Badger Meter - Earnings Call - Q3 2015
October 20, 2015
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the Quarter Three twenty fifteen Badger Meter Earnings Conference Call. My name is Tracy, and I'll be your operator for today. At this time, all participants are in listen only mode. We will conduct a question and answer session towards the end of this conference. As a reminder, this call is being recorded for replay purposes.
And now I'd like to turn the call over to Rick Johnson, Senior Vice President, Finance and Chief Financial Officer. Please proceed. I do apologize, ladies and gentlemen. We'll be back with you shortly. I'll reinsert the music until we start.
Thank you. Apologies for that technical error, and gentlemen. So again, welcome to the Quarter Three twenty fifteen Badger Meter Earnings Conference Call. My name is Tracy, and I'm your operator for today. At this time, all participants are in listen only mode.
As a reminder, this call is being recorded for replay purposes. And now I'd like to turn the call over to Rick Johnson, Senior Vice President, Financial and Chief Financial Officer. Please proceed, sir.
Speaker 1
Thank you very much, Tracy. Good morning, everyone. Welcome to Badger Meter's third quarter twenty fifteen 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 third quarter results. Yesterday after the market closed, we released our third quarter twenty fifteen results. Much of what I'm going to share this morning is very similar to what we said on our second quarter conference call. We continue to experience what I termed last quarter as underwhelming growth.
Once again, sales were an all time record for any quarter, but they were not at the level we anticipated. Because we built our cost structure anticipating higher sales, we also did not perform as well on the bottom line as we anticipated. We'll get into those details in a moment. Our takeaway for you today is that we are still confident that our long term prospects and our position within the industry is solid. So let's talk about some of the details.
Overall sales for the 2015 increased $3,100,000 or 3.2% to $99,400,000 compared to $96,300,000 during the same period last year. The increase is the net result of higher sales in municipal water products offset by lower sales of flow instrumentation and specialty products. Sales of municipal water meters and related equipment and technologies represented 76.9% of sales in the 2015 compared to 72% in the third quarter last year. These sales sales increased $7,100,000 or 10.2% to $76,400,000 from $69,300,000 last year. The increase was due primarily to incremental revenue associated with the purchase of National Meter and Automation.
You recall that we purchased National Meter on 10/01/2014. The remainder of the increase in municipal water was due to higher sales of residential and commercial products, particularly in Mexico and The Middle East. We spoke last quarter about an alliance partner's product issues, which are causing a delay in our sales as our partner addressed these concerns. At that time, we anticipated those sales would be resolved early in the third quarter. Unfortunately, the delays in product availability continued through most of the quarter.
We estimate that these issues have delayed sales totaling $6,300,000 year to date with $4,500,000 of that in this most recent third quarter. The good news is that we believe these issues have been resolved and any delayed sales will be caught up over the next several quarters. Flow instrumentation products represented 20.4% of sales in the most recent quarter compared to 24.9% in the third quarter last year. These sales decreased $3,700,000 or 15.4% to $20,300,000 from $24,000,000 in the same period last year. As we have seen throughout most of this year, the decrease was due to the effect of the strengthening U.
S. Dollar on sales of products sold in euros. The third quarter impact of this was approximately $1,400,000 We also continue to have lower sales to our oil and gas customers due to the weak economic conditions in that sector of the market. Finally, the general softness in the overall economy has impacted sales of several other flow instrumentation product lines. Specialty application products represented just 2.7% of sales in the most recent quarter compared to 3.1% last year.
These sales decreased $300,000 or 10% to $2,700,000 from $3,000,000 last year. The two primary specialty product lines, gas radios and concrete vibrators both had sales declines. Gross profit as a percent of sales was 36.3% compared to 37.9% in the third quarter last year. The decrease is due to product mix with increased sales of municipal water versus flow instrumentation products, which have higher margins. This was offset somewhat by the incremental gross profit related to National Meter, lower metal cost and favorable net exchange rates sourced from Europe.
