Badger Meter - Earnings Call - Q3 2017
October 17, 2017
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the Q3 twenty seventeen Badger Meter Earnings Conference Call. At this time, all participants are in a listen only mode. Following management's prepared remarks, we will host a question and answer session and our instructions will be given at that time. As a reminder, this conference is being recorded for replay purposes. It is now my pleasure to hand the conference over to Mr.
Rick Johnson, Senior Vice President of Finance and Chief Financial Officer. Sir, you may begin.
Speaker 1
Thank you very much, Brian. Good morning, everyone. Welcome to Badger Meter's third quarter conference call. I want to thank all of you for joining us. As usual, I'll 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 results. After the market closed yesterday, we released our third quarter twenty seventeen results. While the bottom line did not match our expectations, sales were a record for any third quarter at just over $100,000,000 This is an increase of $3,700,000 or 3.9% over last year's third quarter sales of $96,300,000 Let's talk about some of the details. Municipal water sales represented 74.7 percent of total third quarter sales compared to 77.4% in the third quarter last year.
Municipal water sales increased 03% to $74,700,000 in the third quarter from $74,500,000 last year. This is the net impact of higher commercial water meter sales and the inclusion of about $800,000 of sales from D Flow, which we acquired earlier this year, offset somewhat by lower sales of residential meters and related technologies. Some
Speaker 2
of
Speaker 1
the decline in residential sales was due to lower international sales, particularly in The Middle East, where as we've indicated in the past, sales tend to be sporadic. Flow instrumentation products represented 25.3% of total sales for the third quarter compared to 22.6% last year. Sales increased $3,500,000 or 16.1% to $25,300,000 from $21,800,000 last year. We saw significant increases across most of our product lines, including meters for the oil and gas market, valves and magnetic meters. Gross profit as a percentage of sales was 37% in the third quarter compared to 40.1% in the 2016.
The primary driver for this decrease was higher brass and other costs compared to the same period last year, which contributed to the lower overall gross margin and lower earnings. Our selling, engineering and administration expenses for the third quarter decreased slightly to $24,600,000 from $24,700,000 You will recall that last year's third quarter expenses included approximately $740,000 of a non cash pension settlement charge that did not recur this year. This year's expenses do include costs associated with D Flow. The provision for income taxes as a percentage of earnings before income taxes for the third quarter was 34.5% compared to 36% in the third quarter of last year. The effective tax rate on an annual basis is now estimated to be 35.3% plus or minus any minor discrete items.
Early in the year, we were using 35.5%, so the effective tax rate for the quarter is lower as we adjust year to date. As a result of the items I just mentioned, net earnings for the 2017 were nearly $8,000,000 or $0.27 per diluted share compared to $8,800,000 or $0.30 per diluted share in the 2016. Our financial condition remains strong. For the nine months ending September 30, we generated $45,900,000 in cash from operations compared to $40,200,000 in the same period in 2016. Debt as a percent of total capitalization stood at 14.1% on September 3037.
With that bit of background, I will now turn the call over to Rich Musson, 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. This was an interesting quarter for us with record sales but lower earnings, as Rick discussed. Although utility metering sales were relatively flat, we have seen an overall softening in the utility market over the past six months. When several of our competitors reported their second quarter results, they had significant decreases in sales. Therefore, we feel good that we've been able to hold our own position and most likely have seen an increase in our market share.
In addition, we continue to see significant increases in our sales of our newer products, both the E Series Ultrasonic Meters and the Orion Cellular Radios. We are currently working to integrate the technology of our recent acquisition, D Flow, into our ultrasonic meters and expect that that project will be completed later next year. Also, the introduction earlier this year of the LTE version of the Orion cellular radio has driven a lot of interest in this leading edge technology, resulting in many utilities initiating pilot tests, which we expect will further increase sales in 2018. We saw a significant rebound in our flow instrumentation business, driven both by continued improvement in the oil and gas markets as well as the impacts of sales channel reorganizations that we completed over the past year. Our recently announced distribution agreement with DNOW LP for our global sales into the oil and gas industry did not have any significant impact on this quarter, but is expected to drive even more growth in future periods.
Margins were softer than usual this quarter, primarily due to a significant impact from copper prices. In the third quarter of last year, copper averaged $2.16 per pound, but increased 35% over the past year to average $2.91 per pound during the third quarter. We purchased a substantial amount of brass for our meter manufacturing, which is primarily composed of copper. Since September 30, copper prices have continued to increase to well over $3 per pound. However, most commodity analysts believe this pricing level is not sustainable and they expect to see price decreases going into 2018.
Nevertheless, we are prepared to announce price increases to offset higher material costs as well as expected price increases in resin due to the impacts of Hurricane Harvey on resin producers in the Houston area. These increases will be announced in the fourth quarter, but will not have any impact until the 2018. It should be noted that when copper prices have jumped in past years, our industry has generally been successful in passing along pricing to offset those increases. We see no reason to expect it to be different in the future. Overall, we continue to be confident about the future of our business and our ability to generate shareholder value on a long term basis.
