Badger Meter - Earnings Call - Q2 2014
July 21, 2014
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the Q2 twenty fourteen Viger Mader Earnings Conference Call. My name is Stephanie, and I'll be your coordinator for today. At this time, all participants are in a listen only mode. Following the prepared remarks, there will be a question and answer session. I would now like to turn the presentation over to your host for today, Mr.
Rich Johnson, Senior Vice President of Finance and Chief Financial Officer. Please proceed.
Speaker 1
Thank you very much, Stephanie. Good morning, everyone, and welcome to Badger Meter's second 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 Friday's earnings release for a list of words expressions that identify such statements and the associated risk factors. Let me reiterate some of our guidelines. For competitive reasons, we do not comment on specific individual product line profitability other than in general terms, nor do we disclose components of cost of sales, for example copper. More importantly, we continue our practice of not providing specific guidance on future earnings. We believe specific guidance does not serve the long term interest of our shareholders.
Now on to the second quarter results. Friday after the market closed, we released our second quarter twenty fourteen results. We are happy to report that we had record sales for any quarter and record earnings and earnings per share for any second quarter. Sales were $95,700,000 compared with $88,300,000 in the second quarter of last year. This represents an increase of $7,400,000 or 8.4%.
This increase was driven by higher sales of municipal water products, offset slightly by lower flow instrumentation and specialty product sales. Let's take a look at each of these groups. Municipal water sales increased $9,500,000 or 15.9% to $69,100,000 in the 2014 from $59,600,000 in the 2013. These sales represented 72.2% of sales for the most recent three months. We saw higher sales of residential meters both as well as higher commercial water meter sales.
Sales of residential meters and related technology increased 19.3% due primarily to the higher volumes of products sold. Commercial meter sales increased 2.7% in the second quarter over the same period last year, also due to higher volumes of products sold. Over the past several quarters, we've been discussing a return to normal buying patterns and we believe that trend continued this past quarter. In addition, we are seeing results from our efforts to increase sales in other parts of the world, particularly The Middle East. And finally, we continue to have sales to former customers of Elster.
Low instrumentation products represented 25.1% of sales for the most recent three month period compared to 28.9% last year. These sales decreased $1,500,000 or 5.9% to $24,000,000 from $25,500,000 in the same period last year. There were more products within this group that had sales increased sales for the quarter. However, they weren't enough to offset decreases in three particular product lines, which accounted for most of the overall decline. Some of the decreases were due to part shortages, while others were due to timing issues.
Specialty Products represented 2.7% of sales for the last three months. These sales decreased $600,000 or 18.8% in the second quarter to $2,600,000 from $3,200,000 during the same period last year. This decrease was not unexpected as we had planned for fewer sales of radios into the natural gas market. The decline was offset slightly by an increase in sales of concrete vibrators. The gross margin for the second quarter as a percent of sales was 36.4% compared to 33.8% in the second quarter last year.
The improved margin was due to higher unit volumes, which resulted in better capacity utilization that helped keep our cost in line. Selling, engineering and administration expenses for the last three months increased just under $1,000,000 or 4.7% compared to the same period last year. The increase was driven almost entirely by higher employee incentives due to our improved financial results to date. The effective tax rate for the quarter was 36.6 compared to 36.1% in the second quarter of last year. Our latest estimate of the effective tax rate for the year as a whole is 36.9%.
As a reminder, our interim provisions are tied to an estimate of the total annual rate, which can vary depending upon which states we sell into, the relationship of foreign and domestic earnings and ultimately how much of a production credit we get on our tax returns. As a result of all of this, net earnings for the quarter were $8,800,000 or $0.61 per diluted share compared to $6,300,000 or $0.44 per diluted share last year. Our balance sheet remains fairly consistent. In the 2014, we generated $12,000,000 of cash from operations, which is less than the $15,200,000 that we generated last year. Higher inventory and receivable balances are the main reasons why cash flow was somewhat lower this year.
