Badger Meter Inc (BMI) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2017 Badger Meter 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 of Finance and Chief Financial Officer.

Sir, you may begin.

Thank you very much, Takeya.

Good morning, everyone, and welcome to Badger Meter's Fourth Quarter Conference Call.

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

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 risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements.

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

Let me reiterate 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 onto the results.

After the market closed yesterday, we released our fourth quarter and annual 2017 results.

We are pleased that sales, net earnings and diluted earnings per share are records for the fourth quarter and the year as a whole despite a softer utility market that impacted the entire industry.

Let's review some of the details.

Sales in the fourth quarter increased 3.8% to $96.7 million from $93.1 million last year.

Municipal water sales were up 1.9% while flow instrumentation sales increased 10.7%.

Municipal water sales represented 76.5% of the fourth quarter sales coming in at $74 million.

Within these sales, residential sales were up 5.4% while commercial sales were down 15.5%.

The fourth quarter of 2016 included several large commercial water meter projects that did not recur this year.

The increase in sales of residential products was driven by the inclusion of sales from D-Flow Technology, which we acquired on May 1, and incremental sales from Carolina Meter & Supply, which we acquired on November 1. The results were also driven by higher sales into the Middle East.

Consistent with the year as a whole, organic domestic residential sales in the fourth quarter were relatively flat.

The 10.7% increase in flow instrumentation sales was due to the continued recovery in oil and gas markets as well as the general strengthening of the industrial market as we continue to broaden our distribution channels.

The gross margin percentage in the fourth quarter was 40.4% versus 36% in the fourth quarter of last year.

The reason for the percentage increase was product mix with more sales of higher technology products.

We sold more radios this quarter than last year against the slight decline in actual meter sales.

Also impacting the margin for the period was the incremental distribution margin, particularly as it relates to the acquired assets of Carolina Meter.

All of this is despite higher brass cost than we saw last year.

Our selling, marketing, engineering and general and administration expenses increased 5.8% fourth quarter over fourth quarter.

This year's amounts increased due to expenses related to the purchase of D-Flow and the additional personnel hired after the asset purchase of Carolina Meter.

In addition, we have higher amortization expense for the various intangibles associated with these acquisitions.

Also included in the fourth quarter was a pension settlement charge of $640,000 or nearly $0.015 per share.

There was a similar charge in last year's financial statements.

I only point this out because this is a noncash charge.

To remind everyone, this charge is already included in net equity, then it is taken out of net equity, run through the income statement and put back into net equity, hence the reason we disclose this information.

I would like to say further on pension matters for a moment and make you aware of a decision made this past summer.

We informed our employees of our intent to terminate our frozen pension benefit plan.

This decision was not made lightly.

Both the Board of Directors and the management team continued to recognize their responsibility to the plan participants.

After reviewing the administrative and monetary costs of maintaining the plan, it was determined that terminating it would better allow us to control the costs of our overall retirement programs.

In addition, it moves our organization into 1 unified retirement program.

The decision has no effect on the amounts our retirees and active employees ultimately receive.

Retirees receiving monthly payments will continue to receive them from an annuity we will purchase as part of the termination.

Active employees will have choices, including monthly payments through an annuity, lump sum distributions that can be rolled into our existing ESOP plan or other options.

If all goes according to plan, the termination will happen sometime in the second or third quarter of this year.

The timing depends on regulatory approvals.

While our pension plan is considered fully funded, there will be a onetime charge, which we currently estimate at approximately $5 million, to buy the annuities for those who are currently receiving or elect to receive monthly payments in the future.

The exact amount of the transaction will not be known until employees make their individual selections sometime in spring or early summer.

In addition, when the assets are distributed, there will be a onetime noncash charge for amounts already included as part of equity in the company's balance sheet.

At December 31, that amount was $17.6 million pretax.

Again, in accounting terms, it will simply come out of equity, go through the income statement and return to equity.

This is very similar to the noncash settlement charges we have taken this year and in other occasions over the past several years.

As I indicated, we are in the process of obtaining regulatory approval and still have the option of reversing our decision.

Therefore, no final amount will be recognized until these transactions take place, most likely later this year.

You will hear us remind you about this over the next several quarters so it is not a surprise when it does happen.

Now let's discuss the other big impact in the fourth quarter.

