Badger Meter - Earnings Call - Q2 2015
July 21, 2015
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the Second Quarter twenty fifteen Badger Meter Earnings Conference Call. My name is Jasmine, and I will be your operator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, this conference is being recorded for replay purposes.
And I would now like to turn the conference over to your host for today Mr. Rick Johnson, Senior Vice President and Chief Financial Officer. Please proceed.
Speaker 1
Thank you very much, Jasmine. Good morning, everyone, and welcome to Batchermeter's second quarter conference call. I want to thank all of you for joining us. 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 on to the second quarter results. Yesterday after the market closed, we released our second quarter twenty fifteen results. We're beginning to hear some phrases describing the second quarter from companies across the country. One of my favorites is spring lull, but probably the best phrase I heard comes from someone likely listening to us today, who had a write up last week describing the second quarter as a period of underwhelming growth. That truly describes how we feel today.
In spite of the fact that sales were at an all time record for any quarter, they were not at the level we anticipated. Frankly, this surprised us because we generally see more strength in the second quarter of any given year. From our viewpoint, there's nothing to suggest that anything is fundamentally different this past quarter. And while we've grown accustomed to lumpiness in our business, it seems to be worse than this rather slow growth hit and miss economy. So let's talk about some of the details.
Overall sales for the 2015 increased 3,200,000 or 3.3% to $98,900,000 compared to $95,700,000 last year. The increase was the result of higher sales of municipal water and specialty products, offset by lower sales of flow instrumentation products. Municipal water sales represented 75.4% of sales in the 2015 compared to 71.6% last year. These sales increased $6,100,000 or 8.9% to $74,600,000 from $68,500,000 last year. The increase includes $3,800,000 of incremental revenue associated with the purchase of National Meter and Automation, which was acquired in October 2014.
The remainder of the increase was due to higher sales of residential products and commercial meter and related technology increased 9.3%, while sales of commercial meters increased 7.4%. Flow instrumentation products represented 21.6% of sales for the second quarter compared to 25.7% last year. These sales decreased $3,200,000 or 13%, 21,400,000 from $24,600,000 in the same period last year. A little over $1,000,000 of that was due to the impact of the strength of the U. S.
Dollar. In addition, we continue to have lower sales to our oil and gas customers related to the weak economic conditions within that industry. That was compounded even more by the substantial rain that occurred in the oil patch during the month of May. Specialty application products represented 3% of sales compared to 2.7% last year. These sales increased $300,000 or 11.5% as we sold higher amounts of gas radios for concrete vibrators.
Gross profit as a percent of sales was 35.5% in the 2015 compared to 36.4% in the second quarter last year. The lower margin was due in part to product mix as we had a higher percentage of sales in municipal water versus flow and fermentation products, which carry higher margins. This is somewhat offset by lower cost of materials, particularly brass as well as the incremental profit from National Muting. Our selling, engineering and administration expenses, which I refer to as SMIGA increased $2,400,000 or 11.7%, $23,000,000 from $20,600,000 last year. This year's second quarter includes $1,800,000 associated with National Media.
We also had significantly higher healthcare expenses and software licensing fees in this year's second quarter. In addition, we invested additional dollars for sales and marketing in drought stricken states, particularly California, which we believe will position us for increased sales in future quarters. The effective tax rate for the quarter was 33.4% compared to 36.6% last year. This year's second quarter included a discrete credit of $228,000 as we settled some open tax years with the IRS. Without the discrete item, we are currently estimating the annual effective tax rate of approximately 35.6%.
This rate will always vary because it depends upon the amount of estimated annual income. And so with lower than anticipated sales, higher selling expenses, we reported lower earnings than last year. Earnings for the second quarter were $7,900,000 a decrease from $8,800,000 in the 2014. On a diluted per share basis, earnings were $0.55 this year versus $0.61 last year. Despite the lower earnings for both the first and second quarters, we are generating more cash from operations than we did in the 2014.
2015, we generated $19,200,000 compared to $12,000,000 last year. Capital expenditures for the first six months of twenty fifteen were $7,600,000 compared to $5,600,000 last year. We were also able to reduce our overall debt level to slightly less than 25% of total capitalization as of June 30.
Speaker 2
With that little bit of background, will I now turn the call over to Rick Musson, Badger Meter's Chairman, President and CEO, who will have some additional comments. Rick?
