Good day ladies and gentlemen and welcome to the Q2 2014 Badger Meter Earnings Conference Call. My name is Stephanie and I will be your coordinator for today. At this time, all participants are in listen-only mode. Following the prepared remarks there will be a question-and-answer session. (Operator Instructions) I'd now like to turn the presentation over to your host for today Mr. Rick Johnson, Senior Vice President of Finance and Chief Financial Officer. Please proceed.

Thank you very much, Stephanie. Good morning everyone and welcome to Badger Meter's second quarter conference call. I want to thank all of you for joining us today. As usual, I will begin by stating that we will make a number of forward-looking statements on our call today. Certain statements contained in this presentation, as well as other information provided from time-to-time by the company or its employees, may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see Friday’s earnings release for a list of words 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. Friday after the market closed, we released our second quarter 2014 results. We are happy to report that we had record sales for any quarter and record earnings and earnings per share for any second quarter. Sales were $95.7 million compared with $88.3 million in the second quarter of last year. This represents an increase of $7.4 million or 8.4%. This increase was driven by higher sales of municipal water products offset slightly by lower flow instrumentation and specialty product sales. Let's take a look at each of these groups. Municipal water sales increased $9.5 million or 15.9% to $69.1 million in the second quarter of 2014 from $59.6 million in the second quarter of 2013. These…

Thank you, Rick and thank all of you for joining us today. Last week, we committed the ultimate sin in the financial community; we released good news on a Friday night, when most companies use that timing to bury bad news. I hope you all have plenty of time this weekend to review our results and to develop your insightful questions. I spent the weekend at a wedding in Bismarck, North Dakota, so I can assure you that I have plenty of time to develop insightful answers. Let me provide a few brief comments on this past quarter in the state of our business. As Rick said, we were obviously pleased with the results. These results were driven by the strength of our markets with the usual tailwinds of meter replacement, new housing and the conversion to automatic meter reading. But, we are also seeing the impact of many of the new products that we have successfully developed and launched over the past several years. First, we developed the E-Series Ultrasonic residential water meters several years ago. We initially developed it in stainless steel, but found that many customers also wanted meter made of engineered polymers which is lighter and has a lower price. We introduced those polymer meters last year. In this recent quarter, we saw a four-fold increase in E-series meter sales compared to the same quarter last year. A portion of that increase was due to stainless steel meter shipped to the Middle East, but half of the quarter sales were the polymer meters that we introduced last year. We expect to continue to see strong growth in this product line. We also developed and introduced our ORION SE Meter reading system last year. As you may recall, this was the first truly simultaneous drive-by and fixed-network…

(Operator Instructions) Your first question comes from the line of Richard Eastman with Robert W. Baird. Please proceed.

Just a couple of things. Rich, maybe you could just address – as we exit the second quarter kind of into the third quarter, there's always some question around seasonality and momentum in seasonality, and the third quarter can be up or down over the second. But how do you feel about the early part of the third quarter here, just in terms of tone of sales and interest level?

Yes, Rick. We are continuing to see the strength as we go into the second quarter – into the third quarter that we saw in the second quarter. I can't really say at this time that the third quarter is going to be stronger or weaker or whatever, it's really hard to know because we don't have that large a backlog to tell that. But – are we still on the line I just want to make sure I heard a beep.

No problem. Yes, that's my phone. We are live. You are fine.

Thank you. But, what I would say is that as we enter this quarter, we are continuing to see the strength that we have seen, we are continuing to see good sales and like I say, we are optimistic about where this can go.

And on the industrial flow side of the business maybe it sounds like you might have expected that to be a little bit stronger, it sounds like there was some timing issues in terms of shipments. But, should that business as we run through the balance of this year, I mean, is the tone there up year-over-year and was just a little bit of anomaly here in the second quarter or – just not – do you have any conviction on that?