As you are aware, President Trump signed the Tax Cuts and Jobs Act into law in December 22.

Long term, we feel this will be a great benefit to Badger Meter.

However, similar to many other companies, there are several provisions of the new tax law that needed to be recognized in the fourth quarter.

The income tax expense for the quarter includes an $800,000 charge associated with what is referred to as the transition tax on the company's undistributed foreign earnings.

This was offset by a credit of $800,000 to recognize the federal rate change on our net deferred tax liabilities.

Now that we have these amounts recorded, we believe the tax law will have a positive impact on our bottom line in 2018.

While there are still many details to understand, we believe our effective tax rate going forward will drop from what was a normal range of 35% to 36% to a range around, and I stress the word around, 24%.

During 2017, we are estimating our effective tax rate to be around 35.5%.

As a result of higher estimated state taxes and some onetime adjustments, our rate for the year as a whole was 37%, which made the fourth quarter tax rate higher than normal as we adjust it to the annual estimate.

As a result, net income was $7.2 million in the fourth quarter or $0.25 per diluted share compared to $6.1 million or $0.21 per diluted share in the fourth quarter of 2016.

Recapping the year as a whole.

Sales increased 2.2% to $402.4 million from $393.8 million last year.

The primary driver for this increase was higher sales of flow instrumentation products, although municipal water showed an 0.8% increase.

The gross margin as a percent of sales was 38.7% for the year compared to 38.2% in 2016.

Better pricing and product mix were offset somewhat by higher commodity costs, particularly brass.

Our selling, engineering and administration expenses in 2017 were just 0.3% higher than expenses in 2016.

We had additional expenses for employees from the acquisition of D-Flow and Carolina Meter and the related amortization of the intangibles from those transactions.

These and normal inflationary increases were nearly offset by lower health care costs and lower employee incentive costs due to redesign programs.

In addition, calendar 2017 included the pretax charge of $640,000 for noncash pension settlements that I just mentioned before, compared to $1.5 million in 2016.

For the year, earnings were $34.6 million compared to $32.3 million in 2016.

On a diluted basis, earnings per share were $1.19 in 2017 compared to $1.11 in 2016.

Our balance sheet remains solid.

We generated over $45 million of cash from operations in 2017.

We increased the dividend for the 25th consecutive year.

And in spite of the acquisitions, our debt only increased by $6.6 million.

With that, 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.

Thank all of you for joining us today.

Before I start my comments, I would like to introduce our new Chief Operating Officer, Ken Bockhorst, who started with us in October.

As COO, Ken currently has responsibility for our North American sales marketing, engineering and manufacturing functions.

Since starting in October, Ken has been busy visiting our facilities, meeting with our customers and meeting some of our shareholders.

I'll ask Ken to offer a few comments on his background.

Yes.

Thanks, Rich.

So these past few months, I have been a bit of a whirlwind, so I've been traveling to our facilities, meeting with our employees, customers and shareholders and really getting to see first-hand how our technologies deliver real-time data that improve our customer's operations.

It's clear to me that the caliber of our team, the sophistication of our products and operations and our strong financial position have us poised to continue growing organically and where strategically right through acquisition.

While at Actuant, where I was for 6 years prior to joining Badger Meter, I ran the company's energy segment.

I was privileged to partner with over 1,500 employees working in 24 service centers and 6 manufacturing locations across the world.

I spent a great deal of time outside the U.S. working to grow the business and overseeing an active M&A portfolio.

And what I've learned throughout my career is that continuous improvement, product innovation, dedicated employees and meaningful customer relationships are really the backbone of how to succeed in a competitive global marketplace.

I'm extremely pleased that, that philosophy is shared by my new colleagues, which is one of the many reasons why I feel at home here already.

If I haven't met you yet, I'm looking forward to doing so in the near future.

And I'm thrilled to be here and excited about our future.

So on that, I'll give you back to Rich.

Thanks, Ken.

As we stated in our press release when he joined us, Ken will be a key part of our future leadership planning here at Badger Meter.

We're fortunate to have an experienced executive like Ken as part of our team.

You'll certainly be hearing more from him in future quarters.

Now let me turn my comments to the results.

As Rick said, this was a strong quarter for us, particularly with the stronger margins driven by the continued shift and mix to the higher margin products, both in our utility and flow instrumentation markets.