Also in this quarter, we took a one time charge of $850,000 to write down gas radio inventory as sales in recent years have not met anticipated demand. Our selling, engineering and administration expenses in the third quarter increased $2,000,000 or 9.8% to $22,500,000 from $20,500,000 last year. The majority of this is associated with National Meter. We also had higher healthcare costs and software licensing fees compared to last year. All of these items were offset somewhat by significantly lower employee incentive compensation costs as we adjusted accruals to reflect our recent performance.
The provision for income taxes as a percent of earnings before taxes for the third quarter was 37.5 compared to 34.9% for the same quarter of last year. If you recall during the second quarter, we had a discrete credit of $228,000 that was reflected as reduced tax expense. In this quarter, we had a discrete charge of approximately $200,000 estimates to the tax returns actually filed. Without the discrete items, we are currently estimating an annual effective tax rate of approximately 35.7%. As a reminder, the rate will always vary because it depends on the amount of estimated annual net income.
With the lower than anticipated sales, the lower margins and higher selling expenses, we reported lower earnings than last year. Earnings for the third quarter were $8,300,000 or $0.58 per diluted share compared to $10,200,000 or $0.71 per diluted share in the 2014. We continue to generate cash from operations. In the 2015, we generated $27,700,000 compared to $20,200,000 last year. Capital expenditures for the first nine months of this year were $12,900,000 compared to $8,800,000 last year.
And finally, our debt as a percent of total capitalization is now less than 23%. With that little bit of 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
Thank you, Rick, and thank all of you for joining us today. As Rick said, this was a disappointing quarter for us. The continued weak dollar, the depressed oil and gas market and the delayed sales caused by the unavailability of radios from our alliance partner all contributed to weaker than expected revenues. However, there are two important points to consider. First, we believe that none of these factors have caused us to lose any market share.
Secondly, the product availability issues now appear to be behind us. We do not believe that we have lost any potential sales associated with these opportunities. As we are able to acquire product from our alliance partner, we expect to catch up on those sales over the next several quarters. Another positive during the quarter was the market acceptance of our new utility products. Unit sales of our E Series ultrasonic water meter increased 70% over the same quarter last year and 35% over the second quarter of this year.
Unit sales of the Orion cellular radio, which was first introduced last year, increased more than fourfold over the third quarter of last year and 18% over the second quarter of this year. Both of these products are performing well and allowing us to capture new accounts in the utility markets. As we complete the first full year of ownership of National Meter, we are pleased with the results. National Meter generates significant value for our shareholders while allowing us to efficiently reach more current and new customers in the Western States. And the recent acquisition of United Utilities, although much smaller than National Meter, permits us to do the same thing in The Eastern United States.
We intend to continue our strategy of making targeted acquisitions in our distribution channel in the coming years. We also continue to see strong opportunities for sales of our E Series water meters and radios in various Middle Eastern countries. Many of these countries have an installed base of older water metering systems and are looking to modernize their systems over the next few years. Currently, we are fulfilling contract in Kuwait, which contributed over $3,000,000 in sales just this quarter and we expect to ship over $8,000,000 for the full year. We have pilot projects running in other Middle Eastern countries that could result significant sales in 2016 and beyond.
We are also starting to see the California utilities move forward on their conservation programs, many of which will incorporate our Beacon advanced metering analytics system and the iOnWater app for the homeowners. I think there's one more important item to note here. While net income has decreased 13.6% over the first three quarters of this year compared to the same period last year, our EBITDA has decreased only 5%. This is due to increased depreciation and amortization as a result of our recent investments in acquisitions and software development. But while we continue to struggle with a lackluster U.
S. Economy, the higher dollar, the weak oil and gas industry and some short term supplier issues. We believe that the bigger picture remains strong for Badger Meter and we're well positioned to take advantage of these opportunities. With that, we'll take your questions.
Speaker 0
Thank And your first question comes from the line of Richard Eastman from Robert W. Baird. Please go ahead.
