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    Badger Meter Inc (BMI)

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    Business Description

    Badger Meter, Inc. (BMI) is an innovator, manufacturer, marketer, and distributor of products that incorporate flow measurement, control, quality, and communication solutions. The company focuses on providing smart water solutions and flow instrumentation for utility and industrial markets. BMI's offerings include advanced metering infrastructure, software services, and various meters and sensors for water and fluid management.

    1. Utility Water - Develops and supplies water meters, radios, software technologies, and services for water utilities, including sensors for leak detection and water quality monitoring.

      • Sub-products:
        • Mechanical and ultrasonic water meters
        • Cellular Advanced Metering Infrastructure (AMI) solutions
        • ORION® Cellular endpoints
        • BEACON® Software as a Service (SaaS)

    2. Flow Instrumentation - Provides meters, valves, and sensing instruments for measuring and controlling fluids like water, air, steam, and other liquids and gases, targeting industrial markets such as water/wastewater and HVAC.

    Q3 2024 Summary

    Initial Price$186.75July 1, 2024
    Final Price$217.96October 1, 2024
    Price Change$31.21
    % Change+16.71%

    What went well

    • Consistent Sales Growth and Positive Outlook for 2025: Despite challenging conditions, Badger Meter's utility business grew 4% in the COVID year and 9% in the supply chain year. The CEO stated they "certainly don't expect down years" and feel "strong coming into 2025".
    • Margin Expansion Driven by Multiple Factors: The company reported record operating margins of 19.5%, with margin improvements attributed to increasing unit volumes, favorable mix, and positive price/cost dynamics.
    • Strong Capital Allocation and Growth Opportunities: Badger Meter maintains a healthy balance sheet with a net cash position, recently raised its dividend by 26%, and remains focused on strategic M&A activities to enhance growth and shareholder returns.

    What went wrong

    • Potential delays in project execution due to hurricanes could negatively impact near-term revenues, with uncertainty on the timing of when delayed projects will contribute. The CEO admitted: "I would say for sure that there would be delays, not cancellations, but I can't promise they would be the first quarter."
    • The company's SaaS revenue growth is heavily reliant on hardware sales, with 99% of SaaS revenue tied to meter hardware, limiting potential growth from cross-selling new services. The CFO stated: "Where we stand today, 99% of the revenue stream is related to meter to cash, surrounding BEACON and AMI."
    • Backlog normalization may indicate slowing demand growth, as the company did not report any meaningful increase in backlog this quarter. The CEO mentioned: "We didn't call it out this quarter because there was no meaningful change within it."

    Q&A Summary

    1. 2025 Sales Outlook
      Q: Do you expect lower sales growth in 2025?
      A: We feel strong coming into 2025 and do not expect a down year; even during COVID, our utility business grew 4%, and 9% during the supply chain year. While annual growth rates may vary between 5% to 12%, the macro drivers remain strong, and we certainly don't expect down years. ** **

    2. Margin Drivers
      Q: What drove the margin improvement this quarter?
      A: Margin improvement was driven by increased unit volumes, higher average selling prices due to customer and product mix, and positive price-cost benefits; these are the three contributing factors.

    3. Hurricane Impact
      Q: How will the hurricane affect your business, especially in the Southeast?
      A: While we can't quantify the impact, we maintain strong direct communication with customers; there may be delays but not cancellations. We have managed such challenges before and continue to deliver strong results despite potential unevenness. ** **

    4. Backlog Levels
      Q: How does your current backlog compare to normal levels?
      A: Our backlog remains very positive with no meaningful change this quarter; we see solid performance across all market areas from engineering to shipping.

    5. SaaS Revenue Growth
      Q: Is your SaaS revenue growth solely unit-driven or from new services?
      A: Growth is primarily driven by additional hardware units in the field; 99% of SaaS revenue is related to meter-to-cash solutions surrounding BEACON and AMI, with a 100% attachment rate to hardware sales.

    6. Capital Allocation and M&A
      Q: What are your capital allocation priorities, and any M&A plans?
      A: Our priorities remain investing in R&D leadership, maintaining dividends—32 consecutive years of increases—and disciplined M&A to expand our BlueEdge portfolio, focusing on sensors and software to enhance customer satisfaction.

    7. BlueEdge and Bundled Offerings
      Q: Are you accelerating bundled sales through BlueEdge?
      A: BlueEdge allows us to tailor solutions, approaching customers wherever they are in their technological journey, enhancing cross-selling and bundling opportunities; this strategy helps increase wallet share.

    8. International Opportunities
      Q: Can you discuss international market opportunities?
      A: We've seen global growth through acquisitions like s::can, ATI, and Syrinix, which have strong relationships and installed bases in over 50 countries; we're excited about expanding BlueEdge globally, with opportunities like AMP8 in the U.K.