With those comments, we'd like to take your questions.
Speaker 0
Thank you, sir. And your first question will come from line of Nathan Jones with Stifel. Proceed.
Speaker 3
Rich, I wonder if you could give us a little more details on the planned price increases in the fourth quarter. Do you think they're going to cover all of the raw material increases? Do you think there'll be a lag to that past the first quarter? Or just how should we think about that price cost dynamic for you guys over the next few quarters?
Speaker 2
Yes. What we will do is over the next thirty days, we'll go through and queue up that increase. We need to give our distributors and certain customers notice, at least thirty days notice, if not more. So over the next thirty days, we'll go through and figure out which products, how much, and adjust our pricing sheets. All of that will be effective January 1.
That's our target. Now our goal now obviously, over the next thirty days, we're going be watching the cost of copper too. This morning, it's at $3.17 So it's jumped again on the London Exchange last night. A lot of that increase is being driven by news out of China. The problem we all have with China is we don't know how much copper they have in their stocks over there.
They don't release they don't announce that. So they are always the wildcard. So what went up so quickly in the last few weeks could also go down just as quickly. So we're gonna be watching that and adjusting that increase for whatever happens with the price of of copper. But we are shooting at a moving target.
Speaker 1
Yes. And the other thing, Nathan, is while we announce it, and we'll announce it in the fourth quarter, we could get orders yet under the old prices for delivery in the first quarter. So to your point, there could be a bit of a lag where it really doesn't fully kick in until the second quarter.
Speaker 2
Yeah. Generally, in the past, we have announced a price increase. And obviously, we have contracts. We don't do contracts for more than a year at a fixed price. If they go beyond a year, we've got a consumer a a producer price index adjustment in them.
But we have contracts that will be coming up for renewal every month over the next year. And as they come up for renewal, we'll factor in those price increases. The ones that have PPI adjustments, we'll factor those in as soon as we can. But then any new contracts will be led at new prices. So unfortunately, it does take a ramp up.
If we target an overall dollar amount that we're after to offset the impact of brass, it takes us a while to get there. On the positive side, we also gain on the downside. If brass starts coming down again, it takes a while for that pricing to adjust down from competitive pressure, and so we we gain on there. So so just like when when brass hit or when copper hit $4 a pound several years ago and we went out and put in price increases to offset that, we expect this to follow along the same guidelines here. So there may be some short term negative impact, but we will get it in there.
Speaker 3
Okay. So it sounds like a couple of quarters of margin headwind there. I understand that this is not the way it will go. But if we assume that copper was flat from here, would you think that by, say, the second quarter of next year that you would be you would have recaptured all of that price cost differential?
Speaker 2
That would be our goal, yes.
Speaker 3
Okay. You did mention in the press release that there were some other expenses in there that also dragged down gross margin. Were they related to the acquisition? Or were they onetime in nature? And any color you can give us on the size of that?
Speaker 1
Yes. This is Rick. I would think for the most part, were onetime in nature and just and frankly, just higher than last year. You also got to remember, our comp last year, the gross profit percentage was 40.1%. That's a little bit higher than normal.
So I mean, when we say higher costs, higher than last year just simply because of that fact.
Speaker 3
Okay. So any color you can give us on the magnitude of that?
Speaker 1
Most of the most of the the decrease in gross profit percentage was driven by the copper. I mean, most of this other stuff was, you know, a 100,000 here, a 100,000 there, nothing of substance.
Speaker 2
Except we did have a significant payment to a search firm for our new COO that we hired. So
Speaker 1
It's not in the margin.
Speaker 2
So No. It's not in the margin, but it's down in the I'm sorry. It's down in the in the s g and a cost, but that was in there too.
Speaker 3
Got it. That's helpful. I'll pass it on. Thank you.
Speaker 0
Thank you. And your next question will come from the line of Tate Sullivan with Sidoti. Please proceed.
Speaker 4
Thanks. Can you follow-up your comment on some softening in the markets? I mean historically, what's that due to? Is is it due to multiple areas being done with the replacement cycle, replacing their older meters? Or what are the current factors in that softening?
Speaker 2
What we're seeing right now is some of the larger projects that were in the queue are getting pushed out, delayed. And it's always a question as to what causes this. We have to go out in the field and get anecdotal evidence. In some cases, it's all this talk out of DC about a possible infrastructure bill, and people are saying, well, maybe there'll be some federal money that will help, and so we're gonna delay a project. So we're hearing some of that talk out in the field.
But but, generally, I we know our competitors are are hearing it too because if you go back to the second quarter conference calls from the competitors who disclosed the water portion of their business, and there's three major ones out there that do that are public, they all said that they were down anywhere from 5% to 13%. So when we saw that we were relatively flat, that's why I felt like we were probably gaining a little bit of share. But there have been delays. I have no reason to believe any projects have been canceled. They'll still come.
Question is will we get them in the fourth quarter or the first quarter?