Speaker 3
Thank you, Rick, and thank all of you for joining us today. As Rick said, this quarter was marked by record sales, but still lower than we had anticipated. On our first quarter conference call, I indicated that we're seeing the normal increase in sales as we moved into the second quarter. While April was a strong month, we saw a marked drop off in May sales that we had not expected. Although June improved, it was not enough to offset the weaker May with the disappointing overall results.
There were a few unusual events in the second quarter, including a major product issue with radio sold by one of our alliance partners. Ultimately, we do not expect to incur any costs associated with this product callback since our alliance partner is providing full warranty support. However, due to this product issue, we were unable to obtain new product from the vendor during the quarter and are still having significant delays in obtaining radios today. Further, some of our customers are focusing their efforts on replacing our alliance partners' product and not on new meter installation, which sales. Although this issue may continue to delay some sales, we do not expect to lose any sales in the long term.
During the second quarter, we also incurred additional cost in connection with our sales and marketing efforts in California. Taking advantage of the recent focus on water issues in that state, we decided to expand our marketing efforts there, particularly in connection with the AWWA Conference in Anaheim in June. We believe that several of our new products, including the Orion Radios and the Beacon Advanced Featuring Analytics software can help the California municipalities achieve the mandated water conservation goals established by that state. These additional sales and marketing investments have already generated new leads and opportunities in California. On the positive side, sales of our E Series meters increased 70% in the second quarter of this year compared to the second quarter of last year.
Sales of our newest meter reading technology product, the Beacon system, doubled sequentially from the first quarter to the second quarter of this year. We introduced Beacon a little over a year ago and as many of you know, this product is unique because it's a managed system that includes cellular endpoints making it both easy to install and cost effective. And looking at the balance of the year, our customers, distributors and sales team are all indicating they expect a strong 2015. Although the weakness in the oil and gas sector is expected to continue to impact us, we expect that our other markets will improve. Construction activities expect to pick up lower copper costs.
Prices should continue to help us and we expect our vendor issue to be resolved. Overall, our new products are gaining market share and we expect to continue to benefit from them as we move forward. In summary, while it's been a disappointing quarter for our company, we're still confident in the basic drivers of our business and we remain optimistic about the balance of the year. With that, we'll open the call
Speaker 0
And our first question comes from the line of Richard Easton with Robert W. Baird. Please proceed.
Speaker 4
Good morning, Rich and Rick. Rich, could you just speak a little bit to the gross margin? I know the sales mix here had an impact. But again, just trying to do the math off of National Meter's contribution. It looks like the gross margin on the core business was somewhere shy of 35%.
And I'm just curious, it seems to me we should despite the volume issue here, we should have a little better gross margin. I mean what were the bigger impacts there?
Speaker 3
Well, I think there were a few things. Obviously, when you say we should have a better gross margin, you're referring to the fact National Meter would be a plus and so would copper compared to a year ago. And but there were some negatives in there too. Probably the biggest one is the mix of industrial versus municipal utility products. Our industrial products, our flow instrumentation products carry a much higher margin overall than the municipal utility products.
And so when industrial products go down and the utility products go up that has a big impact on it.
Speaker 4
Is there do you have any export exposure pricing or margin exposure there? Exports out of The U. S. Do you have any exposure there from a pricing margin issue?
Speaker 3
What do you mean by that? I guess I'm not sure what you mean.
Speaker 4
Companies that have been exporting out of The U. S. To Europe with the strength of the dollar.
Speaker 3
I see.
Speaker 4
They've had some pricing issues, Right. Margin
Speaker 3
You're talking about pricing issues, right? When you were talking about just margin, I was confused. Yes, there's no question that the products made in The United States that we are selling in Europe and other places around the world have become more expensive and we've had the lower price to remain competitive. That has resulted in some margin issues. So as Rick said, we also had the problem that we're not getting the margins on the flow instrumentation product line that we were getting a year ago.
And since half of those are really sold outside of North America and sold in other currencies that's a big part of it Rick.
Speaker 4
Yeah. And is the issues with Itron on the warranty side, do those is that revenue impacting Badger's core business and National Meter?
Speaker 3
Well, I never said Itron, but since you did, I'll accept You didn't have to be hercule Poirot to figure that one out. The as many of let me start by giving some background. As many of you know, Itron filed an eight ks. They had to do a they've had some problems with their radios and they announced in the eight ks that they were going to be incurring some warranty expense in connection with that. Although they were careful to say it was not a recall, they they are indeed calling back a lot of that product.