We are pleased with the rebound in flow instrumentation, particularly in the oil and gas metering markets.

We are also benefiting from the continued market acceptance of the ORION Cellular radios and the E-Series Ultrasonic meters.

Our record-breaking fourth quarter also capped off another record year in 2017, a year where sales crossed the $400 million threshold for the first time.

On a percentage basis, sales increased 2.2%, but our strong margins and cost control efforts combined to increase pretax income by 10%.

As Rich explained, we generated record net income and record diluted earnings per share.

So this was definitely a year for us to be proud of.

The new tax law will benefit us in 2018 and beyond due to its lower corporate tax rate.

However, I'd like to mention one of the costs that we incurred in 2017 that we expect to generate benefits in 2018 and beyond.

As you know, we doubled down on our Ultrasonic metering technology when we acquired D-Flow earlier in the year.

We immediately refocused all of D-Flow's efforts to the task of integrating their technology into our E-Series meters.

We expect to see the benefit of that effort when we introduce our next version of the E-Series meters in the second half of this year, both in the form of improvement and cost reduction.

However, until then, we are absorbing the additional costs of the D-Flow acquisition through our current results.

In fact, during 2017, the net cost of the D-Flow operation was over $700,000, primarily due to intangible amortization related to the acquisition.

We believe that this investment in the next-generation E-Series will yield significant benefits for the company in coming years.

As we look at the year ahead, we have other good reasons to be optimistic.

We continue to see strength in our utility markets as well as select flow instrumentation markets.

Although increased copper costs will continue to challenge margins for the entire industry, we believe that the price increases we instituted on January 1 combined with a continued shift and mix towards higher margin products will be able to offset this impact.

Overall, we continue to be confident about the future of our business and our ability to generate shareholder value for the long term.

With those comments, we would love to take your questions.

(Operator Instructions) Our first question comes from the line of Richard Eastman from Baird.

Rich, could you perhaps maybe just kind of speak to the tone of business here as we track through January.

I mean, the first quarter can be notoriously plus or minus 10% relative to the fourth quarter depending on weather and some other issues.

But could you handicap the plus or the minus 10% given of what you've seen in January and just extremely early February?

Well, what I would say is that thus far, we're seeing good order entry.

So we are optimistic about having a solid quarter.

But as far as handicapping what might happen in the next 2 months, it gets very difficult.

You know that weather can play a big impact in the first quarter.

Blizzards, snowstorms, things of that sort that cause our customers to redirect their efforts and refocus their efforts and maybe delay meter installations.

So those things could impact us.

We're continuing to see strength in oil and gas, so that's good.

But really, beyond that, Rick, I really couldn't -- wouldn't want to try to predict what the first quarter is going to look like.

And it's only February 6.

And it's only February 6.

I realize it's February 6. And then I also wanted to just speak to just around the gross margin, again, you delivered incremental gross margin dollars on lower sales, and we're talking about quarter-to-quarter.

And I think your commentary was the price increase really was a January 1 event.

You're looking forward to this kind of shift in the mix of business being favorable.

So maybe is the setup here that we're kind of targeting a similar gross margin for all of '18 given our pricing strategies and our expectations on mix, can we hold that, not necessarily quarter-over-quarter, but can we hold that for the full year?

Is that the target?

This is Rick.

I'll start and I know Rich will weigh in on this because he'll want to say something.

But my reaction is you can't look at any individual quarter and determine a gross margin.

If you look at this particular quarter, as I said, we sold more radios this quarter than we did in the fourth quarter of 2016.

And we actually sold fewer brass meters, okay?

At some point we are going to be selling meters in there, and that does factor into the mix.

And so it's likely it's going to come down.

And our business is always lumpy.

And so I don't read anything into a particular quarter in terms of gross margins.

Having said that, the trend towards higher technology over the long term should slowly increase gross margins.

And I agree with what Rick said.

If you look at the gross margins, we did over 40% in the fourth quarter, but we did 38.7% for the year.

If I was looking at 2008, I'd be modeling closer to...

2018.

2018.

I just lost a decade there, wow.

If we're looking at 2008, the margins are going to be lower.

Right.

If I was looking at 2018, I would not expect to see margins over 40% for the year, but they are still going to be strong.

The 40 -- part of the 40% was when we looked at the fourth quarter a large number of sales of technology compared to other quarters because we also have quarters where we sell a lot of local read meters.