Speaker 1
And the other thing we're seeing, Tate, is if you recall at the end of the second quarter, we had just introduced the effectively the LTE product. Alright? And what we're finding is is while there's there's there's very much interest in there, people are not they're not buying the thousands of them. They're buying a 100 of them and putting them on tests. So we're seeing a lot more pilots right now, which in a sense, in our mind, just delaying sales.
So I mean and I do agree with Rich. There's nothing fundamental out there that suggests there's a reason for this. It's just kind of a bland year, and it's been a bland year through three quarters.
Speaker 4
Okay. And then I thought you mentioned valves in your comments. And is that valves that go with meters in your industrial business? Or what valve business do you
Speaker 2
In in our flow instrumentation side of our business, which is about 20% to 25% of our business, which, by the way, was up 16% over last year, so it was a it was a good increase. Yeah. I know you read that. I'm I'm just repeating it. Okay.
So so in that within that business, one piece of it is valves. We also do vortex meters. We also do turbine meters, the Coriolis mass meters, mag meters. So there's a lot of other ones in there, but one piece of it is valves. It is the one thing that is not directly flow measurement, but it's a good business for us.
It's profitable. And we do link the valves up with meters sometimes to to form a complete control loop. But that business itself, our valve business is thank you, John. It's being handed to me. Our valve business is about $3,500,000 a quarter.
So it's about $14,000,000 a year.
Speaker 4
Okay. Thank you. And then on to follow-up the brass, the copper comments in the brass, do do your ultrasonic meters even use brass compared to the older meters?
Speaker 2
Our E Series ultrasonic meters are offered in both plastic and stainless steel. Okay? We will be converting them and offering them in brass. We initially came out with them in stainless steel because stainless steel was actually the same price as as brass, and we felt that the market would be willing to pay a premium to have stainless steel, which is viewed as an even better material. What we found out is that the market really doesn't care whether it's brass or stainless steel.
They just want metal. So we started a project to develop in brass. Now if if brass gets too expensive, then the stainless steel is a better option. But right now, they are offered only in stainless steel. But you have to remember that all of our large meters are in brass, and those are the ones that take up a large quantity of brass.
Speaker 0
Thank you. And our next question will come from the line of John Quilley with Canaccord. Please proceed.
Speaker 5
Hey, good morning, folks. First question, Rich or Rick, can you break out mechanical versus AMR, AMI and any third party Itron color you can give us?
Speaker 2
So you're you're you're talking about meters without radios versus meters with radios. Exactly. That's right. Thanks, Rich. And and it and I'm just looking at this.
That's a hard one that's a hard one to say.
Speaker 0
Let me let me try
Speaker 1
and answer it this way. I mean, we we have settled I mean, basically, it's the same underlying meter either way with or without the radio. We've been saying that we're shipping 65% on average of the meters that we're shipping have radios. Okay? Now that varies quarter to quarter depending upon the particular product.
That's why I think Rich is kinda hesitating a little as he went so well with detail. But, you know, that number continues to grow. The installed base out in the field is probably about 55% of the makers out there have radios. And if we keep having an input rate that's approaching, let's say, 55%, that number will continue to grow. It's just a matter of how fast that's going to grow.
Speaker 5
Okay. I'll do two more. So Rich, would love your thoughts on Itron Silver Spring pushes them more electricity, more IoT. What do you think that does to market share, name share in The U. S.
Radio, AMR, AMI market for water, if anything?
Speaker 2
Yes. Silver Spring did not play heavily in water. They were really much more of an electric focused company. And, obviously, I try and the majority of their business is electric. That is where their their big focus is.
We focus only on water. So we didn't see the purchase of Silver Spring as having a huge impact on the competitive market out there on the water side. I think it does have an impact on the electric side, but we don't really see it as having a big impact on water.
Speaker 5
Okay. And then last, so the creation of the COO role and welcome, you guys have run a pretty great business over a number of years. Why now Rich? And what should we think about leadership transition if that's part of this? Thanks, guys.
Speaker 2
Well, no. That's a good question. And we do have Ken Bachor sitting here, who is our new COO, who has just I believe it's his second day of work. So so welcome, Ken. And when I mentioned that we paid a lot of money for a search firm, it was the best money we ever spent, and he agrees.
So we're excited to have Ken joining us. The fact of the matter is I am 62 years old, and Rick is older, slightly older. And so we recognize that over the next couple years, we're gonna have to have a shift in leadership here. The good thing is that the officer team that has driven this company for the past ten years to where it is today is very stable and is here and is going to continue. It's a younger team, younger meeting in their fifth early fifties, so we're gonna have them around a while.
But bringing in Ken helps us set up the transition for down the road. So this has been something that the board of directors has been working on for the past several years. We ran a formal search. We we were fortunate to get somebody of Ken's caliber in here. And and now we will be he will take on that COO role and hopefully be moving up as we go forward.
But it'll give us plenty of time for overlap to make sure that he and other people are comfortable with this management team as we go forward. We will be bringing Ken out for investor meetings. So all of the analysts, investors will have a chance to meet Ken and talk to him. And I think you're going find out that his operating style, his vision very much fits with Badger Meter. One of the things I think we're going to be looking for is getting a little more aggressive in M and A, and that is one of Ken's strong points.