So I'll call it a callback. And that is having an impact on both us and National Meter, you're right, in that Itron radios directly to customers, we have three ways that we're impacted. I'm not doing this eloquently. I apologize. We have three ways that we're impacted.
One is that we buy radios from iTron and put them with our meters and sell them to the customers. We also sell radios directly to iTron or we sell meters directly to Itron. They put them with their radios and sell them to their customers. And then the third way is we have many customers who buy the meters from us and the radios directly from Itron. This callback of product is impacting us on all three levels.
It's reducing the number of meters we sell that will eventually be married up with Icon radios and it's reducing the number of Icon radios that we can sell directly with our meter, mainly because Itron has switched over to production of replacement product and we can't get our hands on new products. So that is having an impact on our customers who purchases or in some case ending. As one example, and I won't name the customer, but we had one customer that for the last two years has bought about $1,500,000 of meters from us every quarter. They bought nothing in the second quarter. And they did that because they were so busy replacing the Itron radios.
So it is now eventually they'll buy those they'll catch up and buy those meters from us, but it's going to have it's having a short term impact on our sales.
Speaker 4
Yes. And this National Meters sales number in the quarter this $3,800,000 obviously that would be impacted probably by $1,000,000 or 2,000,000 from that issue as well, right? Because I understand it contributed, but certainly with the gross margin that that comes in at that's $1,000,000 probably light of gross margin contribution relative to plan as well, right?
Speaker 1
Let's just be clear, Rick. We're talking $3,800,000 of incremental revenue. One of the ironies here one of the customers that needs replacement is Wichita where National Meter is actually doing the replacement of the Icon Radius. So it actually is not necessarily hurting us as much at National Meter as I think because we're actually picking up some incremental business by actually
Speaker 4
picking Okay. Some of that Well, is it let me ask you this way. Is the National Meter EBIT contribution around $500,000 in the quarter?
Speaker 3
A little bit more, Rick.
Speaker 4
A little more. Okay. All
Speaker 3
right. Thank you. And
Speaker 0
our next question comes from the line of Ryan Connors with Boenning and Scattergood. Please proceed.
Speaker 5
Great. Thank you for your time.
Speaker 6
A couple of questions.
Speaker 5
First on the you mentioned kind of the new product traction. And I wonder if you could just give us any additional color you can on the BEACON product in particular Rich and maybe any kind of quantification you might be able to offer on the traction there? Any larger rollouts or however you can quantify for us if at all?
Speaker 3
We have had one major city that is announced and that city is going to be a total of about 35,000 units, okay?
Speaker 5
Right. That was normal. Anything incremental from that?
Speaker 3
Right. We have not yet had any new city. But I will say that just during the quarter, we sold over 35,000 units. So the sales are pretty significant and we're probably on track at the rate this is growing of doing close to a couple of 100,000 units this year, which would be very significant with that product.
Speaker 5
Yes, that's good. Thank you for that.
Speaker 3
Well, especially Ryan considering that that product was first introduced in the middle of last year. I mean that's a relatively fast growth rate for a new product in our industry. Normally, does not grow that fast. Absolutely. And I think you had second question.
And since Rick, I actually plagiarized one of your comments, I'll let you ask the second question.
Speaker 5
Yes. So my other question was bigger picture in nature. So you have the National acquisition kind of in the door. I wonder if you could just put the your that roll up strategy of your distribution of your distributor channel in context with what's happening more broadly. I know that Ferguson and others are also kind of attempting some type of consolidation of distributors of competitors.
And kind of give us the broader landscape of what's happening with the distributor channel and the industry as a whole and how your strategy there fits into that?
Speaker 3
Yeah. There are some of what I call the big box stores, which would be like a Ferguson and HD Supply places like that that are looking at getting into the water metering distribution business. And so they're aggressively going after some of the distributors out there. And recently, I believe Ferguson bought one of Neptune's California distributors. So we're seeing them go out there and becoming pretty aggressive on that.
We are our strategy has been to work with sole distributors who have exclusive territories and are exclusively our distributors. About half of our utility sales go through that distribution network. We bought National Meter, which represented about 20% of our distributor activity. So it was clearly our largest distributor. And we are in negotiations with other distributors that we will be looking at also buying and putting under the national meter umbrella.
So we're still moving forward on that. Our overall strategy is frankly driven by the technology chain. As water metering and metering systems move into the cellular system and a much more software based system, we're finding that we need more boots on the street. We need more trainers, installers, technical support. We need to get close to our customers.