Remember that still in the United States, a lot of meters are simply read by people walking door-to-door, and those margins tend to be lower.

And remember, Rick, I'd said commercial water meters sales were down, I don't know what I said, 15% or something like that, okay?

That's primarily brass type -- I mean, those are lower-margin type products.

When you put technology on commercial meters, technology is not as big a percentage of that because, obviously, there's increased metal cost in those meters.

But I would say, Rick, I'm optimistic that we can maintain the margins that we saw in 2017.

I mean, I hope we can with the price increase offsetting some of the copper.

I just don't think we can plan over 40% for the year.

Understood.

And did the inventory build benefit you at the gross margin line enough to note it?

Because it was a pretty big step up in inventory for the fourth quarter for some reason sequentially.

The problem is the cost of goods sold in the fourth quarter is generally a reflection of the third quarter costs, much the same as your first quarter is more of a reflection of what you made in the fourth quarter just by virtue of the turns in the way the mechanics work, but -- which is consistent with past because the fourth quarter is always one of our slower quarters of the year.

Also, bear in mind that we bought another distributor in the fourth quarter.

And with that, come some inventory.

Our next question comes from the line of Chip Moore from Canaccord.

Maybe you can talk a little bit about pilot activity.

I guess, given some of the new enhancements you're making in some products and if you combine that with tax changes and some of the infrastructure chatter, is that causing any change in the cadence of those pilots to move to projects?

I think we're seeing some stronger pilot activity recently than what we saw maybe throughout the year.

There was anecdotally some slowdown in 2017 related to all this talk about an infrastructure bill that was coming out of D.C. I think now that we've seen more about what the administration is talking about, the previous administration, the infrastructure bill was kind of a Santa Claus thing where they were just giving gifts out to the states and the cities.

This one, they've talked -- there was a lot of talk about a very large $1.2 trillion, $1.5 trillion infrastructure bill.

But when you look at what they're proposing, it's a lot of matching funds.

The administration is saying that they want to see the states and the cities match the funds.

So the amount is not as large coming from the federal and will require a lot of matching funds.

And I think that's caused the municipalities to say, well, maybe this isn't the Christmas present that we were thinking it was going to be.

And now I think they're moving forward on projects that they might have delayed.

Got it, and that's helpful.

And maybe if you could drill down a little bit more on D-Flow.

Sounds like integration is going a little ahead of plan, but in terms of costs out or what that brings in the back half, maybe just provide a little more color on that.

Yes.

Our plan right now is that we would have -- we would start introducing the new version of the E-Series in the larger sizes, probably in Q3 and in the smaller sizes in Q4.

So it will have some benefit to this year.

I'd say a modest impact.

Right, but it's going to be coming in the second half and it's going to take a while for those new products to get out into the marketplace.

I think our plan all along was it was going to have more profound impact in 2019 and beyond than 2018.

Correct.

Yes, that's fair.

And I guess just the last one maybe on oil and gas, industrial.

Obviously, momentum is continuing there.

Maybe you could talk a little bit about early traction on that international distribution deal and some of the other markets.

If you're wondering why we're pausing, we're looking at each other going, hmm.

Yes, I think you're referring to our distribution agreement with a company called DNOW, right, which not to be confused with D-Flow.

It's 2 different businesses.

And DNOW is a larger distributor of oil and gas products.

Ken, did you want to add anything on that?

Yes.

We're starting to see some traction with them, but I wouldn't say that we're on full scale with them yet.

In the past couple of months, we did a joint show with them in the Middle East, the ADIPEC show.

We're generally seeing a lot of the increase in oil and gas and the fact that the market is up.

And we've done a nice job of organizing our team around it internally, but we still have certainly a lot more runway we can get with DNOW.

Our next question comes from the line of Nathan Jones with Stifel.

Just following up on the E-Series rollout.

Can you talk about -- as you roll out the new E-Series meter, how quickly does the old E-Series meter go away?

And what kind of difference that has in terms of margins between the new one and the old one, as you talked about the higher technology and lower cost?

Right.

Well, our plan is to time the rollout and the inventory levels of the old one, so that ideally, we'd love to hit it perfectly.

And on the day we ship the first new one, we ship the last old one, but that never really works out that way.