So that's going to help us, too. So I hope that all helps.
Speaker 0
Our next question will come from the line of Brian Raffin with Morgan Dempsey.
Speaker 6
Good morning, Rich. Good morning, Rick.
Speaker 2
Good morning, Brian.
Speaker 6
You guys, I think, and correct me if I'm wrong, launched the Orion cellular LTE two way in July or was in the second quarter. Is there any pent up demand in delays on orders? Or is there in subsequent quarters? Or is it just going to kind of roll out with pilots?
Speaker 2
So just to clarify, Brian, we launched the Orion Cellular about three years ago as a as a three g product. Okay. And and simply because the LTE networks weren't available for data yet, the LTE chips for data became available late last year. We immediately launched a project to move to the LTE platform, and that that new version with the LTE chips was released in April. Okay.
So so I do believe we we saw a little bit of a delay, people waiting for the LTE. And I still think there is some pent up demand because we're getting a lot of inquiries. We're doing a lot of pilot shipping of people who were waiting for the LTE, but they didn't come in as soon as the LTE was released and say, now give me 10,000. Instead, they said, me 50 or 30, and we'll put them out there and try them for a few months and make sure they work okay before we commit to the larger volumes.
Speaker 6
Got
Speaker 2
it. I'm still convinced that this is going to be the technology of the future for our industry because the whole idea of not having all that infrastructure makes so much sense that that I think people are gonna wanna go this way.
Speaker 6
Yeah. With some 51,000 water meter or water utilities, are are these test pilot programs in hundreds of of utility OEMs, or is it just dozens? Or what's kind
Speaker 2
of No. No. It's hundreds. It's hundreds.
Speaker 6
Okay.
Speaker 2
So we believe it bodes well for future demand. I think we're going to continue to I think we're going to continue to see our two fastest growing products being the E Series water meters, the ultrasonic water meters, especially once we finish integrating the D Flow technology next year, which will make the product even more competitive with the mechanical meters. It's going we're going to see that. And then on the radios, we're going to see cellular. And both of them, we have seen since introduction, strong double digit growth every year, and I think we're going to continue to see that.
Speaker 6
Gotcha. Gotcha. Yeah. Rich, you with the question on mechanical versus AMR and AMI, I think in your presentation in August, you guys got a install base of about 58% meters with radios. And I think Rich's comment was your or the the actual delivery now is more like 60 to 65.
If I were to add on the Beacon advanced meter analytics, you guys kind of being a leader in that, what might that be? Would that be still less than 1% or two? How fast is that add on, that adjunct of technology being put on with the radios?
Speaker 2
The the the Beacon is is also coming on fast, and it's coming on fast in two ways. One is that when somebody buys cellular okay? And I'm looking for Kim to look at me to make sure I'm okay. My VP of sales, I I always like her to be staring at me when I'm saying this so that if I say the wrong thing, she can frown. But I think I'm right on this.
The Beacon is sold with the cellular product. And and and the And the network product. Right. Well, I'm I'm saying, first, it's sold with all of the cellular. But and some of our network customers and even some of our drive by customers have said, you know, we want that Beacon Analytics too.
So we've got it being sold across a much broader base than just the cellular. So so as cellular goes up, so does Beacon, but then we're also picking up these other customers too. I would say in a few years, we're we're gonna be able to phase out some of our older our legacy products and focus much more on the Beacon as as our main product. The nice thing too is that with the cellular, obviously, we gather monthly fees. Okay?
And even with the Beacon product, there are annual fees that we get from that. So so as we've always said in the past, we are not driving towards software as a service as a company, but it is becoming more and more of our revenue stream as we go forward.
Speaker 6
Got you. Got you. I'll just ask one more, Rich. As I'm looking at your market share chart here in your presentation, North American Water, you guys are very quickly catching Neptune. Do you have any comment on kind of that top tier oligopoly Neptune census and Badger Meter kind of where you might see that goal over the next few years?
You know, guidance?
Speaker 2
Yeah. And you guys always love me to talk about the competition, so I won't disappoint. I'll make a few comments here. First off, the market share is very difficult in our industry because if you add up everybody's claim market share, you get to about 120%. So not everybody is being honest on their market share.
And the analysts that do market share analysis, I don't think always get the facts right. I would say is we have a Present company excluded, course. Present company excluded. No. I'm talking about the companies that sell the service of analyzing market share.
But I would say that Badger and Neptune both have a market share that is very close. So we're probably the two top companies as far as selling the meters in North America. Sensus is somewhere below us and then down, you've got less than that at Mueller and MasterMeter and some of these other smaller players in the marketplace. Neptune has been a little slow on new product introduction, but now they have announced a cellular product. So they're three years behind us on that, but they are coming up with cellular.