And by owning our own distribution network, we believe we can achieve that. So we think this is a good strategy and it will serve us well. Now I'm not saying that my competitors are making a mistake by getting in bed with these big box stores, but I from our point of view, I'm just not sure how I could serve my customers through that kind of relationship.
Speaker 5
Okay. And just to be clear that have any of these big box stores to your knowledge made any overtures to any of your distributors in their efforts to expand?
Speaker 3
Yes, they have unsuccessfully.
Speaker 5
Okay. Interesting. Okay. Thanks for your time.
Speaker 1
And
Speaker 0
our next question comes from the line of Chip Moore from Canaccord. Please proceed.
Speaker 7
Hey, Rich and Rick. Thanks. Good morning, Chip. Good Good morning. On the Itron radio modules impact, I think you talked about one customer anecdotally at least being about 1,000,000 point dollars impact.
Can you maybe try to quantify total impact
Speaker 3
tried to do that Chip and it became almost impossible to do, because what you're asking yourself is how much more would each customer have bought if they hadn't been distracted by replacing these radios. So I really wouldn't want to try and put a number on it because I think I'd really be guessing.
Speaker 7
Yes. That's fair. And then on the increased marketing spend on the West Coast, may you quantify that? And then early returns out of AWA what you've seen?
Speaker 3
Sure. And it was I hope you said increased marketing spend. It was increased marketing spend.
Speaker 1
Yes, yes.
Speaker 3
It sounded like you said decreased. Yes. I mean, we when we saw what was happening in California and knowing what a good fit Orion Cellular and Beacon is for solving those problems out there, we decided to make a major investment during the quarter. It's not an investment that will recur. So it isn't like we hired a bunch of people and they're all sitting out there.
We actually redirected a lot of our salespeople into that territory. And most significantly, we upped our spend pretty significantly at the American Water Works Association convention. We put a full court press on getting as many California utilities to attend that convention as we could and we were very successful in that. So there was some great exposure of our products to those utilities because they're all scrambling to figure out how to reduce consumption. I would say we probably spent several $100,000 more than we normally would have during the quarter out in that territory.
Speaker 7
Okay. That's helpful. And then just lastly, you talked about sort of period of underwhelming growth albeit with June bouncing back a bit. What have you seen in July so far?
Speaker 3
Actually, we're seeing a fairly normal July. I think we're still seeing some impact from the Itron radio issues because there are long lead times on getting those radios. So we're having trouble being able to ship to those ship meters and radios to those customers. But other than that, I would say we're seeing things come back to normal. Now I say that hesitantly because that's exactly what I said three months ago and I was proven wrong.
You have to remember that at this point halfway through a month, I've really got about a thirty day outlook. So I can see about a little over one month of the quarter and things can change dramatically. They can improve or they could deteriorate. But based on what I see now, I'm seeing a pretty good quarter.
Speaker 7
Great. Thanks for the I'll
Speaker 3
correct that. Rick Johnson just cringed when I said that. I'll correct that. I'm seeing a pretty good month. I have no idea about the quarter is what I meant to say.
Speaker 7
Yes. Thanks.
Speaker 1
Thanks, Chip.
Speaker 0
And our next question comes from the line of Richard Verdi from Ladenburg. Please proceed.
Speaker 2
Hi. Good morning, Rich and Rick, and thanks for taking my call. The last caller's inquiries kind of cleared up a lot of my questions here. So I just have a couple of higher level things. Looking at the California theme, could you try to give us some color on what you guys feel the market opportunity is there for Badger Meter in that state?
And how quickly that favorable impact could be realized in the P and L for you guys?
Speaker 3
Yes. And it's hard to give you it's hard to quantify exactly. I mean, you can do the math. You know what the population for California represents. But one interesting fact there is that while Badger has about a 30% market share for meters in The United States, we believe our market share in California is substantially less.
And it all goes back to maybe a decade ago when California was the first state to require unleaded brass and we were all scrambling to provide that product. So Badger did not have a strong market share coming in, in California. That actually gives us an even greater growth potential. So in that case, it probably is good to not be the market leader out there. So we've actually opened an office and another warehouse in Southern California.
We had an office and warehouse in Northern California. So we've recently opened that. And we really think that the combination of 250,000 homes in California that buy their water from a municipal water department, but don't have a meter. So there's unmetered homes and that represents a big opportunity. Along with the fact that the water utilities that are metered need to find a way to achieve about a 25% reduction in residential usage.