Speaker 3
Good morning. Rich, could you just kind of fill us in a little bit on National Meter, what their third party sales were in the quarter and the profit impact to you in the quarter?
Speaker 2
Their third party sales were about $5,000,000 for the third quarter.
Speaker 3
All right.
Speaker 2
And incremental. Incremental, that's over and above the sale of the BadgerMeter product.
Speaker 3
Yes. So it was $5,000,000 though. That's a good number. And then I noticed on the I noticed the inventories are up about $4,000,000 Is that basically just staging product for Ipatron shipments?
Speaker 2
Some of that is product that we made but couldn't ship because we didn't have the radios. So you're right on that. But some of it was also product that was produced because we were expecting a stronger quarter than what we had.
Speaker 3
Yes, fair enough. And when so when you speak to in the press release, you do talked about the performance wasn't as anticipated. It does strike me that if you would have shipped the call it 4,500,000.0 or $6,000,000 now of backlog on Itron, the residential utility side of the business would have looked pretty good, right? Mean, would have been up maybe six percent or more. So is your disappointment in the quarter related to the industrial flow business and also essentially the profit line?
Speaker 2
No. My disappointment is primarily related to the fact that at the start of the third quarter, when we did the second quarter conference call, I believe that the supply issues were eminently behind us and we would be able to ship that $6,000,000 in the or at least a piece of it. And I'm disappointed that I was wrong, that didn't come about. We knew there was going to be we knew oil and gas was still weaker. Oil and gas is not going to turn on a dime.
And we've done some digging into the oil and gas impact because I'm probably going to get that question, so I'll head it off a little bit. I've said in the past that oil and gas was less than 5% of our sales. Really, and gas has been about $1,000,000 last year was about $1,000,000 a month of sales, and we're doing about $05,000,000 So it's down about 50%. So we knew that was going be bad for the quarter. We knew the euro wasn't going to get much stronger during the quarter.
So the flow instrumentation side pretty much did what I expected. I was disappointed that we weren't able to catch up on the utility side, Rick.
Speaker 3
Okay. And we have the $6,000,000 and just for modeling purposes or thinking about it, half of that in each of the next two quarters just to capture that catch up.
Speaker 2
I think we used the word several for a reason. Well, my people didn't want me to give the impression that we were going to be able to catch up $6,000,000 in the fourth quarter because that's a lot. And obviously, we've said in the past that this is not like putting products on the shelf at Walmart. Plumbers have to go out and twist pipes to install our products. So that can only be done so fast.
So I'm hoping it gets caught up over the next couple of quarters, Rick. It could go another quarter beyond that, but I'm really hoping the next couple.
Speaker 3
And aside from the catch up on that situation, is really more of an event here, does the business feel like it's pretty lackluster, but does the business feel like a typical fourth quarter kind of seasonality that aside from the catch up that we'll have that typical seasonality to the overall business as we go from Q3 to Q4?
Speaker 2
I would think I would expect so with a little bit of a positive impact from the catch up.
Speaker 3
Yes, I got you. Okay. All right. Thank you.
Speaker 0
Thank you for your question. Your next question comes from the line of Chip Moore from Canaccord. Please proceed.
Speaker 4
Good morning. Thanks, folks. Good morning, Chip. Maybe dig down into Industrial a bit more with oil and gas down 50%, but it sounded like you've seen some slowdown maybe extend a bit beyond that to process markets. I guess what have you seen sort of September, October?
And where do you see that bottoming out?
Speaker 2
Well, we had a meeting on it yesterday and our flow instrumentation people really feel that we kind of hit a bottom in the June, July period and that we're starting to see things come back now. Not much in oil and gas, but I'm talking about more in the process side of the business.
Speaker 4
Yes. Okay. That's helpful. And then on United Utilities just impact purchase accounting, etcetera, how should we think about that in
Speaker 5
the next few quarters at least?