And I and I'm kinda glad of that because it does confirm that cellular is a good product going in the future. We're not the only ones out there with it. They've also announced an ultrasonic meter, and and they're gonna be starting to sell that. So, again, that validates our ultrasonic technology when the two leading companies in the marketplace are selling that technology. Sensus does not have cellular, has not chosen to go cellular.
They are still selling their fixed network called FlexNet, and they have chosen magnetic meter as their solid state metering. I think there are issues with magnetic that that will make ultrasonic more competitive in the future. And meanwhile, Mueller does not have either cellular or a solid state meter. So basically, when you look at the competitive situation, that's where we are. We feel we're in the strongest competitive situation having been in the ultrasonic metering business for seven years and the cellular business for three years, while our largest competitor is just starting this year on both of those.
I think that puts us in a very strong position.
Speaker 0
Thank you. And our next question will come from the line of Richard Eastman with Robert W. Baird. Please proceed.
Speaker 7
Yes. Good morning. Wanted to ask No, Lynn a couple of I'm just kidding. I just wanted to wake him up actually. Just from a municipal standpoint, think the reference was that the international business was lower.
I think you specifically mentioned Middle East. But if you look at the utility business, was the domestic residential business up low single digits, mid single digits? How did the domestic business perform there?
Speaker 1
This is Rick. The domestic municipal water business was essentially flat Q3 over Q3.
Speaker 7
Okay. Okay. And then and does that include the commercial piece?
Speaker 1
Was the commercial meters up? Was up.
Speaker 7
Okay. Okay. Low singles, is that close enough?
Speaker 1
Yes. That's fine.
Speaker 7
Okay. Okay. And then just a question around late in the quarter, any hurricane impact more on the industry? I know both in the Houston market, but more so in the Florida market. I think your exposure in Florida is somewhat limited at Badger.
But was there any cramping up industry in terms of demand installed? I mean, what's your thought, Rich, on the impact there? I mean, when we had Sandy, it kind of held up spend. So maybe just any thoughts there?
Speaker 2
Yeah. I do think there's some impact. Fortunately, we did not have a major project going on in Houston. We didn't have a major project going on in Miami or anything like that. Nobody did.
So there was not a major project where somebody was selling $1,000,000 a quarter in meters that got interrupted. In the case of Sandy, it did. We had some large projects going on in that area. And when that hurricane came through, it was a big impact. Now we do have regular meter sales to those to the to not only Houston, but the area around it.
No question, it got interrupted. But I
Speaker 1
would say it didn't have a profound third quarter impact. If anything, we're still waiting to see if it's going to have an impact in the fourth quarter. But then likely that would rebound in the first quarter if it did happen.
Speaker 2
And the other impact of it, Rick, is, as I mentioned briefly, resin. Don't buy Houston area, but most of our resin suppliers get their feedstock out of the Houston refineries. And so there was an interruption there. We don't think we're gonna have a supply issue, but prices may take a temporary jump. Again, we're going to factor that into our price increasing.
Speaker 7
Okay. And just your reference on the large projects, is that large projects kind of stalling out a bit. Is that a domestic comment? I mean, is that around large projects domestically? Or is this, again, kind of international?
Speaker 2
No. That was a domestic comment.
Speaker 7
Okay. So it's and so it is domestic. Okay.
Speaker 2
Right. The the the the the we have in The Middle East are very spotty, very project related when one of the Emirates or somebody will decide to do a major project. So that's more project related.
Speaker 7
Yes. I was curious, is the state of Illinois kind of mandated, I think this was during the third quarter, certainly earlier this year. They kind of mandated that municipalities have to ensure that they have no more than like 10% unaccountable for water by 2019. And there was a project triggered there. And not to be too surgical here, you guys have some exposure to Illinois.
It's in the Midwest. Is that either a trend or is that at all impactful? The just starting to tighten up on this, you
Speaker 2
know, unaccounted for water? Right. Clearly, everybody wants to tighten up on an unaccounted for accounted for water. The question is do they have the political will to do it? You may recall that we were metering Chicago.
We got it one third metered. People are surprised to hear the city of Chicago is not fully metered. About two thirds of the people in Chicago pay a flat rate for their water. Therefore, you will never know if there's unaccountable unaccountable water there. They'll they'll never be able to track it down.
So and and under mayor Daley, they were they had a metering program. And when Rahm Emanuel came in, he stopped the metering program. So two thirds of Chicago still sits unmetered.
Speaker 0
Okay.
Speaker 2
Now when they get a state mandate like that, obviously, the first thing you would have to do is meter if you're gonna try to reduce unaccounted for water. It because you you can't control what you can't measure. If they can't measure it, they don't even know what their percentage is.
Speaker 1
Sure. And and that's and that's
Speaker 2
the problem. So that would say that more of the Illinois municipalities should start metering. The question really is, Rick, what penalties were put in. It's very easy for the legislature to pass a law saying, let's hit this target by 02/2019. But if there's no penalties, it doesn't mean anything.