They're going to be looking at ways to get their people to start using less and that's where the Beacon system comes in. So the combination of those two is very significant we think represents a good opportunity for us.
Speaker 2
Excellent. Great color. And one other quick question. On the oil and gas business, we spoke
Speaker 5
a little bit about
Speaker 2
today this market added pressure to the flow division. Clearly that's been weak given the drop in oil prices. But with rig count flattening here and most of the energy companies expecting somewhat of a U shaped recovery starting in the second half carrying let's call it in the mid-twenty sixteen, do you feel that could be the outlook for Badger's business in this space? Or do you see maybe a recovery taking longer? Just some color on that unit would be helpful.
Speaker 3
Frankly, I think our recovery should follow the pattern of the other equipment makers in that industry. I don't see any reason why we would lag or we would lead. Our downturn has followed that pattern and I don't see any reason why it would be different.
Speaker 2
Okay. Great. Thanks guys. I appreciate it.
Speaker 0
And our next question comes from the line of Hussain Dussain with Border Access. Please proceed.
Speaker 8
Hi, good morning guys.
Speaker 1
Good morning.
Speaker 8
I have two questions. The first one is the oil and gas. If I'm not mistaken from your prior calls, your oil and gas exposure on a revenue basis is about 5% of sales, correct?
Speaker 1
Somewhere in that range, correct.
Speaker 8
So that would be like an annual revenue run rate of something like $18,000,000 or so. So my question is, how much decline are you seeing in that business if your revenue run rate say is around 18,000,020 million dollars which is 5% of your total sales? I would love to know is what is the actual decline you're seeing in that business?
Speaker 1
I'd say in the first six months and I don't know the exact number of the quarter, but we're probably down 1,000,000 to $2,000,000 in that particular product line.
Speaker 8
Okay. So about 10% decline in sales in that business something like that. My second go ahead sorry. No go ahead. I'm sorry.
And the margins for those meters are like substantially higher than your typical municipal water gross margin?
Speaker 3
Yes.
Speaker 8
Okay. And the second question I had is, I noticed your if I exclude the sales contribution from National Meter, your sales were essentially flat to slightly down year over year, but your inventory balance is up like $10,000,000 So can you explain what led to your inventory balance up so much year over year when your sales excluding National Meter contribution were essentially flat to slightly down?
Speaker 1
Are you talking June 30 to June 30?
Speaker 8
Yes. 06/30/2014 versus
Speaker 1
I don't know. But all I know is the inventory is a little higher because we bought inventory anticipating higher sales levels, okay? We didn't get that. Now they're higher from the way report, we were required to report as we also compare it against year end. At year end, we did a buildup in connection with a product move that was a one time thing for moving some production lines in Mexico.
So it's about the same as it was twelvethirty one.
Speaker 3
But there are a few other factors there that let me add. I mean a year ago when we bought National Meter, National Meter is a stocking distributor. They were not just an order taker. They were a stocking distributor. So buying them, we also bought all their inventory.
So that increased our inventory levels.
Speaker 1
We bought essentially
Speaker 3
bought back our own inventory, so we increased there. Also in a few of the industrial areas, have upped our inventory levels in order to lower our lead times to see that a
Speaker 8
little bit better. Okay. And the final question I have in the oil and gas. Given the weakness you're seeing and you and others in whoever operates supplying equipment to the oil and gas industry, what kind of pricing competition you're seeing on those meters? Because I would assume there's some price competition creeping up for the meters supply to the oil and gas industry.
Speaker 1
Basically, for what we're seeing is prices are essentially flat. If they lean anywhere it's just slightly down right now. It's primarily volume that's impacting the sales.
Speaker 3
And Hassan, I want to correct one thing. You estimated that our oil and gas business was about $18,000,000 It's really closer to about 12,000,000 or $13,000,000 So that was a little high.
Speaker 8
Okay. And just to clarify, you are seeing it down by about $2,000,000 right? Right. Okay. 2,000,000.
So that's okay on a $2,000,000 in the first six months. Would be an annual rate of $4,000,000 right, if Correct. I
Speaker 3
Correct. On about 12,000,000 So we're down about 25%, 30%.
Speaker 8
Perfect. That's exactly what I was trying to understand. Thank you, gentlemen, for the clarification.
Speaker 0
And our next question comes from the line of Bob Chernow from RBC. Please proceed.
