Badger Meter Inc (BMI) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Badger Meter Q1 2016 earnings conference call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Rick Johnson, Senior Vice President and Chief Financial Officer.

You may begin.

Thank you very much.

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'd begin by stating that we'll make a number of forward-looking statements on our call today.

Certain statements contained in this presentation, as well as other information provided from time to time by the Company or its employees, may contain forward-looking statements that involve risks and uncertainties that could cause the 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 costs 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 onto the results.

Yesterday after the market closed, we released our first-quarter 2016 results.

We are pleased to report that the first quarter of 2016 started much stronger than we anticipated.

We had record sales for any quarter in our history and for the first time topped the $100 million mark in sales.

Sales totaled $100.6 million, which were $17 million or 20.2% higher than the first quarter of 2015, when sales were $83.6 million.

This increase was the net result of higher sales of municipal water products, somewhat offset by lower sales of flow instrumentation products.

Municipal water product sales represented 76.9% of sales in this quarter compared to 69.9% in the first quarter of 2015.

These sales increased $18.9 million or 32.3% to $77.4 million in the first quarter of 2016 from $58.5 million last year.

The increase was due primarily to higher volumes of residential and commercial meters; modestly higher prices; and the inclusion of incremental revenue associated with the purchase of United Utilities assets, which we acquired in August of 2015.

An important takeaway from this call is that we believe some of this increase was due to the milder weather experienced this year as a result of El Nino, which resulted in some water utilities placing orders in the first quarter that we normally wouldn't (sic) receive in the second quarter.

Especially gratifying to us is the increase in sales in a number of our flagship products, including E-Series ultrasonic meters and BEACON AMA with ORION cellular radio products.

Rich will have some additional comments on those in moment.

Flow instrumentation products represented 23.1% of sales for the first quarter of 2016 compared to 30.1% last year.

These sales decreased $1.9 million or 7.6% to $23.2 million from $25.1 million in the same period last year.

The decrease was due in part to lower sales of Blancett turbine meters to oil and gas customers.

You'll recall that last year we were impacted by oil and gas but had not yet seen the full impact in the first quarter of 2015.

The weakness in the oil and gas industry has continued into this year.

We're also seeing lower sales as a result of one large customer curtailing its meter purchases and the general softness in the economy.

Gross margin as a percent of sales was 38.8% for the first quarter of this year compared to 36% in the first quarter of last year.

Much of the increase was driven by higher volumes of municipal water products and its impact on factory utilization and the incremental profit associated with United Utilities.

Also, to a lesser extent, brass costs continue to be lower than they were at this time last year.

These factors were offset somewhat by product mix as we incurred lower sales of flow instrumentation products, which generally carry higher margins.

In addition, we incurred higher warranty and customer after-sales costs.

Selling, engineering, and administration expenses for the first quarter increased $3.2 million or 13.9% to $26.2 million from $23 million during the same period last year.

The increase was due primarily to higher employee incentive compensation and software amortization costs.

Our effective tax rate for the first quarter was 36.3% compared to 37.2% in the first quarter of 2015.

Last year's first quarter included a discrete charge for settlement of a tax audit.

If you remove that charge, we are comparable between years.

Again, a reminder that interim estimates are tied to an estimate of the overall annual rate that will vary depending upon the states that we sell into for the remainder of the year and the relationship of our foreign and domestic earnings.

As a result of all of this, net earnings increased to nearly $8 million or $0.55 per diluted share compared to $4.2 million or $0.29 per diluted share in the first quarter of last year.

There were no significant variations other than seasonal factors in our balance sheet.

We continued to generate cash operations and reduced debt in the first quarter of 2016 by over $10 million.

Our debt as a percent of total capitalization was 20.4% at March 31, 2016.

With that 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?

Thanks, Rick.

And I want to thank all of you who have joined us on this call.

We are obviously pleased with the strong first-quarter results.

As Rick mentioned, our strong municipal sales more than offset a continued weakness in our flow instrumentation sales.

There were several factors contributing to the municipal sector's strength.

First, we are continuing to see strong market acceptance of our flagship products: BEACON AMA with the ORION cellular radios and the E-Series ultrasonic water meters.