The California say
Speaker 1
was just gonna bring up California. California has a law in the books that by 2025, every home in California will have a water meter. So as I say, look for big sales in 2024 because they didn't fund they didn't fund it. They didn't it was an unfunded mandate. It's those kind of issues that when we hear that stuff, it doesn't have an immediate impact on our business.
Although, again, when I heard about Illinois, it can't hurt. Okay. It can't That's fair.
Speaker 7
Yep. Yep. Fair enough. Hey, Rick, just one one last question. When I look at both accounts receivables and inventories, inventories stepped up in the second quarter from the first, but then stepped up again in the third by about $3,000,000 and then AR kind of stepped up another $4,500,000 Just given where the sales number came in, can you just explain maybe why AR stepped up as well as inventories?
Speaker 1
Yes. It was simple. September was better than July and August, Okay? And, you know, it's it's our DSOs is up slightly, but there's really no significant collection issues. It's more a function of timing than anything else.
And quite frankly, the same thing on inventory. You know, there's really nothing that suggests that there's any issues one way or another.
Speaker 7
And those are the terms or anything?
Speaker 1
We haven't changed any of the distributor terms.
Speaker 0
Thank you. And our next question will come from line of Hassan Doza with WAM. Please proceed.
Speaker 8
Good morning, guys. Couple of Just follow-up on the balance sheet. If you look at your accounts payable year over year, and this is excluding a 4,000,000 from the D Flow acquisition, your payables went from 19,000,000 to 23,000,000. This is excluding the 4,000,000 people. That's a 20% increase while your sales are down, you know, year over year.
So I'm just curious, what's going on with the payables?
Speaker 1
I my first answer is I have no idea, but I I'm not aware of any particular issues. Are you comparing us to December 31?
Speaker 8
No. I'm comparing you to third quarter of last year. Third quarter
Speaker 1
of last year? It it could be just function of the days when when we pay the bills. Well, that's right.
Speaker 2
It it very often, that's a function of what day of the week the month ends on because bills are usually processed on the Fridays. Yeah. Okay. So it's purely timing. It's nothing more than timing.
Speaker 1
Okay. It's good cash
Speaker 8
know you answered the question on receivables, but just to reiterate again, I mean, when I look at year over year, third quarter last year to third quarter this year, your receivables are up, like, you know, 20%. So I know you just I mean, is there something underneath you're seeing on a more longer term basis?
Speaker 1
No. There's I mean, frankly, I mean, is is there a distributor too instead of paying us in thirty days or paying us in forty five? Yes. We've got it. There's some business issues at work here, but nothing that's of a concern to us at this time.
Speaker 8
Okay. And my second question is, you referenced in the release that you're seeing some customers upgrade their system as they wait to adopt your cellular product. Can you give some color as to what type of upgrades, for example, a customer would need to make and how much would it cost them for you for them to adopt your cell product?
Speaker 2
No. I I think I think you misunderstood what I said. There there is no requirement for a customer to upgrade their system in order to adopt our cell product. If they adopt our cell product, they also use the software, the Beacon software, that goes with it. Just like if you were to buy a printer, you would probably use the printer driver that goes with it.
And the Beacon software, of course, comes with a lot of analytics and other capability, but that's a very easy software to put in. Now very often, though, some of these customers have homegrown billing systems, and the Beacon software has to be mapped into their billing systems. That can get a little tricky. But, generally, there's no system upgrade they have to do in order to use the cellular system.
Speaker 8
Okay. Yes. Mean, look, I'm taking this straight out of the release. It says several major municipal water projects slated for the third quarter are now expected in the future as customers upgrade their systems.
Speaker 1
Well, in other words, what what we're saying is yeah. So what we're saying is they plan to upgrade their system. So instead of placing the order now, they instead of buying again, my example, instead of buying a thousand meters, alright, they bought a 100 and put them on test pilot just to see how they work, and then eventually, they'll make the purchasing decision sometime in the future.
Speaker 2
But, Hassan, the reference to upgrading
Speaker 1
this from from what they bought fifteen years ago.
Speaker 2
It's not their IT system. It's upgrading their system of meter reading. Correct. And we probably should have been clear about that. We're talking about their meter reading system, not their IT system.
Speaker 8
Okay. Okay. Fair enough. Wow. Okay, guys.
Thank you so much. Okay.
Speaker 0
Thank you. And our next question will come from the line of Jose Garza with Gabelli and Company. Please proceed.
Speaker 9
Good morning guys.
Speaker 1
Good morning, Jose.
Speaker 9
Hey, Rich. I guess just kind of talking about the DNOW distribution. If you could just kind of give more color and then kind of what does that mean for your existing kind of oil and gas business and if there's any kind of other additional partnerships you're kinda looking for on the on the flow side, instrumentation side?
Speaker 2
We yeah. We we are the the flow instrumentation business, we go to market primarily through distribution. And when I said we reorganized our distribution channels, what we did was we started focusing on the end markets instead of the products. So we, in the past, may have had a distributor who specialized in turbine meters and a distributor who specialized in impeller meters. What we've done now is we've reorganized to where we have a distributor who perhaps specializes in breweries or a distributor who specializes in dairies or oil and gas.