Speaker 6
Yes. I've got three questions. One, can you divide up your pipeline business between what we would call transportation for example pipelines for Kinder Morgan and that would be demand and the supply basically for drilling. How much of it comes from pipeline business? How much from drilling business?
Speaker 3
I'd love to be able to Bob that's a tough one. Perhaps one of our sales guys could sit down and do it as an estimate. The problem is we sell to reps and reps then sell the meters on and we don't always get good detail as to exactly where they're used. But I do know the bulk of the meters are used in refineries and also in actual drilling equipment. This is we're talking mostly about our Blanchett meter line and that's where they're used.
But it's really hard for me to say what percentage is used on drilling versus refining. I don't think there's that much used on pipeline
Speaker 6
Two other questions. One, your distributor that you purchased, are they then excluding other lines that they might sell in your own product line? Are they have they gone to an exclusive view? Or are they still using selling other lines of products? And then last my last question is, can you give us a time horizon that you're comfortable with to settle the Itron difficulty?
Speaker 1
I'll let Rich answer the second one, but I'll answer your first one. In terms of National Meter, we're some of our distributors National Meter included at the time sell our products exclusively, all right? The only other thing they're allowed to sell and that's why we talk about the incremental revenue is anything that's ancillary. They may sell meter boxes, pit lids. In the case of National Meter, they do some testing for utility customers.
They also do some installation work and that's what we refer to as the incremental revenue.
Speaker 5
Okay.
Speaker 1
So they're really not none of our distributors are selling any of our competitors' products. They are exclusive to our products.
Speaker 3
And regarding the Itron issue, Itron still has us on extended shipment terms. In other words, the lead times on their products are much longer than what they normally are. And they're telling us and I mean, this is a good question you could ask IFRONT, but they're telling us that they feel by the end of the quarter they'll be back down to normal lead times on their equipment.
Speaker 5
Thank you.
Speaker 0
And our next question comes from the line of Brian Raffin with Morgan Stanley and Company. Please proceed.
Speaker 9
Good morning, guys.
Speaker 1
Hi, Brian.
Speaker 9
Me a sense Rich you were talking a little bit about your kind of vertical integration with some of your distributors. When you look at those transactions, obviously, you've known them a lot if they're exclusive. Is there an exodus or retirement or something some change that creates a tripwire that puts those deals through? Or is that not really an issue?
Speaker 3
Yes, Brian. No, I think you hit a good key here. We have about 30 distributors and we have no intention of going and putting a gun to anyone's head and saying sell our business to us sell your business to us. What we really have is 30 distributors, many of whom have been working with Badger for a long time. They built their business and their success by partnering with us and they've helped us a great deal in that time.
So we feel a great deal of loyalty and respect for what they've accomplished. But many of them are also getting to an age point where they're saying, Hey, what is our out here? Is there a next step? And Badger, if you don't want us to sell to a big box store, what are you going to do? And so that's really where we're looking and we're having conversations with these guys.
There are other firms that have said to us, I could really service my territory better if I had more resources and bringing Badger in either as a buyer or as a partner could help them service the territory and grow even faster. So we're looking at all of those opportunities and negotiating with those distributors.
Speaker 1
To be clear, we do have an upper hand here because if the distributor processes and says, I'd like to sell to a big box store, we have to reassign the franchise price. We control that particular trigger and that would be that's how we control that from not happening. It's built into
Speaker 3
our Yes.
Speaker 9
Okay. Got you. You jumped my second question a little bit, Rich. When you make those integrations, how much capital or resources? You talked about more boots on the ground, Badger being the corporate umbrella.
How important is that? And does that make an impact on the effectiveness of those distributors?
Speaker 3
Well, you're yes. And I think a good example is we bought National Meter last October. Last month, they opened a new office and warehouse in Southern California. That was something they never had before. We were able to invest the money and get that done.
There are other areas necessarily physical capital. It's just hiring more people, having the resources to actually do some missionary work in some areas that they haven't been able to do. So it is very important and it's something that we're talking to all the distributors about.
Speaker 9
Yes. Okay. You mentioned a little bit about you talked certainly about the demands with Beacon and obviously the water conservation and the crisis in California. Rich, how rapid is that technology with Beacon? And how many next generation how fast if you get a huge ramp up, how fast is the next generation cycle?
Or is that technology fairly static for the next couple of years?
Speaker 3
Oh, no. We obviously still have our Silicon Valley operation. We've expanded it. We are enhancing the product. We're not changing it.