Sales of ORION cellular radios increased fourfold in this quarter over the first quarter last year as customers continue to see the value in using our cellular technology, both for meter reading and through our BEACON AMA software for system analytics.

Regarding the E-Series ultrasonic water meters, first-quarter 2016 sales were 2.5 times greater than the same quarter last year.

Our customers are continuing to move to this latest metering technology, and we are in a strong competitive position, because only Badger Meter and one other company are offering a full range of electronic water meters in North America.

We also continue to ship these meters to customers in the Middle East and view that market as a significant opportunity for future growth.

Both BEACON cellular and the E-Series meters are the result of a long-term technology strategy and product development effort that have been our focus over the past several years.

I'm particularly proud of our team's foresight in determining the key products that are now driving our growth as well as the team's successful efforts in implementing those plans.

We are clearly seeing the benefits of all of those years of hard work.

Also impacting 2016 is the American Water contract that we announced during the first quarter.

We are seeing shipments ramp up as the contract moves towards full implementation.

In addition to new products in the American Water sales, our first-quarter results also benefited from the milder winter in most of North America.

This allowed our municipal customers to begin their meter replacement programs earlier than usual.

We saw a significant increase in March sales, as customers were able to accelerate purchases that normally would have fallen in the second quarter.

We estimate that this acceleration represented between $3 million and $4 million in municipal sales that moved from the second quarter into the first quarter.

As a result, we are anticipating an offsetting impact in our second-quarter sales.

In fact, we have already seen this expected softness in orders during the first two weeks of this quarter.

Although we do not give formal guidance -- this is where everybody sits up and pays attention suddenly.

Although we do not give any formal guidance, I will say that we have not increased our original internal full-year plan for 2016 to reflect the strong first quarter, given the pull-ahead of second-quarter sales and the possibility of continued weakness in the flow instrumentation business.

However, on an overall basis we continue to expect a solid 2016.

Flow instrumentation product sales have remained weak, as the oil and gas industry is not rebounding.

In addition, late last year one large customer moved their industrial metering program in-house, which contributed about $0.5 million in sales during the first quarter of last year.

We do not expect to see this program to return in 2016, although we are pursuing several other programs to replace this volume.

We are also making progress on the development of new products and expansion of our sales channels, which we expect to benefit our flow instrumentation sales in the coming quarters.

Looking at the first quarter on an overall basis, balancing stronger municipal sales with weaker flow instrumentation sales, this was a very solid start to the year.

And we expect continued strong results over the balance of 2016.

And with that, we'll take your questions.

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

Thank you.

Rich, could you maybe add any color at all to the incremental revenue contribution from United Utilities, American Water?

And then, also, maybe the third item is just -- there was maybe $2 million of this Itron catch-up still in backlog at year-end.

Could you just give us any sense of the incremental contribution from those three items in the quarter?

Right.

And I will say that the Itron catch-up did benefit the quarter.

We did pick up that couple million.

So we saw that come in.

United Utilities -- I'm looking at my people, between $1 million and $2 million in sales in the first quarter that got added, although the margin impact is a little bit stronger.

We get some benefit to the margin.

But we are talking about their additional -- their addition to our top line.

Okay.

And on American Water -- we talked about this, Rich, and we decided we're not going to report quarterly on our sales to American Water.

With that contract we have some pretty strong confidentiality wording in there, where they want to approve any types of discussions of that sort.

And so I'm just not comfortable, going forward, reporting each quarter what the sales to one customer were.

So we're going to pass on that and simply say that American Water did contribute to the quarter.

Okay, fair enough.

And just looking at the dynamics in the quarter from a revenue perspective, with the weakness on the industrial flow side and yet -- you know, the better volumes, the lower brass prices, is there -- when you look at the gross margin delivered in the first quarter, assuming there is some seasonal ramp in Q2 in volumes, is there any reason that the gross margins should back up south of 38% going forward?

You know, for the second and third quarter?

It's a good question.

And I would say that we are expecting second- and third-quarter volumes to be greater than first-quarter in the municipal area.

Flow instrumentation is still a crapshoot as to what's happening with the market there.