Nevertheless, we were able to reduce our debt in the second quarter. At June 30, debt as a percent of total capitalization was slightly under 25%. I will now turn the call over to Rich Musson, Batchelmeter's Chairman, President and CEO, who will have some additional comments. Rich?
Speaker 2
Thank you, Rick, and thank all of you for joining us today. Last week, we committed the ultimate sin in the financial community. We released good news on a Friday night when most companies use that timing to bury bad news. I hope you all had plenty of time this weekend to review our results and to develop your insightful questions. I spent the weekend at a wedding in Bismarck, North Dakota, so I can assure you that I had plenty of time to develop insightful answers.
Let me provide a few brief comments on this past quarter and the state of our business. As Rick said, we were obviously pleased with the results. These results were driven by the strength of our markets with the usual tailwinds of meter replacement, new housing and the conversion to automatic meter reading. But we are also seeing the impact of many of the new products that we have successfully developed and launched over the past several years. First, we developed the E Series ultrasonic residential water meter several years ago.
We initially developed it in stainless steel, but found that many customers also wanted a meter made of engineered polymers, which is lighter and has a lower price. We introduced those polymer meters last year. In this recent quarter, we saw a fourfold increase in E Series meter sales compared to the same quarter last year. A portion of that increase was due to stainless steel meters shipped to The Middle East, but half of the quarter sales were the polymer meters that we introduced last year. We expect to continue to see strong growth in this product line.
We also developed and introduced our Orion SE meter reading system last year. As you may recall, this was the first truly simultaneous drive by and fixed network radio system in one package, providing utilities with an easy migration path from one system to the other as well as a drive by backup system in case of a problem with a fixed network. Sales of these units have tripled over the same quarter last year with new orders continuing to come in. Finally, earlier this year, we introduced the Beacon cellular based meter reading system, which uses existing cell towers to not only provide communication from the meter to the utility, but also to provide water usage information directly to the consumer. As we have explained in the past, our industry is relatively slow to adopt new technologies and sales of any new system usually takes a year or more to become significant.
However, almost 100 customers have already purchased starter kits that include a small number of radios and access to the BEACON software for evaluation purposes. Also, we're very excited that we have already made our first sales of complete systems to several utilities. Customer acceptance and field reports for BEACON have been very positive. With these three new products, the E Series meter, the Orion SC radio and the Beacon system, we're very excited about the future long term growth opportunities. In the near term, we have had a solid first half of the year and we are cautiously optimistic about the remainder of 2014.
With that, I'd be very pleased to take your questions.
Speaker 0
Your first question comes from the line of Richard Hissman with Robert W. Baird. Please proceed.
Speaker 1
Hey, just a couple of things. Rich, maybe you could just address as we exit the second quarter kind of into the third quarter, there's always some question around seasonality and momentum in seasonality. The third quarter can be up or down over the second. How do you feel about the early part of the third quarter here just in terms of tone of sales and interest level?
Speaker 2
Yeah, Rick. We are continuing to see the strength as we go into the second quarter that we saw into the third quarter that we saw in the second quarter. I can't really say at this time that the third quarter is going be stronger or weaker or whatever. It's really hard to know because we don't have that large a backlog to tell us. But are we still on the line?
I just want to make sure I heard a beep.
Speaker 1
No problem. Yes, that's No, my we're live. You're fine.
Speaker 2
Thank you. But what I would say is that as we enter this quarter, we're continuing to see the strength that we've seen. We're continuing to see good sales. And like I said, we're optimistic about where this can go.
Speaker 1
And on the Industrial Flow side of the business, maybe it sounds like you might have expected that to be a little bit stronger. It sounds like there were some timing issues in terms of shipments. But should that business as we run through the balance of this year, I mean is the tone there up year over year and just a little bit of an anomaly here in the second quarter or just not a do you have any conviction on that?
Speaker 2
No. I would say that from our point of view, we expect to see an up year. What happens on this business is a lot of it is project related and the timing of when they're putting up large plants and we can get very large orders delayed or moved up whichever just based on the timing of when they want the shipments. So overall, things can swing between one quarter and another, but overall we're still expecting an up year.