Speaker 1
Yes, this is Rick. Total purchase price is about $3,300,000 It's really it was $304,100,000 dollars of I suppose she's pointing at the I could read the actual words, but it was about $800,000 of receivables, 400,000 of inventory, probably only $100,000 of fixed assets and the rest of it and goodwill, which is yet to be allocated.
Speaker 4
Perfect. And then just along those lines, you talked about the next few years going after some more distributors. Do you have a pipeline of targets or anything near term there?
Speaker 2
Yes. We have a pipeline of targets and we're in conversations, but nothing will happen yet this year.
Speaker 4
Okay. And then just lastly on Middle East, I think you talked about some pilots. Can you maybe expand on the opportunity there?
Speaker 2
Yes. In most of those Middle East countries, they have the old Kent meters that you find pretty much around the world country that used to be part of the British Empire, Kent being the British meters. In The Middle East, what we're seeing is pretty much all of the countries wanting to modernize and pull out the Kent meters and replace them with something more modern. So what's happening is we are in there competing against several of the European water meter companies that are also selling into that area. And we've seen some really good response to, in particular, our metal e series meters.
One of our competitors has a solid state meter, but it's only offered in plastic. And in The Middle East, with the temperatures that things reach, they aren't too thrilled with that. So they're very interested in our stainless steel e series meters, for those applications. And like I said, we've we've got the project in Kuwait to use reference project. That's gone very well.
So we can take people over there and show them that. And I think 2016 and beyond, we're going to see some good projects coming out of there.
Speaker 4
Okay, fair enough. Thanks a lot, folks.
Speaker 0
Thank you for your question. Your next question comes from the line of Ryan Connors from Boenning and Scattergood. Please proceed.
Speaker 5
Great. Thanks so much. I wonder if you discuss the municipal market for us a little more. Rich, when you talked about municipal volumes being up, you cited Mexico and The Middle East, which would imply that even excluding the alliance partner issue, things don't look so great in The U. S.
So can you just kind of reset us on the tone and order patterns in the municipal customer base in The U. S?
Speaker 2
Yes. Ryan, we're hearing from the field salespeople that they're very positive and that they feel the tone is very good. The other thing that's happening is without naming cities, there are a lot of large cities that are now moving to RFP. That can be a year or two before it turns into actual shipments. But some of the you people have always asked me about the elephants that are out there.
And for the last few years, there really haven't been any elephants. But now some of the larger cities in America are starting to look at doing something pretty significant. So that's a real positive for our industry as a whole. I think the other thing that's happened a little bit is our introduction of cellular has slowed down the industry a bit because a lot of our customers and a lot of our non customers have delayed making decisions wanting to run pilots on cellular. The good thing about that is our cellular product is performing extremely well.
So we think there's going to be a pent up demand on that.
Speaker 5
Okay, interesting. My other question, Rich, had to do with copper and raw material costs. I mean, know you've always downplayed that as a major driver of margins. But it does seem like there used to be a little bit more of a discernible influence as copper went down, margins would benefit and vice versa. But now it seems like that's really gone out the window entirely as having really any correlation with what the margins are doing.
Can you talk about why what the drivers behind that change are and or if there's or if that's not the right way to look at it?
Speaker 2
Well, there's a few factors in here. And one is that as copper declined, so did our sales volumes and so we had capacity costs that spilled in there. So benefit from copper was offset by unabsorbed overhead, if you will, because of the capacity issues, excess capacity issues. So that's one factor. There are some other large factors in here.
One of them is that there is, in The United States, more of a movement to plastic, the polymer solutions. People are getting more comfortable with them. So we're just not buying as much or selling as much copper or brass product. And then of course, the other factor is that although copper has come down, nickel and zinc have gone up. And so to some extent, that balances things that causes things to move over.
Also, bear in mind that our E series, none of that is brass. That's all stainless steel. And stainless steel prices haven't come down like copper. So as our we move our customer base more over to stainless steel, we're not seeing the copper impact. So you're right.