Yes.

But the only negative that I see on margins, Rick, is that copper prices are coming back up.

You know, they hit a low of about $2.10 a pound, and they're back up over $2.20 now.

So at some point that's going to have a little bit of an impact.

But frankly, no, I think we can continue to expect to see decent margins as we go through the next couple of quarters.

Okay.

All right, very good.

Thank you.

Thank you.

Chip Moore, Canaccord.

Thank you.

Just a follow-up on that last question, I guess, on the margins.

I think you called out some modestly higher pricing on the muni side.

Maybe you can give us a little more color there?

Well, I wasn't necessarily calling out higher pricing.

Okay?

Oh, you did.

Thank you.

No, what I was talking about going forward -- I'm not expecting higher pricing in the second and third quarter than what we saw in the first quarter, okay, to be clear about that.

Got you.

But for Q1, I guess, was that an increase?

Or where are we seeing those higher prices?

(technical difficulty) Probably coming off this first quarter, we really struggled to get sales out the door.

You know, modestly higher prices may be more of a return to the norm.

But we probably saw somewhere between $1 million and $2 million of price increases in this quarter.

And I'll say the bigger impact for this quarter was volume, which creates a lot of absorption to the factory.

Okay.

It sounds like we might have some audio -- I don't know.

I was having a hard time hearing you.

I guess on flow, maybe -- you called out the customer, the industrial customer that went away.

That $500,000 run rate Q1 last year -- is that a similar headwind for the next three quarters or so?

Yes, it is.

Okay.

Okay.

And then just lastly, on E-Series and BEACON, some nice growth.

Maybe you can give us a little more on traction there?

I'm not sure what else I can give you.

What I will say is that both of those products have seen a faster market acceptance than any products we've ever introduced in our history.

You know, one of the hallmarks of the municipal water industry is that when you do introduce a new product, it takes years for you to get market acceptance.

A lot of utilities will say, give us a few of them, we'll try them out.

And maybe in a year or two we might consider buying.

With the BEACON cellular, we went with our starter packages in 2014.

And a lot of customers picked up those starter packages.

Other customers jumped in right away.

In 2015, we saw them jumping in even more; and now in 2016, we are seeing very strong results with those products.

And this is Rick.

And the thing I'll add also is that in municipal water, we saw increases against virtually every product that we had, with the exception of plastic meters.

And the only reason we didn't see it there is that we went back looked at last year, and we had a huge order for plastic meters to particular customers.

So I mean, you know, this is kind of a broad-based increase, also, in addition to the new products.

And when Rick said we had huge orders to plastic meters to particular customers, it was primarily Mexico.

Mexico.

Okay.

Mexico predominantly orders plastic meters.

And so those -- we had some large Mexican sales in the first quarter of last year, plastic meters, that didn't come in the first quarter of this year.

Got you.

That's helpful.

Thanks, Rick, and thanks, Rich.

Congrats.

Ryan Connors, Boenning & Scattergood.

Great, thank you.

And, yes, congrats to everybody on a great quarter.

I wanted to actually -- I've had some audio issues as well, so I apologize if some of this has been covered.

But I wanted to kind of follow up on --.

Ryan, before you start, then, can I ask the moderator -- are you hearing us clearly?

Yes, sir.

And this is Rick.

You can hear me also?

You're a little bit more distant but yes.

It was more you, Rick.

Rich has been coming through pretty clearly the whole time.

Anyhow --.

Okay.

We want to make sure everybody can hear us.

So go ahead, Ryan.

Thank you.

Yes.

So, yes, basically I wanted to kind of drill down on the new product side a little bit.

And obviously you're talking about huge growth rates for BEACON and the E-Series, but these are new products coming off of a very low basis.

So can you just -- I know you don't want to comment on individual product profitability.

But can you just give us some sense for the top-line materiality there -- whether we've kind of reached the point where they're really moving the needle, or when we might reach that point?

Just give us some perspective on that.

I'll say -- let me say that -- and I'm looking at the numbers here: on the E-Series and on cellular, each of those products right now -- the cellular radios, and this is just the radios without the meters, okay, is representing now -- and I've just -- let me eye this up a second.