Speaker 1
Okay. And just last and I'll jump out of the queue here. But is on the E Series in The Mideast, have we had any follow on business in that area onto the back of the $6,000,000 order that we were able to announce earlier?
Speaker 2
We have not yet, but we have had follow on visits. In other words, we have had visitors from other countries in The Middle East who have come and toured our plants in Milwaukee Mexico, our plants in Germany and The Czech Republic to look at the products and to qualify the plants qualify the products for purchase in their country. So we're very optimistic about what we might see in the future.
Speaker 1
Okay. Excellent. Thank you so much. Nice quarter. Okay.
Thanks.
Speaker 0
Your next question comes from the line of Brian Raffin with Morgan Density Capital Management. Please proceed.
Speaker 3
Good morning, Good morning, Brian. Can you guys hear me? You're breaking up a little. So maybe it's on my end.
Speaker 1
Yes. It's on your end, but we can hear you.
Speaker 3
Okay. Sounds good. Let me just ask Rich for an insightful answer here a little bit. You talked a little bit about tone and pace and trend of business. Do you get any sense that it may be a bit of a stretch whether this is a kind of a capture of pent up demand?
Or do you think this is more of an organic just a buildup resurgence in just normal business?
Speaker 2
Well, what I would say is what you're seeing in the last quarter is a little bit of a pent up demand. I think the whole market I would be surprised if the whole market isn't up. Now I haven't seen my competitors' conference calls yet. But I wouldn't be surprised if the whole market is up a little bit. But then I think we've layered on top of that some benefit from our new products.
Speaker 3
Okay. All right. A little comment maybe any what you're seeing as it plays out into 2014 kind of this strategic shift in market share with Neptune and Elster exiting some of these markets. Are you seeing some pickup in some of that incremental business?
Speaker 1
Well, we yes, I mean, this is Rick. We are seeing increased sales from what I call the former L Star customers. But I think it's a little early because we haven't all reported our results to the publishing entities yet, but we should pick up some market share as a result of that.
Speaker 3
Okay. You talked a little bit about kind of as much as a twelve month a little more adoption cycle with new products. Are you seeing with the 300% up in Orion SC the dual network drive by as well as network, Are you seeing an adoption of that any quicker given the kind of Orion brand has been out there? And obviously with that kind of technology, it would seem to be something that it's a no you can't miss. It's a fairly riskless adoption given that dual strategy.
Speaker 2
You're right. And I obviously some of the pickup in the Orion SC sales is cannibalization of the older Orion versions where the customers are switching over. But we are signing up new accounts, new customers who hadn't made a decision. The real benefit in my opinion of Orion SC is we had a lot of customers who are on the fence and could not decide between a drive by or a fixed network. And now we were able to go to them and say you don't have to decide.
You can buy one product that is both.
Speaker 3
And then you also talked about some fairly robust sales in the Easter is the engineered polymer. Are you seeing Rich a because you guys make stuff that's in past brass and it's just massive and it's got rigidity and it's got till Christ returns. Are you seeing more of a U. S. Utility demand for engineered polymer?
Speaker 2
Yes. Definitely the engineered polymer is of more interest to The U. S. Customers. Now bear in mind too that because of the design of our ultrasonic meter, we don't have as big a pressure vessel.
And therefore, the engineered polymers can perform just as well as the stainless steel. But when we get to The Middle East, they have concerns about temperature and the wear of sand that might be in the water hitting the meter. So they're much more interested in the stainless steel. But definitely the polymers are more U. S.-based.
Speaker 3
Okay. Okay. And then just one more on the beacon sales. What type of when you say you had several customers adopt the entire complete packages, can you comment on dollar amounts? What when you talk about a package what is that does that something that would serve I don't 10,000 customers or 1,000?
Or I get a sense as to what a complete package is?