Something that really impacted us almost, dollar for dollar. If copper moved so much, margins moved so much in the past, we're not seeing as big an impact.
Speaker 5
Well, that certainly would explain it. Thanks so much.
Speaker 0
Thank you, Ryan. Your next question comes from the line of Richard Verdi from Ladenburg. Please go ahead.
Speaker 6
Good morning, Rich and Rick, and thank you for taking my call. A lot of my questions have been answered here, but there's also been a lot of discussion on the metering side. So I was wondering, could you just talk a little bit about the accompanying software to the meters and the benefits, it's had for those implementing that technology?
Speaker 2
Software is a good question and an interesting topic here because for many years, one of the discerning differences between a water utility and an electric or gas utility, primarily between electric and water, was that electric demanded a much higher level of software for doing time of day billing and load management and all of that, whereas water didn't have the software demand. Many of our water customers primarily wanted to send a bill, and that was it. Badger Meter, we ourselves changed the game a little bit when we introduced Beacon, which was a much stronger software suite and also provided all kinds of information to the homeowner. So we've changed the game, and the other companies are following us, into a situation where software sales are becoming a little more significant and software investment is becoming more significant in all our companies be able to So support you're right, there's no question that software is becoming a bigger piece of what we do.
Speaker 6
Okay, and thank you for that. And how about the competitive landscape and alliances? You know, I ask this because I was at the NAWC Water Summit the week before last and not only was the implementation of smart meters more heavily discussed in previous sessions, but also the technology, especially associated around metering software just was a heavily focused theme. So I'd like to just hear a little bit about what that competitive landscape looks like, the alliances and maybe with the likes of smart utility systems or other companies like that company.
Speaker 2
Well, fortunately for us, our competitors still have issues and are in a little bit of a disarray on certain things. There are basically two companies out there that are really selling a solid state meter in North America, Badger and Sensus. Sensus only has the plastic. We offer both the plastic and the stainless steel. The other major competitor, the other major player in North America, Neptune for metering, has just now introduced a solid state meter about five years after Badger and Census introduced ours.
And they've only introduced it in one size, so they have to complete their line. So we've got to that extent, we've got a little bit of jump on things. On the radio side, I believe we got a very significant jump with the cellular. I don't think anybody has a cellular product that's even close to what we have, and I think we're gonna have that advantage for a while, and we're really gonna press it. And then on the software side, all the companies have software.
They've all got software that can do different things, but the key to the software is the meter and the radio that's providing the data. That's what's so very important. And because we're cellular based, we're able to information much more easily to the homeowner, and that gives us an advantage on the software side with iOnWater. So there are all those factors out there, but it's still a very competitive market for us. There's still obviously price pressure and everything else.
But we have a good relationship with Itron. So basically when a customer wants Itron radios, very often they want to put those on Badger meters. That's great for us. We've also developed a good relationship with Elster, which was a competitor. They no longer sell water meters in North America, but they have electric and gas.
And so we have an opportunity to work with them on projects. So we have a few opportunities out there that in the competitive environment that are unique for us.
Speaker 6
That's great color and a super update. Thank you, Raj. That's it for me.
Speaker 0
Thank you. Your next question comes from the line of Kevin Bennett from Stern Agui. Thank you.
Speaker 7
Thanks. Good morning, Rich and Rick.
Speaker 1
Good morning.
Speaker 7
I'm sorry if I missed this, but did you guys give a breakdown of your resi commercial municipal sales in terms of year over year, I guess, it would be a decline this quarter?
Speaker 1
No. I mean, what we've just said is most of the increase is associated with National Meter, and then any other remaining increase is really due to higher sales in The Middle East and in Mexico.
Speaker 2
You're talking on municipal only?
Speaker 1
On municipal only. But I mean, we didn't split residential I and don't have that in front of me. I mean, they were both up a little bit.
Speaker 2
I just want to clarify, Kevin, was your question about flow instrumentation versus utility? Or was it about No.