Bear with us; it's small print.

Right.

I'm looking at it representing -- and I'm just talking roughly -- about 25% of our radio sales right now.

Okay?

So that's the level it's reached.

And the E-Series -- that looks to me like it has reached about 40% of our sales, of our meter sales.

Not sales, of our meter sales.

And so when you look at it that way, you can see how -- you know, I don't want to talk about specific dollar sales or specific unit sales, but you can start to get a feel for how significant they are and what the saturation rate is.

Yes.

Okay.

And so by -- okay, good.

That's helpful.

And then just kind of on -- following on the same topic, because obviously you had a very timely and compelling series of product launches in the last few years.

But you know, always the customer -- you know, things moving forward.

What does the product pipeline look like for you right now?

Maybe not -- without identifying specific products.

But do you feel like you're going to be able to continue that momentum?

I know we've got the big show coming up in Chicago.

Are there other things you have on the pipeline that will enable you to kind of sustain that lead you've built versus some of the competition?

We have a very full product pipeline, the technology roadmap.

And we are continuing to invest a consistent amount of money into R&D that we have in the past.

So we are not seeing ourselves cutting R&D at all.

Obviously, we are continuing to invest in the BEACON analytic software and its capabilities.

We are continuing to invest; with any kind of cellular product, you've got to stay up on the new technologies that are being offered in the cellular world.

So we're focused on that.

And on the meters themselves, yes, it's the same sort of thing.

We've got some new metering products that we're -- we hope to be introducing soon and some new features.

So without being able to go into details, because obviously my competitors are listening, we do have a full line.

Now, what I will say is that we spent a lot of years and time developing the cellular products and developing the E-Series products.

So it isn't like we're going to go from cellular tomorrow to having chips implanted in everybody's brain to read their water meters the next day.

You know, cellular is really the cutting edge and will be for a while.

I might have come up with something better than that, even.

Well, okay.

Rick says there might have been a better example.

Okay, satellite technology for reading meters.

Who knows?

But my only point is for a while now cellular technology is going to be the leading thing.

And we will continue to invest heavily in the cellular technology because of the benefit it gives the customer.

Our water utility customers have repeatedly said they don't want a lot of infrastructure; they don't want a lot of devices up on towers.

That's very hard for them to maintain.

Water utilities have backhoes.

They don't have bucket trucks.

And so minimal infrastructure is important to them, and that's what the cellular technology gives them.

Then with the BEACON analytics, more and more of the water utilities are saying, we want to be able to provide better data our consumers, so that they are encouraged to conserve water.

And that's what EyeOnWater and products like that do.

So we see ourselves investing more in expanding those product lines as we go forward.

Okay, that's great stuff.

And then one last one, if I could.

There's just been some talk about some megadeals, some elephants out there -- as the municipal market recovers, that there could be some big cities do some pretty substantial rollouts on the AMR or AMI side.

But yet it's very tough to substantiate that independently, although there's some of that talk out there.

And what's your comment on that?

Are there some of those things -- are there are some of those RFPs out there?

Or is that a little overblown?

We're seeing them.

Okay, were not seeing the RFPs at this point; we are seeing RFIs -- requests for information -- which is what a lot of the municipalities do before they get to the RFP stage.

They are not asking for quotes.

They're asking, what are your products capable of?

And so you are right about one thing, Ryan.

I think although this economy is a slow growth and kind of slugging along, everybody seems to be adapting to a slow-growth economy.

And so a lot of the cities that just had things on hold are saying, you know, we can't wait forever.

At some point we have to start making decisions.

And so even if the economy is not going to go gangbusters, we should start looking at making these kinds of investments.

So we have over the last year seen more RFIs coming out of the larger cities.

They are out there.

The cities don't necessarily want it public, so I'm not going to name cities.

But those RFIs usually turn into RFPs, and that could be coming down the road.

Now, on the other hand, that -- Ryan, I don't know what Flint means to all of this.

A lot of cities are very worried about what happened at Flint with the lead in the services.

Will they refocus their direction from metering over to lead services?

I don't know.

And I think everybody is still trying to figure out what that really means.