We also have some customers who might want to try the new meters for a while before they're comfortable switching over because it is going to be a different design and that may cause customers to say, "Wait a minute, we really want to test this out." So we are optimistic about being able to get it out there pretty quickly because it will represent a margin enhancement for us.

I think there's enough cost reduction there that we can remain competitive in the price and yet get some enhanced margins off of it.

We're not going to say how much.

We're not going to give out any numbers on it, but we do think we're going to see some margin improvement on that.

Okay.

And then you talked about putting through price increases on January 1. Gross margins were a little soft in 3Q with that price cost imbalance there.

Did you push through any price increases during the fourth quarter or you held those off until January 1?

No, we held all those off until January 1.

So really the gross margin improvement here was all about mix rather than price cost.

And price cost is still to come.

Correct.

Our next question comes from the line of Ryan Connors with Boenning and Scattergood.

Wanted to revisit this gross margin issue a little bit.

You're stressing mix and specifically the impact of new products.

But Rick, you mentioned also the radios were up.

And I'm wondering about your resales of other OEM radios, whether there was an impact of any shift there.

I know you used to disclose the metric on the multiple by which your own products were outselling resales and so forth.

Any update there?

No.

I mean, really, the mix of our product -- the reason we stopped disclosing is we still are -- we're primarily selling our own radios, and we continue to be an Itron reseller, obviously.

But that's not that significant.

There was no significant swing there, whatsoever.

Okay, so it really is purely just new products getting traction at the higher margin.

Yes, but really it -- and it was just -- it happened to be the orders we got in this particular quarter.

Again, this goes back to this lumpiness.

We got a lot of technology orders this particular quarter.

There'll be some quarters sometime where we'll weigh towards a lot of manual read meters and our margins will be down and you'll be saying, is that an indication that technology is not selling.

Sometimes it's just a matter of how the orders come in.

Got it.

And to give you some more details on that.

Our Itron sales quarter -- fourth quarter versus fourth quarter of the prior year were relatively flat.

In fact, they were down a couple of percentage points, whereas our sales of our own radios were up significantly.

Got it.

Okay, so on the margins it might have helped.

Which is higher margin.

It's obviously -- it's higher margin when it's our own product.

Yes, got it.

Also, it seems like I know you talked about not wanting to get to into forecasting based on the market outlook here, but it does seem like project pushouts and delays have kind of been a recurring issue not only for yourself, but industry-wide.

How reliant in your mind is the '18 outlook on larger projects that could push to the right versus kind of a more broad -- a broad market upswing?

We have some projects, some larger projects planned in '18, where we're fairly confident they're going to come through in the U.S. I wouldn't say that, that represents a greater mix of larger projects from '17.

So I don't think we're -- our '18 growth is being predicated upon a handful of very large projects, rather it's being predicated on a broader growth across the market.

Then I will also throw out there that we are still active in the Middle East and we have some Middle East projects that are also in our plan for '18, which have been delayed out of '17 and could benefit us.

Got it, okay.

And then last one for me is just on this acquisition, Carolina Meter.

Can you just update us on where this deal puts you in terms of your overall forward integration strategy, kind of where you stand in terms of what (inaudible) in there and any metrics you can share about it?

What portion of your business now is coming through corporate owned distribution?

Right.

Well, and as you may recall, when we started down this path of acquiring some of our distribution, we were selling about 50% through distribution and 50% through our own direct sales force.

We have now completed 3 distributor acquisitions.

Obviously, they're 3 of our larger distributors.

We do believe we have a couple more that we want to complete, so we think we might -- you might be seeing one of those 2 yet this -- in 2018.

And I would say we're down to probably below 20% of our sales are coming through distribution -- through non-company-owned distribution.

Part of that is we tagged on additional territory that wasn't assigned to the distributor to our -- to the ones we bought.

So...

Right.

But the fact of the matter is you probably got less than 20% that's going through non-company-owned distribution.

Wow.

Okay, I didn't realize it was that low.

The ones we bought were all the largest.

(Operator Instructions) Our next question comes from the line of Jose Garza with Gabelli & Company.

Welcome, Ken.

Yes.

Thank you.

Rick, just a quick one.

Just what was kind of the contribution from the acquisitions here in the fourth quarter, I guess, D-Flow and then maybe some on Carolina Meter?

Yes.

Well, I can answer that right away.

I could tell you it that it was -- bizarrely, it was a wash.