Speaker 7
Was usually, you guys break out that residential meters were up x percent in quarter and commercial meters were likewise, which is just in the municipal business.
Speaker 1
They were fairly consistently with each other. They pretty much Okay.
Speaker 7
Got it. And then secondly, Rick, in terms of the Itron issues we're having, I guess, what gives you confidence that we're finally past this? I mean, are you actually I think last quarter you talked about you weren't even getting product from them. Are you now getting product from them and so you feel good that we're gonna start to recoup these sales?
Speaker 2
Yes. Our manufacturing people tell me that we are getting the products where there were issues in the past with product that caused Itron to have to take some actions, we're now getting that product on a regular basis. So we no longer have that issue. There are still some products that have long lead times, but that's common with any supplier, unique products that maybe require a little more attention. But generally, where the issue was, that's been resolved.
We have the radios and we're now able to start shipping the meters But obviously, we can't just turn around and ship 6,000,000 worth of product. The customers have to be ready to take them, and they have installation crews that can only take so many meters a week to install, and so you have to ship at that pace.
Speaker 1
And in fact, what happened is some of them had installation crews ready, let's say, a month ago. They've since disbanded them. They got to get them back together. It's those timing issues that will really dictate when these sales get recognized.
Speaker 7
Sure. That makes sense. It's good to hear that we're actually moving now. That's kind
Speaker 4
of what I was looking for.
Speaker 7
And then last question on Beacon. I was wondering if you could provide an update. I think last quarter you did 35,000 units or something like that. And how that was selling and progressing? If I guess there were any big orders out in California this quarter?
Speaker 2
Well, Beacon is the software that's driving a lot of our products. What I was commenting on in the past was Orion Cellular. And on Orion Cellular and I'm getting some information here. On Orion Cellular, that's where I said we're up fourfold over last year. We we are on track to I I would say we've done we're on we're on track to do well over 100,000 units this year.
Speaker 7
Okay.
Speaker 2
Which was kind of our target. We were hoping to do 100,000. We're gonna blow past that and and do very well on Orion Cellular. So it's going faster than what we thought. And when you consider we sell about a million radios, that's about 10% for a product that was just introduced last year, that's pretty good.
Speaker 7
Got you. Okay. Thank you, guys.
Speaker 0
Thank you for your question. Your next question comes from Sreedhar Mumand from Grizzly Rock Capital. Please proceed.
Speaker 8
Yes. Thanks for taking my questions, guys. So I'm just a little curious on the revenue opportunity that was pushed forward. I mean, given that assuming that it is battery that controls these relationships, I mean, why not simply attach your radios to these meters if they are fairly comparable to Itron?
Speaker 2
Right. And that's a real good question. You have to understand that most customers want to have their entire system with one type of radio or one type of meter. You don't have very many customers that are interested in having a mixed system where they read half their city with one software and one reading device and the other half the city with the other. So generally, if a customer had 40% of the city done with Itron, it's very hard for us to convince them to suddenly start putting in Orion radios.
So that's not a real practical solution. It sounds like a nice idea. And certainly with Orion Cellular, it's a little bit easier because you don't have to worry about the collection device. You're using the public cell tower. But if they had already put up towers to read Itron radios, they are not interested in installing Orion radios underneath those towers and not being able to use the towers.
Speaker 1
In addition, some customers are a combination of electric, gas, and water. And obviously, you know, if they've already selected Itron on the electric side, they just naturally will fall soon. So they will wait to get the radios.
Speaker 6
Right.
Speaker 8
Got it. Okay, that's helpful. And then maybe addressing the inventory growth, I mean, what steps has management taken to rectify that issue? I mean, should we expect, I guess, discounting or perhaps even further write downs?
Speaker 2
No. We don't view the inventory as an issue for us. First off, understand we did write off some old gas inventory. And let me make a comment about that. We bought that inventory we built all that inventory well about two years ago when we were very much into a large gas product with Duke Energy.