You know, the other -- one additional comment on elephants is even when you win an elephant, and I remember Chicago from eight, nine years ago, it's not a full impact in a given year.

Sometimes it's done over five, six, seven years.

And it doesn't have the impact everybody thinks it's going to have financially, because it's the equivalent of getting a different city every year for those seven years.

So keep that in mind, also.

Got it.

Well, that's all very helpful.

Thanks for your time today.

Richard Verdi, Ladenburg.

Good morning, Rick and Rich, and congrats on the great quarter here, and thanks for taking my call.

Pretty much all my questions have been answered, but I just have two simple ones left.

First, the vendor issue you guys had last year -- how many quarters do you expect to catch up from that vendor issue to positively impact the top line?

And, Rick, you had mentioned it was about $2 million this quarter.

Can we expect $2 million a quarter going forward?

No, I think -- this is Rick.

I think for the most part we're caught up at this point.

Okay, okay, great.

And for Rich, you had mentioned the energy environment is a crapshoot.

I get that.

But I'm wondering: what type of feeling are you getting from oil and gas customers?

Do you feel the bottom with them is near, or do you feel it's nowhere in sight?

I'm going to say that I feel the bottom is near, but I'm also going to say that I said that three months ago.

And I really thought the bottom was near, and it wasn't.

So, I mean, if I knew for sure, I'd be playing the oil and gas market.

And I wouldn't be sitting here.

It does seem like it can't go much lower.

It seems like things can't slow down much more.

But even in the first quarter, we saw another decrease in our oil and gas products.

So last year we were basically doing about $1 million a month.

It dropped down to $0.5 million.

So I thought, well, that's got to be the bottom, surely; and we are seeing more decreases.

Now the decreases are single digits, but still, it is a surprise to us.

I got you.

That's very helpful.

Okay, thank you, guys.

And congrats again.

Thanks.

(Operator Instructions) Kevin Bennett, Sterne Agee CRT.

First question -- kind of similar to the conversation that we were having with Ryan a couple of questions ago.

If we look at this quarter and, I guess, try to back out United Utilities; American Water; and the weather and whatnot, and just think about kind of the core public utility spending, can you comment on what you're seeing there?

And have you seen that step up over the last either several months -- and what do you think about that going forward?

I think we are seeing an improvement in the utility spending.

Now, part of that is being driven by the new products we're offering.

And there are a lot of utilities that are saying, yes, I want to get involved in these new products.

It is time to make a decision.

And I think part of it is that the market is overall a little bit stronger.

But you're right; if you strip away some of these unusual impacts in the quarter, that $100 million in sales we have for the quarter comes down a little bit if you assume that $4 million got pulled in from the second quarter, and there were some carryovers from last year.

And it still is a good quarter, but it's not perhaps as great as it first looked at first blush.

And now I'm going to do a Donald Trump and go off-script here and say some things that weren't vetted.

So I may get myself in trouble.

I'm just warning -- everybody around the table is rolling their eyes now.

Because of what I've seen happen to the stock price this morning -- our stock price jumped 13% at open.

It's up over 10% right now.

We had a conversation yesterday about the risk of overreacting.

Our stock price often overreacts on good news and often overreacts on bad news.

And it tends to swing both ways.

Part of the problem is we are in a lumpy business.

And we constantly say we are in a lumpy business.

This quarter is a classic example, where in the last two weeks of the quarter we had some utilities that just called and said, you know that product that we wanted in April?

Can you get it to us now?

And all of a sudden, $4 million swings into March.

And that puts about $0.08 on our earnings per share.

So instead of our $0.55, without that, we'd probably be down around $0.48.

Still a great quarter, but not the $0.55 you saw.

So we worry about the market seeing the lumpiness in our business and, every time there's a lump up or a lump down, projecting that out for the full year.

So I was very careful in the press release to say that we internally are not changing our full-year projection based on the first quarter.

The first quarter was good; it was strong.

We have an internal full-year projection, which we have not shared with the market because we don't give guidance, that we put together coming into this year.

And we still think that's a good number.

But that means if we had a very strong first quarter, internally we pulled some of the future quarters down to balance it out and keep the same full-year number.