    Key Metrics

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    Executive Team

    NamePositionStart DateShort Bio
    Kenneth C. BockhorstChairman, President, and Chief Executive OfficerJanuary 2019Joined Badger Meter as COO in October 2017, promoted to President in April 2018, CEO in January 2019, and Chairman in January 2020. Previously held leadership roles at Actuant Corporation, IDEX, and Eaton.
    Robert A. WrocklageSenior Vice President — Chief Financial OfficerJanuary 2020Elected as Senior Vice President — CFO in January 2020, previously served as Vice President — CFO and Treasurer in 2019, and Vice President - Finance from August 2018 to December 2018.
    Karen M. BauerVice President — Investor Relations, Corporate Strategy and TreasurerJune 2019Elected Vice President in June 2019, joined the company in July 2018 as Director, Investor Relations and Corporate Strategy. Oversees ESG initiatives.
    Fred J. BegaleVice President — EngineeringN/AHas served as Vice President - Engineering at Badger Meter for more than five years.
    William R. A. BergumVice President — General Counsel and SecretaryN/AHas been in the role since at least 2022, but exact start date is unspecified.
    Sheryl L. HopkinsVice President — Human ResourcesOctober 2020Elected Vice President — Human Resources in October 2020. Previously served as Vice President of Human Resources for ADVENT and Senior Vice President of Human Resources for Runzheimer International.
    Richard HtweVice President — Global OperationsJanuary 2023Elected Vice President — Global Operations in January 2023. Previously served as Vice President of Global Operations for Emerson Commercial and Residential Solutions' InSinkErator business unit and Wahl Clipper Corporation.
    Lars Bo KristensenVice President — Global Flow Instrumentation and International UtilityDecember 2022Elected Vice President in December 2022. Previously served as Group CEO for Agramkow Fluid Systems and held various international management roles at Kamstrup.
    Kimberly K. StollVice President — Sales and MarketingN/AHas served as Vice President — Sales and Marketing at Badger Meter for more than five years.
    Matthew L. StuyvenbergVice President — Software and Water QualityJanuary 2023Elected Vice President — Water Quality in January 2022 and Vice President — Software and Water Quality in January 2023. Joined Badger Meter in April 2007 as a Mechanical Engineer of Applied Research.
    Daniel R. WeltzienVice President — ControllerMarch 2019Elected Vice President — Controller in March 2019.

    Questions to Ask Management

    1. Given the strong sales growth over the past three years, are you anticipating a significant slowdown in 2025 to low or mid-single-digit growth, and how does this align with your long-term strategic growth expectations?
    2. Considering the resilience of your utility business even during challenging times, would a scenario of flat or declining sales growth in 2025 be surprising, and what factors could lead to such an outcome?
    3. Can you quantify the potential impact of recent hurricanes on your business in the Southeastern U.S., specifically how project delays in that region might influence your fourth-quarter and 2025 outlook?
    4. With gross margins reaching a record high this quarter, can you elaborate on the key drivers behind this improvement and discuss the sustainability of these margin levels going forward, especially considering potential mix variability?
    5. Your SaaS revenues increased approximately 35% this quarter; to what extent is this growth driven solely by meter deployments versus adoption of new services like leak detection under BlueEdge, and how do you plan to diversify and expand SaaS revenue streams beyond hardware attachment?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateFebruary 2023
    End Date/DurationFebruary 2026
    Total Additional Amount200,000 shares
    Remaining Authorization200,000 shares (as of 2025-01-07)
    DetailsNo explicit purpose stated

    Past Guidance

    Summary of Badger Meter (BMI) Guidance from the Last Four Earnings Calls

    Earnings Call TitleIssued PeriodGuided PeriodGuidance
    Q3 2024 Earnings CallQ3 2024Q4 2024 and FY 2025- Sales Growth: High single-digit growth through a cycle, with uneven quarterly outcomes. <br> - Backlog: Strong backlog with no meaningful change from the prior quarter. <br> - Margins: Record operating margin of 19.5% in Q3 2024, but no new normalized gross margin range declared. <br> - Tax Rate: Effective income tax rate expected to remain in the plus or minus 25% range. <br> - Hurricane Impacts: Potential delays in Southeastern U.S. utility projects due to hurricane recovery activities, but no quantified impact.
    Q2 2024 Earnings CallQ2 2024Second Half of FY 2024- Sales Growth: Normalizing into the high single-digit range in the back half of 2024. <br> - Operating Margins: Modest year-over-year expansion expected in the second half of 2024. <br> - Gross Margins: Expected to remain within the 38%-40% range, though pressures like copper pricing may prevent reaching the high end.
    Q1 2024 Earnings CallQ1 20245-Year Strategic Cycle- Growth Outlook: High single-digit growth on average over a 5-year cycle, with variability year-to-year. <br> - Sales and Earnings Comparisons: Tougher year-over-year comparisons expected as 2024 progresses. <br> - SEA Expenses: Absolute SEA spending to increase due to growth investments, but SEA leverage expected. <br> - Revenue Seasonality: Sequential revenue growth from Q1 to Q2 2024 will not match the 11% seen in 2023.
    Q4 2023 Earnings CallQ4 2023Strategic Cycle- Sales Growth: High single-digit growth expected through the strategic cycle. <br> - Margins: Gradual year-over-year margin improvement anticipated. <br> - Top-Line Growth: Expected to moderate from recent levels due to the law of larger numbers.

    Notes:

    • Badger Meter does not provide specific quarterly or annual guidance but instead focuses on strategic cycles and qualitative commentary.
    • The periods guided for are often broad (e.g., "second half of FY 2024" or "5-year strategic cycle") rather than specific quarters or fiscal years.