Badger Meter - Earnings Call - Q1 2016
April 19, 2016
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the Badger Meter Q1 twenty sixteen Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. 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.
Speaker 1
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 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 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 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 results. Yesterday after the market closed, we released our first quarter twenty sixteen results. We are pleased to report that the 2016 started much stronger than we anticipated. We had record sales for any quarter in our history and for the first time topped the $100,000,000 mark in sales. Sales totaled $100,600,000 which were $17,000,000 or 20.2% higher than the 2015 when sales $83,600,000 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 760.9% of sales in this quarter compared to 69.9% in the 2015. These sales increased $18,900,000 or 32.3% to $77,400,000 in the 2016 from $58,500,000 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 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 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 a moment. Flow Instrumentation products represented 23.1% of sales for the first quarter of compared to 30.1% last year. These sales decreased $1,900,000 or 7.6% to $23,200,000 from $25,100,000 in the same period last year. The decrease was due in part to lower sales of Lansett turbine meters to oil and gas customers. Lower You recall that last year, we were impacted by oil and gas, but had not yet seen the full impact in the 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% in 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, RAS 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 $3,200,000 or 13.9% to $26,200,000 from $23,000,000 during the same period last year. The increase was due primarily to higher employee incentive compensation and softer amortization costs. Our effective tax rate for the first quarter was 36.3% compared to 37.2% in the 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 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 $8,000,000 or $0.55 per diluted share compared to $4,200,000 or $0.29 per diluted share in the first quarter of last year. There were no significant variations other than seasonal factors balance sheet.
We continue to generate cash from operations and reduced debt in the 2016 by over $10,000,000 Our debt as a percent of total capitalization was twenty point March thirty one, twenty sixteen. With that background, I will now turn the call over to Rich Mussen, Badger Meter's Chairman, President and CEO, who will have some additional comments. Rich?
Speaker 2
Thanks, Rick, and want I to thank all of you who've joined us on this call. We're 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 strength. First, we're 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 twenty sixteen sales were 2.5 times greater than the same quarter last year. Our customers are continuing to move to this latest technology, 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're clearly seeing the benefits of all 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 3,000,000 and $4,000,000 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 $05,000,000 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 to see continued strong results over the balance of 2016. And with that, we'll take your questions.
Speaker 0
Thank And our first question comes from Richard Eastman from Robert W. Baird. Your line is open.
Speaker 3
Okay. Well, 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 $2,000,000 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?
Speaker 2
Right. And I will say that the Itron ketchup 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, one between 1,000,000 and $2,000,000 in sales in the first quarter that got added, although the margin impact is a little bit stronger.
We get some benefit of the margin, but we're talking about their addition to our top line. And on American Water, we talked about this, Richard. We decided we're not gonna report quarterly on our our sales to American Water. With that contract, we have some pretty strong confidentiality wording in there where they want to approve any kind 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 gonna pass on that and simply say that American Water did contribute to the quarter.
Speaker 3
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 the better volumes, the lower brass prices. Is there when you look at the gross margin delivered in the first quarter, assuming there's some seasonal ramp in Q2 in volumes, is there any reason that the gross margin should back up south of 38% going forward for Yes. The second and third
Speaker 2
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. But the only negative that I see on margins, Rick, is that copper prices are coming back up. They hit a low of about 2 a pound, and they're back up over $2.2 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 some to see decent margins as we go through the next couple of quarters.
Speaker 0
Thank you. Our next question comes from Chip Moore from Canaccord. Your line is open.
Speaker 4
Thank you. Just a follow-up on that last question, I guess, on margins. I think you called out some modestly higher pricing on the muni side. Maybe you can give us a little more color there.
Speaker 2
Well, 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 it.
Speaker 4
Got you. But for Q1, I guess, was that an increase? Or where were you seeing those higher prices?
Speaker 2
And I'll say the bigger impact for this quarter was volume, which creates a lot of absorption through the factory.
Speaker 4
Okay. It sounds like we may have some audio. I don't know if I'm 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?
Speaker 5
Yes, it is. Okay.
Speaker 4
Okay. And then just lastly, on E Series and Beacon, some nice growth. Maybe you can give us a little more on traction there?
Speaker 2
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, you know, give us a few of them. We'll try them out, and maybe in a year or two, we might consider buying.
With with the BEACON cellular, we we went with our starter packages in '14 in 02/2014, and and a lot of customers picked up those starter packages. Other customers jumped in right away. In 'fifteen, we saw them jumping in even more. And now in 'sixteen, it's we're seeing very strong results of those products.
Speaker 1
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 and looked at last year, we had a huge order for plastic meters to particular customers. And so I mean, this was kind of a broad based increase also in addition to the new products.
Speaker 2
And when Rick said we had huge orders to plastic meters to particular customers, it was primarily Mexico. 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.
Speaker 4
You. That's helpful. Thanks, Rick. And thanks, Rich. Congrats.
Speaker 2
Thank
Speaker 0
you. Our next question comes from Ryan Connors from Boenning and Scattergood. Your line is open.
