was kind of our target.

We were hoping to do 100,000.

We are going to blow past that and do very well on ORION cellular.

So it is going faster than what we thought.

And when you consider we sell about 1 million radios, that is about 10% for a product that was just introduced last year that is pretty good.

Got you, okay.

Thank you, guys.

Saidal Mohmand, GrizzlyRock Capital.

So, I am just a little curious on the revenue opportunity that was pushed forward.

Given that -- assuming that it is a battery that controls these relationships, why not simply attach your radios to these meters if they are fairly comparable to Itron?

Right, and that is a real good question.

You have to understand that most customers want to have their entire system with one type of radio or one type of meter.

You don't have very many customers that are interested in having a mixed system, where they read half their city with one software and one reading device and the other half of the city with the other.

So generally, if a customer had 40% of the city run done with Itron, it is very hard for us to convince them to suddenly start putting in ORION radios.

So that is a not a real practical solution.

It sounds like a nice idea.

And certainly with ORION cellular, it's a little bit easier because you don't have to worry about the collection device.

You are using the public cell tower.

But if they had already put up towers to read Itron radios, they are not interested in installing ORION radios underneath those towers and not being able to use the towers.

In addition, some customers are combination electric, gas and water.

And obviously, if they have already selected Itron on the electric side, they would just naturally follow suit.

So they will wait to get the radios.

Right.

Got it.

Okay, that is helpful.

And then maybe addressing the inventory growth, I mean what steps has management taken to rectify that issue?

Should we expect, I guess, discounting or perhaps even further write-downs?

No.

We don't view the inventory as an issue for us.

First off, understand we did write off some old gas inventory and let me make a comment about that.

We bought that inventory that -- we built all the inventory about two years ago when we were very much into a large gas product with Duke Energy.

At the time, we were told that Duke was going to continue the project, continue to move forward.

We had a long lead time on the parts, so we ordered the parts, got them in, and then what happened was Duke made a large acquisition of another electric company, basically got involved in a lot of that and stopped the project.

It is possible they will start the project again.

We just got to the point where we said, let's write off that inventory, write it down, because it is just too much on our books for us to continue to carry.

So that was one issue.

The book of our other inventory, we feel very good about and our inventory turns about four times a year as a company, which is not bad.

And so generally, we will find ourselves using it over the next quarter or two.

And one of the things Rich commented is just the sheer number of offerings that we have to people, the fact that we offer mechanical meters in both polymer and in metal, and then we offer solid state in polymer and metal.

There are some additional -- we have to carry more inventory because of those lines, but it also gives the customers more choice.

And it is, as the CFO, it is something I look at.

But my carrying costs right now are relatively low.

My all-in borrowing cost is less than 1.5% right now.

So in our mind, it is worth carrying a little bit of that extra inventory for the potential sales that we are going to get.

This is Rich again.

One of the things that I always emphasized in talking to our shareholders is that Badger Meter has the largest product line offering both in meters and in radios, dry bite fixed network and cellular in our industry as compared to our competitors.

In order to offer all those product lines, we carry a little more inventory.

However, we feel as the market transitions in the future from metal to polymer, from mechanical meters to solid-state meters, from mobile to fix network to cellular, as it transitions, we are going to be in the strongest position to serve that transitioning market.

Whereas most of our competitors have made a choice and only offer one of the other on those types of things, we offer them all.

So to do that, yes, we have a little higher manufacturing cost.

We have to have more capacity of production lines available and we have a little higher inventory carrying cost.

But we figure it is worth it to capital those sales opportunities.

Got it, got it.

And just one quick one, inventory mix; is it predominantly more slated to radio or is it the actual meter itself?

Definitely slated to radios.

Radios are our highest dollar item in inventory --

And longer lead times.

And mainly because they have a very long lead time, our radios either come over from Europe or sometimes from Malaysia, and they come mostly by boat and so that adds to a lot of lead time.

Said differently, our castings tend to turn very fast.

Right.

Got it.

(multiple speakers) the foundry is right here in Wisconsin, so we do tend to keep fairly lean inventory there.

Great, well, thank you, guys, for your time.

Richard Eastman, Robert W. Baird.

Just a couple follow-ups; Rich, to be clear, on this Itron business, basically Itron shipped to you the radios you guys assemble onto the meters and ship the meter out with the radio attached, correct?

That isn't the whole story.

What I am kind of getting at here, I want to hear the whole story, but what I am trying to get at is your revenue recognition on those shipped meters, is that a meter sale price alone?

No, let me answer this first, because I know what he will answer (laughter).