The product that's out there is the product, but we're able to offer more and more enhancements as we go forward. We'll be offering better analytical tools for the homeowner to understand what they're using. One great example is that we'll be able to add a tool on the mobile device that will not only show you your water usage, but will show you the average water usage of your neighbors who maybe have similar sized houses and pools and things like that. You answer a few profile questions and then it gives you this comparison, allowing people to see are they actually doing a good job conserving or not. Those are really powerful tools and those are additional enhancements that will be coming out.
So I'm not we're not saying that we're going to be, wholesaling replacing it because the product as it is, is a great product and it's gaining a lot of traction, but we will be rolling out enhancements. And since the software is all cloud based, rolling out those enhancements becomes a very easy thing to do.
Speaker 9
Okay. And then finally on the Beacon kind of the same thing you talked about the American Water Works. Is once you get a discovery by the water utility does that product pretty much sell itself? Or are you getting a lot of other entrants into the business? Or what's kind of you guys always kind of chuckle about the slowness of water utilities to make decisions
I'm just wondering since you talked about a fairly fast run rate ramp up, how that technology is being adopted?
Speaker 3
Yes. Brian, I wish I could say that product sold itself, but in our industry nothing sells itself. Okay. Which explains why we have to have these distributors and these sales force out there. It is these water meter systems are like life insurance.
They're not a product that's bought. They're a product that's sold.
Speaker 4
Okay. Thanks guys. Appreciate it.
Speaker 0
And our next question comes from the line of Kevin Bennett from Stern AG Capital. Please proceed.
Speaker 10
Good morning, guys. How are you all doing?
Speaker 3
Good morning.
Speaker 10
Following up on Brian's question sticking with Beacon. Rich, if you look back at I guess past new technology offerings, I mean, does the typical product ramp progress?
Speaker 3
Yeah. And I would say, if you look back over the last ten years when we introduced Galaxy when Trace then Galaxy then Orion the one way endpoint and eventually the two way. In no case did we see the year after introduction hitting anywhere near 200,000 units. I would say you would introduce it in a year and let's say you introduced it the '1, the following year you might see 50,000 to 100,000 units. So I would say this thing is ramping up probably about twice as fast as we have seen products in the past.
Now a major reason for this, I would like to say it's all entirely due to the fact that it's a fantastic product. But there's also a very significant factor in that. This is the easiest product to transition to as compared to any of our past products. For example, if you buy a fixed network product from Badger or any of our competitors, you put a device up on a pole and then you start changing out the houses that are within the immediate radius of that device. When you have a cellular product, you can put it on any house anywhere in your service territory and location doesn't matter.
So you don't have to start changing it out neighborhood by neighborhood. You can kind of change it out in a shotgun pattern as you're visiting those houses under a normal replacement program. That's having a that ease of change out is extremely important. And I think that's one of the things that's driving this faster change out, the lack of infrastructure.
Speaker 10
That makes a lot of sense and certainly nice to see it ramping that fast. Back to the Itron issues, do you think this could be an opportunity for you guys, I guess to take some additional market share in radios? I mean, seeing you people replace the bad Itron radios with badger meter radios? Or is there a reason why people wouldn't do that?
Speaker 3
It's a good point. And I we have not seen that, okay? First off, let me say that Itron is doing Itron what you would expect of Itron, they are standing behind their customers. And I'm including Badger Meter as one of their customers. They are standing behind it behind the product.
They are replacing the product. They're pulling it out of the field before it fails and they recognize that they have an issue. That's something that Badger would do. That's something that a good solid company like Icon would also do. So I think as long as they continue to stand behind the product as they have in the past, I don't think you're going to see a lot of customers wholesale switching over.
And that's fine. I mean, I would prefer to sell Orion, but we have a great relationship selling Itron products also and I hope to be doing that for a
Speaker 8
long time to come.
Speaker 10
Sure. And then last question on the flow instrumentation business. Can you talk about some of the other I guess industries you sell into there ex oil and gas? A lot of other companies are talking about a slowdown in just kind of your traditional industrial spending. Are you seeing that?
Or is the rest of that No. Business actually holding up pretty
Speaker 3
We're seeing a little bit of a slowdown. We have seen a little bit of a slowdown over the past year in all those industries. Remember that we sell into food and beverage, chemical, petrochemical, wastewater, HVAC systems. Our meters are in a lot of products that you don't even realize they're When somebody pours you a cup of coffee, very often that coffee is being measured by a Badger meter. So generally, as industry has a slow time with this slow growth economy, we're also feeling that.