So we we I'm sorry. And I'm using the word distributor. I apologize. I just got a note. I should be using the word rep.
These are reps, not distributors.
Speaker 0
Okay.
Speaker 2
These are primarily reps. Okay? So we have reps that now focus on various industries and specialize in those industries. That has helped us a lot because now a rep goes in and can sell any type of meter that is needed in that particular industry, and that's a good thing. It was a big coup for us, we feel, to get DNOW because we were going to the oil and gas market with a lot of smaller, more decentralized reps.
And DNOW is really a a very large international. They're an international company that services oil and gas markets all around the world. And so having an agreement with them where they are repping Badger's flow instrumentation products, I think, is really gonna open a lot more doors for us and help us get out there. So that's what really d now does for us.
Speaker 9
Yeah. And just remind me, is that an exclusive partnership?
Speaker 3
That is outside of
Speaker 1
North America.
Speaker 2
It is exclusive outside of North America. Within North America, we have some other reps also.
Speaker 9
Okay. And for the rest of your business, I mean, in the full instrumentation side, are there other opportunities that you guys are are are looking at that, I guess, similar that would be, you know, similar in to to dNOW?
Speaker 2
Yeah. We're always looking at opportunities to improve distribution channels. We have some distributors now that we picked up over the last year that we really like, but there's always opportunities to find other ones that specialize in different areas, and and we're gonna be pursuing those.
Speaker 9
Excellent. Thanks, guys.
Speaker 0
Thank you. And our next question will come from the line of Brian Raffin with Morgan Dempsey. Please proceed.
Speaker 6
Yes, Rich, just kind of maybe a five year outlook relative to kind of the larger municipal national sales accounts. Any big cities, you know, looking at at projects that the you know, not for you, but just for the industry that, you know, might be good?
Speaker 2
Right. There are some big cities out there that we've talked about in the past that will be that keep saying they're gonna be looking at doing a major project. They they, from time to time, put out a request for information. They may form a committee to look into it. We're in those cities talking to them.
Miami Dade is probably one of the big classic elephants out there. They've not done anything, but they've run tests. They've run pilots. So they're out there. Detroit is talking about doing something new, so they're always a possibility.
There are other cities in, some of the major cities in Ohio are are are opportunities for us. So those are the ones that could still pop over the next several years that could be pretty big game changers.
Speaker 1
And that's important from clearly from a sales and marketing side, I keep being told to put up my mic. I hope everybody can hear me. But from a sales and marketing but also, you gotta remember that that they're they don't have the same impact on the business, let's say, that they do in the electric industry. Because usually, when we get those, they're multiyear contracts. Okay?
And they get spread out. So even when we had Chicago now, what, six, seven years ago Right. Alright, it got spread out over three to five years, and it had an impact. It's it's nice to have that that steady order, but you can also sell a lot of small cities the same amount of meters in a given year.
Speaker 2
Also, people people tend to forget that the size of a city can be deceiving. For example, a lot of people think Atlanta would be a huge customer, customer, the the city city of of Atlanta. Atlanta. City of Atlanta is only 300,000 people. It's not that big a city.
However, the surrounding area is huge, the metro area. Well, when we're selling water meters, we're generally not selling to the metro area. We're selling to the municipality. And so what some people think of as a large city isn't necessarily one. The largest cities tend to be the ones in Texas, like Houston and and Dallas and some of those because they don't have that many people living in high rises.
It's spread out more. Whereas other cities like Atlanta, you you would be surprised that they aren't as large as you would think.
Speaker 6
That begets another question, Rich.
Speaker 2
I would.
Speaker 6
As you've seen with police departments, fire departments, you got up, you know, in the North Shore. Milwaukee has you know, they got a whole fire department. It's not municipal. It's, you know, several municipalities. Do you see that urbanization developing, or is it strictly, you know, one city, you know, one one municipal utility?
Speaker 2
It is it is we have not seen that developing. For for decades, all I've heard about is the coming consolidation of water utilities, and it has not happened. There has not been the consolidation. Now, you know, you and the reason people predicted it was because electric and gas, it tends to be consolidated. Also, sewage tended to be consolidated along the water basins.
It just has not happened in water, and we don't see anything driving it.
Speaker 1
And we'll see plenty of signs if it does come because they gotta get the police departments, the fire departments, and the library systems done before water would ever happen.
Speaker 6
Okay. Alright. And then just one final one. I I always laugh at your comments with Chicago, the Anaconda being unmetered. It's like horses and carriages.
If you look at the large municipal projects going forward, is it is it an install of meters for this kind of unmetered unaccountable water, or is it primarily with big projects gonna be just the conversion of radio and and and all that?
Speaker 2
Right. With the big projects, it's gonna be primarily radio conversions. Most of the large cities are metered. Chicago is kind of an exception. And there are also a lot of unmetered communities in the Central Valley Of California, but they're smaller communities too.