And so we were trying to get that message across to the market to understand that there is lumpiness.

And our quarters can swing -- our results can swing from one quarter to another.

And we just want the market understand that.

So that's really where we are.

And I guess that isn't the response to any particular question you had; I just wanted to get that out there.

Fair enough.

Let me ask, I guess, this question.

And just -- if I think about a random public utility that was going to replace 100,000 meters in 2016, and we got to start early, so we did more in the first quarter, am I still going to replace 100,000 in 2016?

Or maybe I can do 120,000, assuming the rest of the year plays out?

You know, and this -- you raised a very important point.

You are probably still going to do the 100,000, and the reason is because the municipal budget was set for that 100,000.

And so that's what they have set aside.

That's what they're planning to replace.

So when we've seen utilities start their programs earlier, they tend to finish them earlier.

We've also seen utilities start their programs later; and then, weather permitting, they'll go later into the fall replacing the meters.

So that is kind of a governor on our business, if you will, that it tends to adjust that way.

So budgets tend to drive that more than the time available to replace the meters.

That makes perfect sense.

And then one last question for Rick: on the SG&A line, we stepped up a couple million bucks from the fourth-quarter level.

And I'm curious if there were some one-time items there, or if the $26 million is kind of the new run rate going forward.

Well, assuming this level of sales, I think that's the new run rate.

I mean, we put some new software that went into effect in the first quarter of this year.

So our amortization is up on that.

And then we've got higher incentives just simply because of the increased sales level, so --.

Okay.

Thank you, guys.

Chris Kovacs, Levin Capital.

Congratulations on the quarter.

Just a quick question on the gross margin.

I mean, I think if I look back last year, you had a couple of quarters where you were pretty close to around $100 million of revenue as well, in Q2, Q3, specifically.

I think your gross margins were closer to, like, the 36% level.

And we had obviously a very nice step-up here in Q1.

Can you just -- I understand you mentioned some of the utilization comments, but given the revenue levels were somewhat similar, can you help me kind of bridge that 300 basis points of improvement?

Well, I'm not going to do the numbers for you, but I mean -- you know, the thing on margin is that in any given quarter, it also depends upon the particular mix.

And as you've heard this quarter, we're more heavily weighted toward technology products, which generally carry higher margins.

And again, I don't remember specifics about the second and third quarter of last year, but I mean, product mix, brass prices -- last year we got dinged by FX because we buy the radio boards in euros.

We don't see some of that effect this year.

I mean, there's just a multiple -- a multitude of things that affect the margin, including slow-moving, obsolete, warranty charges, and the like.

So on any given quarter, we try and highlight what we think are the key drivers.

But it varies quarter to quarter depending upon the particular sales in that quarter.

Okay, okay.

I appreciate that.

And then, I guess, just a follow-up thing on Rick's question earlier.

So the commentary was -- or the expectation is we shouldn't see too much of a deviation from this.

And I guess that kind of assumes that we kind of have a higher technology mix throughout the year.

Yes.

I mean, right now we are anticipating that we will continue to see a higher technology mix throughout the year.

That could change; like I say, we are in a lumpy business.

And all of a sudden you could have one customer that's putting in a cellular system that decides to slow down there for whatever reason, decides to slow down their implementation.

For example, right now there are many communities in Texas that are underwater, and that can cause a slowdown.

So you could have reasons why there could be slowdowns from one quarter to another.

But right now we're anticipating that we will continue to see a strong technology mix for the rest of the year.

Okay, thank you, and congratulations again.

Thanks.

Chris Bamman, Sidoti & Company.

Actually, you've done a good job of answering all of my questions.

So at this point, I don't have any just yet.

Thank you.

Okay.

Thank you, Chris.

Richard Eastman, Robert W. Baird.

Thanks for taking the follow-up here.

Rick or Rich, just could you maybe just comment for a second or two -- with the E-Series growth on the meter side, is it surprising that you get the same absorption benefit from the growth in the E-Series versus more of the standard meters?

I mean, is that brass and polymer?

And I presume that you still outsource the casting, so the absorption benefits are more on the assembly and machining?

Is there any --?

The absorption benefits are fairly comparable.