Speaker 6
Great. Thank you. And yes, congrats to everybody on a great quarter. I wanted to actually I've had some audio issues as well, I apologize if some of this has been covered, but wanted to kind of follow-up
Speaker 2
Ryan, on before you start then, can I ask the moderator, are are you hearing us clearly?
Speaker 0
Yes, sir.
Speaker 1
And then and this is Rick. You can hear me also?
Speaker 0
You're a little bit more distant, but yes.
Speaker 6
Yeah. It was more you, Rick. Rich has been coming through pretty clearly the whole time. Want to make sure
Speaker 2
everybody can hear us. So go ahead, Ryan. Thank you.
Speaker 6
Yep. So, yeah, 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 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.
Speaker 2
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'm just I let me eye this up a second. Bear with us. It's small print. Right.
I'm 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, 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.
Speaker 6
Good. That's helpful. And then just kind of following on the same topic because obviously you had a very timely and compelling series of product launches in the last few years, but always the customer 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 a big show coming up in Chicago. I mean, are there things you have on the pipeline that will enable you to kind of sustain that lead you've built versus some of the competition?
Speaker 2
We have a very full product pipeline, the technology roadmap. And we are continuing to invest a consistent amount of money into R and D that we have in the past. So we're not seeing ourselves cutting R and D at all. Obviously, we are continuing to invest in the BEACON analytics software and its capabilities. We're 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, yeah, it's the same sort of thing. We've got some new metering products that we hope to be introducing soon and some new features. You know, without being able to go into detail, 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 gonna go from cellular cellular tomorrow to having chips implanted in everybody's brain to read their water meters the the next day. You know, cellular is really the cutting edge and will be for a while.
Speaker 1
I might have come up with something better than that even.
Speaker 2
Well, okay. There might have Rick says there might have been a better example. Okay. Satellite technology for Who reading knows? But my only point is for a while now, cellular technology is gonna 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. So minimal infrastructure is important to them, and that's what the cellular technology gives them. And then with the beacon analytics, more and more of the water utilities are saying, We want to be able to provide better data to our consumers so that they are encouraged to conserve water. And that's what Ion Water and products like that do. So we see ourselves investing more in expanding those product lines as we go forward.
Speaker 6
Okay. That's great stuff. And then one last one if I could. There's just been some talk about some mega deals, some elephants out there as the municipal market recovers that there could be some big cities do some pretty substantial rollouts on the AMR AMI side. But yes, it's very tough to substantiate that independently, although there's some of that talk out there.
What's your comment on that? Are there some of those things are there some of those RFPs out there? Or is that a little overblown?
Speaker 2
We're seeing them. Okay? We're not seeing the RFPs at this point. We're seeing RFIs, Request for Information, which is what a lot of the municipalities do before they get to the RFP stage. They're 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 adapt 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 gonna, you know, go gangbusters, we should start looking at making these kinds of investments.
So we we have, over the last year, seen more RFIs coming out of some of the larger cities. They are out there. The cities don't necessarily want it public, I'm not gonna name cities, but those RFIs usually turn into RFPs. And and and that can be coming down the road. Now on the other hand that Brian, I don't know what 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's still trying to figure out what that really means.
Speaker 1
You know, the other one additional comment on elephants is 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.
Speaker 6
Got it. Well, that's all very helpful. Thanks for your time today.
Speaker 0
Thank you. And our next question comes from Richard Verdi from Ladenburg. Your line is open.
Speaker 7
Hi, 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 $2,000,000 this quarter. Can we expect $2,000,000 a quarter going forward?
Speaker 1
No, I think for the this is Rick. I think for the most part, we're caught up at this point.
Speaker 7
Okay, okay, great. And then for Rich, you had mentioned the energy environment to crap shoot, 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?
Speaker 2
I I'm gonna say that I feel the bottom is near, but I'm also gonna say that I said that three months ago. And I really thought the bottom was near, and it wasn't. So, I mean, if if I knew for sure, I'd be playing the oil and gas market, and I wouldn't be sitting here. It it 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 $1,000,000 a month. It dropped down to half a million. So I thought, well that's gotta be the bottom, surely. And we're seeing more decreases.
Now the decreases are single digits. But still, it is a surprise to us.
Speaker 7
I gotcha, that's very helpful. Okay, thank you guys and congrats again.
Speaker 8
Thanks.
Speaker 0
And our next question comes from Kevin Bennett from Stern AG CRT. Your line is open.
Speaker 5
Thank you. Good morning, Rich and Rick. How are you all?
Speaker 7
Good. Doing great.
Speaker 2
First question, kind of similar to
Speaker 5
the conversation 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? Have you seen that step up over the last either several months? And what do you think about that going forward?