And the reason I say it was a wash is there was a positive contribution of Carolina Meter, which was substantial, but the D-Flow amortization offset that contribution.

So when we are all done, it was within $100,000 plus or minus.

Okay.

And Rich, I guess, just in terms of the, I guess, a little bit more positive sentiment on pilot programs.

I mean, would you characterize that, I guess, just across broader demand now that, I guess, some of these legislative wishes have kind of worked themselves through?

I think we're seeing broader demand, but I wouldn't say it's so much the legislative.

Yes, there were some delay last year, hesitation because of that.

But when we're talking about pilot projects, that's generally people who are testing out new technology, and that's driven more by the desire to see the new technology and see what's going on.

So when you use the term pilot project, I think about somebody saying, look, I've been using either another company's technology or I've been manual meter reading and now I want to go to something new.

And I'd like to test out cellular, fixed network, drive by and see what I want to try.

And that's when they run a pilot project.

When it comes to companies just delaying a project, they may have already run the pilot.

They were ready to pull the trigger and they delayed because of this infrastructure billing.

So it's really 2 different things.

Does that make sense?

Yes, I mean -- I guess, then -- I mean, any kind of change, I guess, just in terms of what you think is -- what you'd characterize as kind of continued softness, if I think back a few months when we last spoke.

Yes, this is Rick.

I mean, when we talk about the softness, I think part of it is we just finished the first year of a new administration.

And I think if you go back a year when we were looking at 2017, I think there was so many uncertainties as to what could be changing in this market?

How could the money be allocated from the federal government?

What about infrastructure?

All right.

And I think there was, I don't want to use the word hope, because that's a strong word, but there was anticipation of some kind of change within the year.

Now that we're a year into this, I think a lot of people are saying Washington has settled in to the way they're doing business right, wrong or indifferent, okay, and we're just going to continue on with our plans because we don't see any fundamental changes coming that are going to impact our business.

So I mean, there's nothing that we can -- I mean, a lot of this is anecdotal, as Rich says, this past year.

But a lot of the slowdown had to be -- had to do with some of the uncertainty about what's going to happen and how we're going to get this stuff funded.

Now that we're a year into it, I think there's not a lot of anticipation of changes in '18 for anything, I think we'll see some resumption.

Yes.

So when we look at 2017, obviously, we're not pleased with the 2% top line growth.

That's not normal for our industry.

It's not normal for our company.

And we looked at '17 and said, yes, anecdotally from our customers, there were some slowdowns.

Things were generally sluggish during the year.

I think you heard that from some of our competitors, too, at least the ones who tell the truth.

When you look at 2018, we think we believe we're going to see a return to normal growth rates.

We believe we're going to see the whole market growing again as it has in the past.

Our next question comes from the line of Richard Eastman with Baird.

All right.

Just a reference earlier in the call, I think when you were talking about residential meters or just the municipal side was that -- it included revenue from D-Flow and Carolina.

Could you just -- what would be a number of quarterly contribution from those 2 acquisitions?

It could be $1 million or...

$2 million.

About $2 million.

Okay.

And obviously, Carolina was only in for part of it.

So $2 million in the quarter from those acquisitions.

And then a quick question.

I just want to return to this inventory number for a minute.

I mean, just -- we went from the Q3 to Q4, a step up of $8 million of inventory.

Was there any a prebuy ahead of price hike on the meter side?

Or what accounts for that inventory?

A lot of this is we -- I think this is just -- it's a function of timing.

We got our inventory in anticipation of first quarter.

Maybe compared to last year where it came in, in January, there's nothing that sticks out.

It's just -- and in fact, I'm writing the verbiage for the 10-K.

And yes, there are little things, you buy Carolina and it goes up whatever and whatnot.

But the reality as I think is just timing.

Yes.

Has there been -- have you been able to collect any feedback from the field or the channel relative to competitors, maybe announcing a price hike match or any sense of how competitors will respond to that?

We -- as you know, we do have our annual sales meeting in January.

So we just came back from that a few weeks ago, and that's always a good way for us to gauge what's going on with the competitors out in the field.

I think the general consensus of the sales force was that with brass prices going where they are, most of our competitors either have or will be following with some price increase, and they're going to have to.

I mean, yes -- and I'm sorry, I said gas price, I meant brass prices.

Did I say gas prices?