Speaker 10
Got it. Okay. That's helpful. Thank you.
Speaker 0
And we do have a follow-up question from Mr. Richard Ausenan with Robert W. Baird. Please proceed.
Speaker 4
Yes. Thank you. Is there any pricing pressure at all in the muni meter side with copper prices down here and volumes a little bit on the soft side? Are you able to hold prices in residential meters?
Speaker 3
We're not Rick, we're not seeing pricing pressure at this point. Okay. We are able to hold prices. You're right. I think if with copper prices being down, you might have expected some pressure.
But frankly copper has been so volatile over the last few years that nobody is willing to say, all right, I'll give you a three year contract based on these lower copper prices. We're all a little gun shy having been burned in the past. So we're not seeing our competitors flashing prices out there. Obviously our competitors know that if they were to drop prices significantly, we would also drop prices significantly and then we're all stuck in a Nash equilibrium.
Speaker 6
Sure.
Speaker 4
And the lower volumes of Itron as they're kind of regulating their volumes into the marketplace here. But the lower volume of resale product is actually a positive for your gross margin, is it not?
Speaker 3
Well, yes. You're right to the extent that the mix of more Orion and less Itron is favorable to our gross margin.
Speaker 1
But I'm not selling meters.
Speaker 3
But the loss of the meter valve that went with those radios is a big negative to our gross margin.
Speaker 4
Yes. But I mean but part of the switch out and part of this warranty service work, I mean they're not switching out every meter, right? Mean these are modular.
Speaker 3
No they aren't. But remember Rick that a lot of our customers are not installing new meters.
Speaker 4
Yes, new meters. Yes.
Speaker 3
Because they're busy out there switching out the radios.
Speaker 4
Yes, yes.
Speaker 5
Fair
Speaker 3
enough. And I had the example of the customer who for two years has bought 1,500,000 meters not radios meters from us every year. They buy the radios every quarter, I'm sorry. They buy the radios directly from Itron. They merge the two together and they're not buying from us this quarter because they're busy replacing the radios.
Speaker 4
Yes. Yes. Okay. And then just one question, which is as Beacon has gained some traction given that it's a cloud based access to the data and it's a cellular network that it runs on, are you seeing any new software competition come in at that entry point kind of the cellular based entry point?
Speaker 3
Yes. And before I answer that Rick, let me go back to one thing because I just got a note telling me I misspoke. When I was talking about that customer for the last two years that bought $1,500,000 from us each quarter, I was talking dollars not units. They told me I said meters by mistake.
Speaker 4
You did say meters and dollars makes more sense.
Speaker 3
It's dollars, okay. 1,500,000.0 meters would be a heck of a lot of meters. No. It's dollars. So I want to correct that for the record.
But let's go back to your question about the software. And yes, I think the answer is yes that we are seeing competitors scramble to offer analytic software that's comparable to what we offer for the utility. We're not seeing a lot of competitors yet that are able to offer analytical software for the consumer, for the homeowner to use. And that's where we have a very strong edge. So I think you're going to continue to see competition in the utility software side, but it's going to take them a while to come up to offering that information for the homeowner.
Speaker 4
I see. For their access. Okay.
Speaker 3
Correct.
Speaker 7
All right.
Speaker 4
And then just last question on the SMEAGA expenses as we go forward here. Off the second quarter run rate, do we have some any controls in place here to kind of hold that at least flattish or?
Speaker 3
We're going to work really hard obviously in the second half to recoup some of what we lost in the first half on the bottom line. And doing that is going to be cost containment. Now we did not want to fall back in the second quarter on our California initiative. So I'd let that go forward. But there are other things that we are doing to hold the line on cost in the second quarter in the second half.
Speaker 4
Second half. Okay. Very good. Thank you again.
Speaker 3
That
Speaker 0
concludes today's question and answer session. I would now like to turn the call over to Mr. Rich Mieson for closing remarks.
Speaker 3
Well, I want to thank everybody for joining us. We obviously had a difficult quarter. Everybody here recognizes that it has been a difficult quarter and that we have an opportunity in the second half hopefully to recover what we can through cost control, through expanding sales. We're working every possible angle. We still are very confident in the long term potential for this company and we're trying to maintain our focus of the long term and not react to short term volatility in our business.
Thank you.
Speaker 0
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. So you all have a great