Speaker 2
I 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 wanna get involved in these new products. We we 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, you know, some of these unusual impacts in the quarter, that 100,000,000 in sales we have for the quarter comes down a little bit. If you assume that 4,000,000 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 and I and now I'm I'm gonna 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 every everybody around the table is rolling their eyes now. Because 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're in a lumpy business. And we constantly say we're 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, 4,000,000 swings into March, and that puts about $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 to understand that. So that's really where we are, and I guess that isn't in response to any particular question you had. I just wanted to get that out there.
Speaker 5
Fair enough. Let me ask, I guess, this question. 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 you know, assuming the rest
Speaker 4
of the year plays out?
Speaker 2
You know, you're and and this you raise a very important point. You're probably still gonna do the 100,000. And the reason is because budget was set for that 100,000.
Speaker 7
And
Speaker 2
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.
Speaker 5
Makes perfect sense. And then one last question for Rick. On the SG and A line, stepped up a couple of million bucks from the fourth quarter level. And I'm curious if there were some onetime items there or if the $26,000,000 is kind
Speaker 4
of the new run rate going forward?
Speaker 1
Well, assuming this level of sales, I think that's the new run rate. I mean, 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.
Speaker 5
Okay. Thank you, guys.
Speaker 0
All right. Thank you. And our next question comes from Chris Kovacs from Levin Capital. Your line is open.
Speaker 9
Hi. Congratulations on the quarter. Just a quick question on 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 $100,000,000 of revenue as well in Q2, Q3 specifically. I think your gross margins were closer to like the 36 percent 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?
Speaker 1
Well, I'm not going to do the numbers for you, but I mean the thing on margin is on 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 foreign 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 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.
Speaker 9
Okay. Okay. I appreciate that. And then I guess just a follow-up 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?
Speaker 2
Yes. I mean, right now, we're anticipating that we will continue to see a higher technology mix throughout the year. That could change. Like I say, we're 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 their 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.
Speaker 9
Okay, thank you. Congratulations again.
Speaker 2
Thanks.
Speaker 0
Thank you. And our next question comes from Chris Baumann from Sidoti and Company. Your line is open.
Speaker 8
Good morning, gentlemen. Actually, you've done a good job of answering all my questions. At this point, I don't have any just yet. Thank you.
Speaker 2
Okay. Thank
Speaker 0
And our next question comes from Richard Eastman from Robert W. Baird. Your line is open.
Speaker 3
Hi, guys. Thanks for taking the follow-up here.
Speaker 2
Rick or Rich, just could
Speaker 3
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, that brass and polymer? And I presume that you still outsource the casting, so the absorption benefits are more on the assembly and machining? The Is there any
Speaker 2
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.
Alright? 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're probably about equal
Speaker 6
on a torque. So
Speaker 2
as we swing, you know, as our sales swing from mechanical meters over to electronic meters, I don't think we're gonna see a big difference in our absorption.
Speaker 3
Yeah. And do you do you export all the e meter products that are going to The Middle East? Is that
Speaker 2
Yes. We do. From yes. From here.
Speaker 3
Okay. Okay. So that growth
Speaker 2
in the North America. Right. With one exception. Okay. We also make larger magnetic meters.
The e series meters go up to about a two 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.
Speaker 3
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 absorption out of The US. Yeah. Okay. Okay. Very good.
And then just on the industrial flow side, obviously, customer in house is some of the product here. Could you just maybe offer what industry 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 cost there proportionately?
Speaker 2
Yeah. 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 so and and that isn't unusual for some of these 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. When you go from $1,000,000 a month in oil and gas meters down to $500,000 a month in oil and gas meters, it's not easy for us to get rid of oneeight 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.
Speaker 1
Although Flow Instrumentation's gross margins as a general are still higher than municipal water, not as much higher as they've been in the past.
Speaker 3
Okay. And we okay. But again, some leverage that we can pick up ultimately when volumes
Speaker 2
if if if we don't see a rebound and and I mean, that's a good point, Rick. If we don't see a rebound in oil and gas in the next couple quarters, if we don't see a rebound in some of these areas, we're gonna have to take looks at some of our overhead costs in those areas.
Speaker 3
Yeah. Okay. And just I got a note for Rick that that's awfully nice tax rate that you contributed.
Speaker 1
Thank you, Rick.
Speaker 3
You're welcome. Thanks.
Speaker 2
Well but you understand, Rick.
Speaker 3
Yeah.
Speaker 2
Before you go before you go complimenting him and it goes to his head somehow, in the first quarter of last year, there was a tax
Speaker 1
$75,000 tax charge.
Speaker 2
Charge in there. And in the first quarter of this year, there was a credit. A $17,000. A $17,000 credit. So it did that did swing it a little bit.
Speaker 6
Okay. So
Speaker 2
he he doesn't get credit for that.
Speaker 3
Well, what matters is your end. What matters is your end. Alright. Thank you.
Speaker 2
Yes. Yes. Alright.
Speaker 7
Thank you. Take care.
Speaker 0
Thank you. And I'm showing no further questions. I would now like to turn the call to Rich Musson, Chairman, President and CEO, for any further remarks.
Speaker 2
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.
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.
Speaker 0
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.