At the time, we were told that Duke was going to continue the project, continue to move forward. We had a long lead time on the parts, so we ordered the parts, got them in, and then what happened was Duke made a large acquisition of another electric company, basically got involved in a lot of that, and stopped the project. It's possible they'll start the project again. We just got to the point where we said, let's write off that inventory. Write it down because it's just too much on our books for us to continue to carry.
So that was one issue. The bulk of our other inventory, we feel very good about. And our inventory turns about four times a year as a company, which isn't bad. And so generally, we'll find ourselves using it over the next quarter or two.
Speaker 1
And one of the things Rich commented is just the sheer number of offerings that we have to people. The fact that we offer mechanical meters in both in polymer and in metal and then we offer solid state in polymer and metal. There are some additional we have to carry inventory because of those lines, but it also gives the customers more choice. It is as the CFO, it is something I look at, but my carrying costs right now are relatively low. I mean, my all in borrowing cost is less than 1.5% right now.
So in our mind, it is worth carrying a little bit of that extra inventory for the potential sales that we're going get.
Speaker 2
And this is Rich again. One of the things that I always emphasize in talking to our shareholders is that Badger Meter has the largest product line offering both in meters and in radios, drive by fixed network and cellular, as in our industry as compared to our competitors. In order to offer all those product lines, we carry a little more inventory. However, we feel as the market transitions in the future from metal to polymer, from mechanical meters to solid state meters, from mobile to fixed network to cellular. As it transitions, we're going to be in the strongest position to serve that transitioning market.
Whereas most of our competitors have made a choice and only offer one or the other on those types of things, we offer them all. So to do that, yes, we have a little higher manufacturing costs. We have to have more capacity and production lines available and we have a little higher inventory carrying costs. But we think it's worth it to capture those sales opportunities.
Speaker 8
Got it. Got it. And then just one quick one. Inventory mix, is it predominantly more slated to radios or the actual meter itself?
Speaker 2
Definitely slated to radios. Radios are our highest dollar item in inventory.
Speaker 1
And longer lead times.
Speaker 2
And and has mainly because they have a very long lead time. Our radios either come over from Europe or sometimes from Malaysia, and and they come mostly by boat. And so that adds to a lot of lead times.
Speaker 1
So said differently, our castings tend to turn very fast. Right. It's located the foundry is right here in Wisconsin, so we do tend to keep fairly lean inventory there.
Speaker 8
Great. Well, thank you. Thank you guys for your time.
Speaker 6
Thank
Speaker 0
you for your question. We have another question from Richard Eastman from Robert W. Baird. Please proceed.
Speaker 3
Yes. Thank you. Just a couple of follow ups. Rich, to be clear on this Itron business, this basically Itron ships you the radios. You guys assemble onto the meter and ship the meter out with the radio attached, correct?
Speaker 2
Not that isn't the whole story. Okay?
Speaker 3
Well, and what I'm kinda getting at here, I I wanna hear the whole story, but what I'm trying to get at is your revenue recognition on those shipped meters, is that a a meter sale price alone?
Speaker 1
No. It's let me answer this first because I know what he'll answer. But the predominant really predominantly what we're what we're looking at here is where Itron ships the radio to our factory, our sales price to the customer is the meter and the radio. Correct. And in the cost of goods sold.
Now what Rich is also gonna tell you is that on occasion, Itron can order the meter from us, in which case then I just have a meter sale to them. They, turn, will bill the customer. And on occasion, the customer will simply buy the meter from us with the appropriate register. They'll buy the radio from Itron and they'll meld the two out there. Those latter two are probably the smaller.
Predominantly, if we sell Itron, it's with the radio that we buy included in our revenue.
Speaker 2
And that is exactly what I was going to say. Mr. Johnson and I have worked together too long.
Speaker 3
But what I'm getting at is the $6,000,000 that's essentially in backlog that's now shipping. Is that going out with a local read meter profit margin and sale price? Or is that going out with full AMR endpoint sale price and the profit margin?