I heard brass, so that's okay.

(inaudible) where copper prices went.

So...

Right.

Yes, so with brass prices going where they are, either before January, we saw some competitors putting -- trying to put in price increases and I think the others will follow.

That's been the historic norm.

I don't think anybody is going to destroy pricing in our market.

We're all pretty smart about what we can do out there, and I think we'll see that again.

Rich, can I ask you, if I look over the last, call it, 3 years or so, some of the fourth quarter seasonality has kind of dissipated from the business.

I mean, if you go back 4, 5, 6 years ago, we typically see a fourth quarter where sales would decline kind of high-single digits, if not double digits, sequentially.

In the last 3 quarters, we really haven't seen that -- the last 3 years, excuse me.

And I'm curious, is it mix of business?

Is it international sales?

Or what in your opinion kind of accounts for that lack of seasonality that we've seen over the last few years?

I think you're absolutely right that we're seeing some changes in that seasonality, especially when you see a weak third quarter followed by a strong fourth quarter.

I mean, normally, our second and third quarters were strongest and our first and fourth were weakest.

And we didn't see that last year.

Last year started to see some unusual things.

The first thing I'll say is that historically and going back 10, 20 years, Badger Meter had been strongest or had the largest market shares in the upper Midwest and the Northeast.

And we were not as strong in the South and the West.

I think that has changed.

We're starting to gain a lot of market share in the South and the West.

And so I think our market share is moving more into, call them, the sunshine states, where they aren't as affected by that winter weather, the fourth and the first quarter.

So I think that's part of it.

I also think that a lot of our customers have figured out that they can continue to change out meters in -- around that winter period without disrupting things too badly.

And so that helps.

And also, if we get the growth rates that we really anticipate in this industry, you probably would see more of that in the second and third quarter.

And we haven't seen it for the past couple of years simply because the markets have been kind of limping along a little bit.

So I think if we -- we always talk about long term that we want to try and grow that top line in the high-single digits and we're not necessarily seeing that in the most recent years, but that -- the strength in this business has always been in the second and third quarters, too.

So we'll see if that returns.

So maybe the anomaly is really more around Q3 not seeing the strength versus Q4 where the decline is less.

I'm just throwing that out as another possibility.

Yes.

No, I understand.

Mathematically.

Okay.

Next, we have a follow-up from the line of Nathan Jones with Stifel.

Just following up on the pricing question.

What -- do you guys see any kind of risk from smaller, maybe private competitors on the lower technology side potentially using some of the tax savings as a means to go after market share by perhaps not raising prices or perhaps discounting prices?

One of the benefits that we have, Nathan, in this industry is that we are somewhat in an oligopoly.

There's really 5 major companies in North America selling water meters.

We always have some small companies out there that are trying to come in.

But the problem is that you're fighting against companies that have a 100-year brand and that have extensive market channels.

There are -- remember that there are about 50,000 water utilities in the United States and it's very hard to develop channels into a market that that's spread out.

Also, water utilities tend to be very conservative and want a deal with a larger company.

So I'm more concerned about what my large competitors might do than what the small startups might do.

And one of the thing -- factors that I like is that compared to some of our large competitors, we are more focused in North America and the tax rate cut is going to help us more than a company that is more international.

And so we kind of sit in a stronger position from that point of view.

So we're going to watch.

We're going to watch what our competitors do.

If pricing becomes an issue, we're going to have to try and respond, what I'd rather do is find ways to offset that through efficiencies, reduce costs if we can, as that goes forward.

But it is a concern, we'll have to watch for it.

Thank you.

I'm showing no further questions in queue at this time.

I would like to turn the conference back over to Rich Meeusen, Chairman, President and Chief Executive Officer, for closing remarks.

Thank you.

And I want to thank everybody for joining us today.

We were very pleased with the quarter certainly with about a 45% increase in pretax earnings.

And for the year, when we look back on the year, yes, top line only grew about 2%, but we had about a 10% increase in pretax earnings on the operating line.

So we are very pleased with that.

So overall, a great quarter.

We look at 2018, we're excited about how it looks and what our opportunities are out there.

We're excited about having Ken Bockhorst on the team now, and we will be looking for a -- we're optimistic about a good year.

So again, thank you everybody for joining us.

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

This concludes today's program.

You may now disconnect.

Everyone, have a great day.