Really predominantly what we are looking at here is where Itron ships the radios to our factories, our sales price to the customer is the meter and the radio.

Correct.

Okay.

And then the cost of goods sold.

Now, Rich is also going to tell you that on occasion, Itron can order the meter from us, in which case then I just have a meter sale to them.

They in turn will bill the customer.

On occasion, the customer will simply buy the meter from us with the appropriate register.

They will buy the radio from Itron and they will meld it to out there.

Those latter two are probably the smaller.

Predominantly, if we sell Itron, it is with the radio that we buy included in our revenue.

That is exactly what I was going to say.

I knew that.

But the (multiple speakers)

Mr. Johnson and I have worked together too long.

(laughter)

But what I am getting at is the $6 million that is essentially in backlog that is now shipping, is that going out with a local read of meter profit margin and sale price?

Or is that going out with a full AMR endpoint sale price and profit margin?

Going out with the full AMR.

Okay, and that margin (multiple speakers)

It is a higher margin.

That is a higher margin product.

Okay, I understand.

And then also, there was mentioned in the press release about healthcare costs as they applied to -- I believe to the COGS line.

Well COGS and [SMEGA] -- the reality is is our healthcare is up pretty significantly this year.

I think we are up probably -- I want to say about 18% over last year, simply because we are self inferred to a set point and we have had a lot of significant cases this year, whereas last year, for some reason, we had none.

It was the -- but I guess if we have an inventory charge of $850,000 in the COGS line, is the healthcare cost variance anywhere near that?

Is it six figures?

In the COGS line?

It is definitely six figures.

I am just trying to figure out -- it's pushing seven.

(multiple speakers) Overall.

In the quarter or year to date?

Year to date.

Year to date.

Or even on an annualized basis, it will be pushing seven.

Yes, okay, all right.

I am just trying to get at the impact in the quarter on the gross profit margin line from the healthcare cost number, so again, I guess with that kind of annualized number, I should think $200,000 or $250,000 or something like that in the quarter.

At least.

Okay.

And just one last question; Rich, could you kind of speak to -- ? I am curious a little bit on kind of in Elster update here.

We had this goal of taking half of that share, both in terms of meters and sales.

We are two years past that agreement now and I'm curious.

Have we accomplished that goal?

And then secondly, has [Zenner] kind of stepped in to this discounting mode and basically been a substitute here for Elster when it comes to discounting on bids in the marketplace on the meter side?

Yes.

So let me answer that in the pieces that it was asked.

So first, when Elster pulled out of North America, we had made an agreement with them where we would do joint sales calls and try to work with -- take over whatever contracts they were walking away from or ending.

And we hit our target.

We did over -- we did pick up over 50%, some of them at very low margin.

Then, over the course of the last three years, and that has got to the at least three years ago that that happened, I think, over the last three years as those contracts have all come up, we have renewed them with some very good success on raising the margins.

So we've been very pleased with that.

In fact, there was one large account where we thought we were kind of bidding off by putting in a high margin and we won it.

So, we have been fairly pleased with how those contracts are working out.

There is another piece here, though, that Elster Electric and Gas, which is still operating in North America and is a major player in North America, they now do not have a water offering.

And so we are working with them on quite a few accounts where, when they sell to an electric, gas, water combination or electric/water combination and they need a water meter, they bring us in as the bidder.

So we have had some very good success there and that has been a very positive relationship.

Finally, the question is about well, if Elster isn't out there lowballing on the water side, is anybody?

And the answer is yes.

Zenner is a company that owns a lot of small water meter companies around the world, does not really consolidate them into one.

They kind of operate all of these independent entities.

They came in and picked up a small water meter company here, and I think they're -- I am not sure where they are making their meters, but they have come in with a very lowball bid on some contracts and so we are seeing them kind of take the place of Elster at the low end of the market.

Got it, okay, thanks again, appreciate it.

Thank you very much.

Now I would like to turn the call over to Rich Meeusen, Chairman, President and CEO, for closing remarks.

Well, I want to thank everybody for joining us.

This was a very noisy quarter in that there were -- the tax rate moved around and nobody wanted to grill Rick on that, so I think he is happy.

And we had some other issues -- the supplier issues and things like that.

But generally, I think we are very well-positioned.

We are looking now -- we're focusing on 2016 and beyond.

We think we are going to have some strong growth and we are going to create some good shareholder value going forward.

So I want to thank everybody for taking the time to join us, and we will talk to you soon.

Thank you.

Thank you, Rich.

Thank you for your participation in today's conference, ladies and gentlemen.

This concludes the presentation.

You may now disconnect and have a good day.