So when I'm talking about Detroit's and Miami's, they're metered. We're talking about the opportunity to sell them radios. But very often with the radios come meter change outs.
Speaker 6
And
Speaker 0
our next question will come from the line of Richard Verde with Atwater Thornton.
Speaker 10
Just a couple of quick questions, primarily pertaining to the President Trump attempt to lower the tax rate. Kind of wondering how does Badger Meter believe the customers will react in terms of pricing? Do you think you guys will see some pressure where the customers will want to reduce prices and see some of that tax benefit passed through?
Speaker 2
I don't expect that. And the reason I say that is unlike the electric industry where there are 3,000 or 2,300 electric utilities in The United States, and therefore, are some very large utilities that have a lot of buying power. The water utility is very the water industry is very fragmented. There are 51,000 water utilities in The United States. And so you don't have the large ones with a lot of a a lot of buying power.
And and so we haven't seen that in the past. Generally, pricing pressure in our industry comes from internal rivalry. And I'm I'm kind of quoting Porter Michael Porter's five forces. That's where you for all you MBAs out there, that's where you see the pricing pressure in our industry. So if anything, it would be that we would all start competing more aggressively and driving prices down.
I think that's why when we do a price increase for something like brass, we can get it through. And then generally, as brass prices come down, we don't go out and announce a huge price decrease. Instead, you just start seeing bids and quotes pushing pricing down over a period of time based on competitive pressures. That's what really happens in our industry.
Speaker 10
That's great. Thank you for
Speaker 6
that color. And then let's just say
Speaker 10
Badger Meter didn't see any pricing pressure and the company recognized the full benefit of the tax cut. I mean, valuations aren't really right for a buyback. So could you give us some color on maybe what you guys might do with that benefit? I mean, could it be placed towards acquisitions or R and D? What would be the early thinking?
Speaker 2
Yes. So first off, we would tend to benefit from that more so than some other companies. And the reason I say that is if you look at our effective tax rate, it tends to be higher than other companies in our industry. And mainly because we have more of our operations solely in The United States. And therefore, we tend to pay the higher tax rate.
Companies like Honeywell, which owns Census and and I'm sorry. Xylem, which owns Census. I said that wrong. Okay? Honeywell, which owns Elster.
They have a large percentage of their operations outside The United States, and therefore, have a lower tax rate. So the benefit isn't as great for them. So let me first point out that, yeah, we would tend to we would stand the benefit more significantly some from some of the others. What we would do is if we if we had additional resources, we would definitely want to deploy them and would want to deploy them probably in acquisitions. That would be our biggest opportunity.
And as I said, we have a desire to get a little more aggressive on acquisitions than we have in the past. I think the Board wanted to be a little more settled on our succession plans going forward before they jumped in on something major. And now that we've got that better settled, think we'll be you'll see us get a little more aggressive.
Speaker 10
Excellent. Thank you. And then just a last question, kind of just an easy one here. I'm sorry if I missed it, but can you just tell me what the business looks like now in terms of new installation versus replacement?
Speaker 2
You know, that's that's always a very hard thing for anybody in our industry to answer. And the reason is if I ship a 100 meters to the city of Chicago, I don't know how many of those meters are being put into new housing versus being used in replacement. But having said that, if our industry sells about 6,000,000 meters in The United States a year, and that's probably a reasonable round number. Okay? And if there are 1,000,000 new housing starts in The United States every year, and let's say 80% of those new housing starts are on municipal water, 20% are on private wells, you could guess that of the $6,000,000 maybe a little over $1,000,000 is going into new housing and the $5,000,000 a little bit less than $5,000,000 is going into replacement.
Speaker 1
Perfect. Thank you very much. So a higher percentage.
Speaker 2
So replacement is a much higher percentage in our industry.
Speaker 10
Got it. Okay. Thank you, guys. I appreciate the time.
Speaker 2
Thanks, Rich.
Speaker 0
Thank you. Ladies and gentlemen, this concludes our question and answer session for today. So now it's my pleasure to hand the conference back over to Mr. Rich Musson, Chairman, President and CEO, for some closing comments and remarks. Sir?
Speaker 2
Yes. Thank you, Brian. And all I'll say is that, obviously, we had a record year last year. We had two record quarters this year. The third quarter was a little disappointing.
And the stock price I always say our stock price tends to overreact on good news and overreact on bad news. So the stock price has dropped down to a level that we haven't seen well since July. So our stock price is back down to where it was in July. It had had a significant run up just in the last couple of months, and it's back down to the July levels. But we still are very confident about where our business goes in the future.
We don't we tend not to focus a lot on the stock price and try to manage that. We tend to instead manage our business for the long term, and that's our focus. We think we'll be able to offset this higher brass. We know we'll be able to offset this higher brass with price increases, which we are working on. There will be a temporary disruption, but the long term fundamentals of our business are still there.
They're still strong, and we have a lot of confidence in our ability to continue to generate shareholder value. So with that, I'll thank everybody for joining us. Thank you.
Speaker 0
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and we may all disconnect. Everybody, have a wonderful day.