Speaker 1
We have test kits out there too just well over 150 customers right now. And just like last year when we introduced the Orion SC and they put it on test and we're seeing increased sales this year, we don't substantial sales of BEACON yet in any of these results, but the interest is about as high for this product as anything we've ever seen. So we anticipate that we will have the first orders yet this year and we're looking forward to increased sales next year.
Speaker 2
And Brian, the customers that have committed to the BEACON package, we're talking tens of thousands of meters and millions of dollars.
Speaker 3
Okay. Thanks guys. Appreciate it. Good job. Thanks.
Speaker 0
Next question comes from the line of Chip Moore with Canaccord. Please proceed.
Speaker 4
Thanks. Hey, Rich and Rick. Just on some of the residential strength this quarter, did you see any of that lose it or lose it use it or lose it spend for those junior end municipalities?
Speaker 1
Usually, we hear some type of an anecdotal story about that. And the honest answer is we've heard none.
Speaker 2
I'm sure it's out there. You always have these cities that have a June 30 year end that have a budget expiring and they're rushing out to use it. But we really didn't hear a lot about that this time. Looking at my salespeople and they're all
Speaker 1
shaking their heads.
Speaker 2
They're all shaking their heads that they don't they didn't hear much at all about it.
Speaker 4
Sure. And that jives well with what you're seeing so far in July it sounds like. Yes. Yes. On international, can you talk about some of the mix there for meters and radios this quarter?
Speaker 1
There was probably it was probably just under $1,000,000 of sales to The Middle East in this particular quarter.
Speaker 2
Remember when we talk international, we're talking outside of North America. We consider Mexico, U. S. And Canada all as kind of our domestic market if you will. I know the terms aren't quite correct.
So when we talk about international water meter sales, it's really we've got a couple of things going on. One is that opportunity in The Middle East. And the other one is we've started shipping private labeled Orion radios to a partner in Europe who is reselling them. And again that's tens of thousands of dollars at this point, but The Middle East was a little over $1,000,000 And
Speaker 1
just to be clear when he says that, okay, when it sales to Canada and Mexico, we do report them as international.
Speaker 2
Well, yeah. The 10 ks we comply, But for our own discussion purposes, we tend to refer to Canada and Mexico, North America as one market.
Speaker 4
Okay. That's helpful. And then on the reseller agreement with Itron, is that remind me does that come up next year? And then when should we be thinking about a potential renewal on that?
Speaker 1
'15 or so. I thought it was '16.
Speaker 2
They're looking at each other right now. It's either '15 or '16. We're not sure.
Speaker 1
I want to say '16. It's '16.
Speaker 4
Early sixteen.
Speaker 2
I think they believe it comes up early twenty sixteen. We're not really concerned. We have a very good relationship with Itron. We continue to sell a lot of their radios and so we're not concerned about any change in that relationship.
Speaker 4
Okay. And then just lastly on the balance sheet, the tick up in receivables just what was driving that?
Speaker 1
Well, the sales in the quarter were more skewed towards the May and early June. And especially when we presented against the end of the calendar year, the end of the fourth quarter receivables are generally at their lowest level. So it's a factor of the recent sales.
Speaker 2
We don't feel we have any collection issues at all.
Speaker 4
Okay. Thanks guys. Okay.
Speaker 0
Your next your follow-up question comes from the line of Richard Hispan with Robert W. Baird. Please proceed.
Speaker 1
Hi, guys. I threatened I'd be back. Just on the gross margin side, could you just discuss maybe given that we don't give guidance on gross margin, can we just discuss some of the variables that went in there? I think Rick you had mentioned absorption and the improvement in volumes which I understand because I'm looking at the gross margin sequentially quarter to quarter and the plus 170 basis points I think was the sequential improvement and obviously absorption in volume. But can you just comment were some of your pricing gains
Speaker 2
were you able
Speaker 1
to hold some of your pricing improvements? And then also the mix within residential, was there a better AMR or just automation quarter this quarter versus last? No. The latter one, no. The automation was there.