Speaker 2
Going out with the full AMR, yes.
Speaker 3
Okay. And that margin
Speaker 2
That is a higher margin product.
Speaker 3
Okay. No, I understand. And then also, there was mention in press release about healthcare costs as they applied to, I believe, the COGS line?
Speaker 1
Well, COGS and SMEAGA, the reality is our healthcare is up pretty significantly this year. Think we're up probably, I want to say about 18% over last year, simply because we're self insured to a set point and we've had a lot of significant cases this year, whereas last year for some reason we had none.
Speaker 3
It was a but I guess if we have an inventory charge of $850,000 in the COGS line, is the healthcare cost variance anywhere near that? Is it six figures or in the COGS line?
Speaker 1
It's six figures.
Speaker 2
Definitely six figures.
Speaker 1
I'm just trying to figure if it's seven, okay? It's pushing seven. Overall, for the
Speaker 3
year the quarter or year to date?
Speaker 7
Year to date. Year to date.
Speaker 1
Or even on an annualized basis, it'll be pushing seven on an annualized basis.
Speaker 3
Okay. All right. I'm just trying to get at the impact in the quarter on the gross profit margin line from the healthcare cost number. So again, I guess with that kind of annualized number, I should think 200,000,000 or $250,000,000 or something like that in the quarter?
Speaker 1
At least.
Speaker 3
Okay. All right. And then just one last question. Rich, could you kind of speak to I'm curious a little bit on kind of an Ulster update here. We had this goal of taking half of that share both in terms of meters and sales.
We're two years past that agreement now. And I'm curious, have we accomplished that goal? And then secondly, has Zener kind of stepped into this discounting mode and basically been a substitute here for Elster when it comes to discounting on bids in the marketplace on the meter side?
Speaker 2
Yes. So let me that in the pieces that was asked. First, when Elster pulled out of North America, we had made an agreement with them where we would do joint sales calls and try to work with take over whatever contracts they were walking away from or ending. And we hit our target. We did pick up over 50%.
Some of them at very low margin. Then over the course of the last three years, and that's got to be at least three years ago that that happened, I think. Okay? Over the last three years, as those contracts have all come up, we've renewed them with some very good success on raising the margins. So we've been very pleased with that.
Fact, there was one large account where we thought we were kind of bidding off by putting in a large a high margin, and we won it. So we've been fairly pleased with how those contracts are working out. There is another piece here though that Elster Electric and Gas, which is still operating in North America and is a major player in North America, they now do not have a water offering. And so we are working with them on quite a few accounts where when they sell to an electric gas water combination or electric water combination, and they need a water meter, they bring us in as the bidder. So we've had some very good success there, and that's been a very positive relationship.
Finally, the question is about, well, if Elster isn't out there low balling on the water side, is anybody? And the answer is yes. Zener is a company that owns a lot of small water meter companies around the world. Doesn't really consolidate them into one. They kind of operate all as independent entities.
They came in and picked up a small water meter company here. And I think they're I'm not sure where they're making their meters. But they've come in with a very low ball bid on some contracts. And so we are seeing them kind of take the place of LCR at the low end of the market.
Speaker 3
Got it. Okay. All right. Thanks again. Appreciate it.
Speaker 0
Thank you very much. Now I would like to turn the call over to Rich Muschin, Chairman, President and CEO for closing remarks.
Speaker 2
Well, want to thank everybody for joining us. This was a very noisy quarter in that there were the tax rate moved around and nobody wanted to grill Rick on that, so I think he's happy. And we had some other issues, the supplier issues and things like that. But generally, I think we're very well positioned. We're looking now, we're focusing on 2016 and beyond.
We think we're going to have some strong growth, and we're going to create some good shareholder value going forward. So I want to thank everybody for taking the time to join us, and we'll talk to you soon. Thank you.
Speaker 0
Thank you, Rich. Thank you for your participation in today's conference, ladies and gentlemen. This concludes the presentation. You may now disconnect, and have a good day.