And the reason I say that is because on both mechanical meters and the electronic meters, the ultrasonic meters, we outsource castings.

So that's consistent between both.

We are now machining the E-Series castings in-house, but we don't machine the mechanical castings in-house.

So we actually pick up there.

But then the mechanical meters have more plastic molded internal components than what the E-Series has, and we do those in-house.

So those two kind of balance each other out.

The machining of the E-Series castings but the molding of the internal components for the mechanical meters balance each other out.

And beyond that it's all of the assembly and test, which is where the bulk of the work is.

And they both contribute to that.

So I would tend to say they are probably about equal --.

Right.

-- on a scorecard.

I see, okay.

So as we swing -- you know, as our sales swing from mechanical meters over to electronic meters, I don't think we're going to see a big difference in our absorption.

Yes.

And do you export all the e-meter products that are going to the Middle East?

Is that --.

Yes, we do -- yes, from here.

Okay.

Okay.

So that growth --.

Right, with one exception, okay?

We also make larger magnetic meters that are the big commercial meters.

The E-Series meters go up to about a 2-inch size, and over that you're up into magnetic meters.

And those are all made in the Czech Republic.

So those are brought from the Czech Republic to the US or to the Middle East.

But the growth in the Middle East on the E-Series side, which looked pretty significant last year into the Middle East, that absorption --.

That is parts that came out of the US.

Yes.

Yes.

Okay.

Okay, very good.

And just on the industrial flow side, obviously, a customer in-houses some of the product here.

Could you just maybe offer what industry that that customer is in?

And then, also, what does the contribution margin look like now from the industrial flow products with the lower volumes and this step-down?

I mean, are we able to manage the costs there proportionately?

Yes, first off, the customer was in the ag business.

So we do a lot of meters that either go in irrigation or on ag equipment.

And so -- and that isn't unusual for some of these ag equipment makers.

A lot of them are looking at ways to reduce costs by bringing processes in house.

And this is one that -- it's a product we developed with them.

And for a while we made it, and now they've decided to produce it in-house.

And that's their decision.

Our margins on our industrial have always been larger -- have always been higher than our margins on the municipal side, because the volumes are smaller and the nature of the products.

Yes, the margins -- the fully-loaded margins with the overhead have gone down as we've seen the volume go down.

You know, when you go from $1 million a month in oil and gas meters down to $0.5 million a month in oil and gas meters, it's not easy for us to get rid of 1/8 of a plant.

So even though we've done a pretty good job on cutting costs, there are some absorption problems there.

And they are having a negative -- it is having a negative impact on margins.

Although flow instrumentation's gross margins as a general -- are still higher than municipal water.

Right.

Just not as much higher as they've been in the past.

Okay.

But again, some levers that we can pick up, ultimately, when volumes go up.

Yes.

Ultimately, if we don't see a rebound -- and that's a good point, Rick.

If we don't see a rebound in oil and gas in the next couple quarters and we don't see a rebound from some of these areas, we're going to have to take harder looks at some of our overhead costs in those areas.

Yes, okay.

And just -- I got a note for Rick that that's an awfully nice tax rate that you contributed.

Thank you, Rick.

You're welcome.

Thanks.

But you understand, Rick --.

Yes?

Before you go complimenting him and it goes to his head somehow, in the first quarter of last year there was a tax --.

$75,000 tax charge.

A tax charge in there.

And in the first quarter of this year there was a credit.

$17,000.

A $17,000 credit.

So that did swing it a little bit.

So he doesn't get credit for that.

Well, what matters is the year-end.

Thank you.

Yes.

Take care.

Thank you.

And I'm showing no further questions.

I would now like to turn the call back to Rich Meeusen, Chairman, President, and CEO, for any further remarks.

Thank you.

So, again, we felt this was a very strong quarter.

There were certain lumpy items that made it even stronger than normal; but without those lumpy items, we still beat our expectations for the quarter.

The sales were strong.

The results were strong.

Our performance was good.

So we're very pleased with that, and we are still very optimistic about a strong year going forward.

And I want to thank you all for joining us today.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes today's program.

You may all disconnect.

Everyone have a great day.