The pricing was negligible. Primary was volume in this quarter. One of the things that kind of affected margin negatively was the mix, because we had a higher percentage of municipal water compared to flow instrumentation. Yes. So that was actually a negative.
So all the improvement really came out of the volumes. It really wasn't a mix issue, wasn't a pricing issue. I mean, obviously copper, again, you don't break it out, but that was more favorable. Well, copper was not as big as you think in this particular quarter because the prices weren't substantially different from a year ago. Now the fact of the matter is last year I think we were on the tail end of the 81 brass.
We still had 81 brass in the second quarter of last year. This year for the most part it's all by alloys. So that's not an issue. Okay. So our gross margin as long as the bottoms don't fall out of our volume, our gross margin should be sustainable and maybe improve a little bit if we can get our mix up Industrial Flow improves.
Speaker 2
Yes. This is Rick I'll also add that I have now seen a few renewals for former Ulster customers come across my desk. And we are being aggressive to try to improve that pricing more up to market pricing from what Ulster was charging. You recall that when we got into a lot of the Ulster customers, we said we had a one year or eighteen month contract and we were going to try to move them along each time. I've seen those increases.
I can't say that we're capturing market prices yet, but I think our plan is over several years to get them there.
Speaker 1
Okay. Okay. And just the last question again just I know it's small, but the specialty business anything going on there? I know we got the concrete vibrator business. That's a good thing.
But the gas meters that seem to be more and more like a one off opportunity and sale. Yes. I think Rick I think we've always said that it was way back when we got Duke that was kind of a lottery. To the extent we can remember we're not selling gas meters, we're just selling the radios that attach to the gas meters. And those opportunities are not out there as much because many of the gas utilities are aligning themselves with electric.
The provider of the electric radio, the Itrons, sensors of the world, they generally have a solution for water. Okay. Yeah. So there's really not a there's nothing in there that could really propel that growth rate there off of the small base, I mean, for the time being? No, unless there's unless somebody big comes along and even if there's if it's a combo, if they pick someone who doesn't have a water solution as was what happened with Duke, we're more than able to do it.
It's just Sure. It's kind of a if it happens we'll take it. Yeah. Okay. Fair enough.
All right. Thank you again. Okay. And then before you take another question just to clarify on Chip's question before, we have verified that the Itron contract expires in January 2016. So Stephanie, you can take the next question there.
Speaker 0
With no further question in queue, I will turn the call over to Mr. I'm sorry. We do have a follow-up question from the line of Brian Rafn with Morgan Dempsey Capital Management. Please proceed.
Speaker 3
Yes. Just slipped a couple under the rug here. The let ask you, Rich, you talked a little bit about Beacon. Is your sense that those orders are being driven by utilities in Western areas that might be looking at droughts? Or do you think that there is a residential pollsters that want to look at their own individual water usages?
Speaker 2
Actually Brian that is what I would classify as one of those insightful questions. We are not seeing yet. Right now the Beacon order kits are pretty much coming from across The U. S. But clearly one of the big advantages of Beacon is the ability of a customer to take an iPhone or an iPad and see what their water usage is and look for potential ways to reduce water usage.
And I would think that we would see a lot of the drought stricken states and cities that have major water pumps wanting to push this technology or even customers saying to their utilities, hey, we want this technology. And I do believe in the long term over the next several years, we're going to see that trend. Right now, I can't say we're seeing it right now.
Speaker 3
Appreciate it. Thanks, guys.
Speaker 0
With no more questions in queue, I will turn the call over to Mr. Rick Mearsen for closing remarks. Please proceed.
Speaker 2
Thank you, Stephanie. And I want to thank everybody for joining us today. Obviously, Badger is very pleased with our results. We feel like the products that we're offering to the market are gaining good acceptance and we're seeing good strength out there in addition to just basic strength in our overall markets. So we're very optimistic about where things are going in the future in the long run and we appreciate everybody all the support from everybody.
Thank you.
Speaker 0
Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect and have a great day.