No. I would say that from our point of view we expect to see an up year. What happens on this business is a lot of it is project related and the timing of when they are putting up larger plants and we can get very large orders delayed or moved up which ever just based on the timing of when they want the shipments. So overall things can swing between one quarter or another, but overall we are still expecting an up year.

Okay. And just last and I will jump out of the queue here. But, on the E-Series in the Mid-East have we had any follow-on business in that area on to the back of the $6 million order that we were able to announce earlier?

We have not yet, but we have had follow-on visits, in other words we have had visitors from other countries in the Middle East, who have come and toured our plants in Milwaukee and our plants in Mexico, our plants in Germany and the Czech Republic to look at the products and to qualify the plants – qualify the products for purchase in their countries. So we are very optimistic of what we might see in the future.

Okay. Excellent. Thank you much. Nice quarter.

Okay. Thanks

Your next question comes from the line of Brian Rafn with Morgan Dempsey Capital Management. Please proceed.

Good morning guys.

Good morning Brian.

Can you guys hear me? You have been breaking up a little. So maybe it's from my end.

Yes. It's on your end but we can hear you.

Okay. Sounds good. Let me just ask Rich for an insightful answer here a little bit. You talked a little bit about tone in case and trend of business. Do you get any sense of it, it maybe a bit of a stretch whether this is a kind of a capture of pent up demand or do you think this is more of an organic just a build up resurgence in just normal business?

What I would say is what you are seeing in the last quarter is a little bit of a pent up demand, I think the whole market, I would be surprised if the whole market isn't up, now, I haven't seen my competitors' conference call yet. But, I wouldn't be surprised if the whole market is up a little bit. But then I think we’ve layered on top of that some benefit from our new products.

Okay. All right. A little comment maybe any – what you are seeing as it plays out into 2014 kind of this strategic shift in market share with Neptune and Elster exiting some of these markets. Are you seeing some pick up in some of that incremental business?

I mean, this is Rick. We are seeing increased sales from what I call the former Elster customers. But I think it's little early because we haven't all reported our results to the publishing entities yet, but we should pick up some market share as a result of that.

Okay. You talked a little bit about kind of as much as 12-month a little more adoption cycle with new products. Are you seeing with the 300% up in ORION SE, the dual network dry-buy as well as network, are you seeing an adoption of that any quicker given that kind of ORION brand has been out there and obviously with that kind of technology it's – would seem to be something that it's a no – you can't mess it – it's a fairly riskless adoption given the dual strategy.

You are right. Obviously, some of the pick up in the ORION SE sales is cannibalization of the older ORION versions where customers are switching over. But, we are signing up new accounts, new customers, who hadn't made a decision, the real benefit in my opinion of ORION SE is, we had a lot of customers who’re on the fence and could not decide between a dry-buy or fixed-network. And now we are able to go them and say you don't have to decide, you can buy one product that is both.

Okay. And then you also talked about some further robust sales on the E-Series, the engineered polymer, are you seeing, Rich a – because you guys make stuff with some cash brass and it's just massive and it's got rigidity, and it's got last till Christ returns. You are seeing more of a U.S. utility demand for engineered polymer?

Yes. Definitely the engineered polymer is of more interest to the U.S. customers. Now bear in mind too that because of the design of our ultrasonic meter we don't have is bigger pressure vessel and therefore the engineered polymers can perform just as relevant as stainless steel. But when we get to the Middle East, they have concerns about temperature and the wear of sand that might be in the water heating the meter. So they are much more interested in the stainless steel.

Okay.

But definitely the polymers are more U.S. based.

Okay. And then just one more on the BEACON sales, what type of – when you say you had several customers adopt the entire complete packages, can you comment on dollar amounts or what – when you talk about a package, what is that – does that something that would serve 10,000 customers or a 1000 or I get a sense as to what a complete package is?

We have test kits out there too just well over 150 customers right now and just like last year, when we introduced the ORION SE and they put it on test and we are seeing increase sales this year. We don't have substantial sales of BEACON yet in any of these results. But, the interest is about as high for this product as anything we have ever seen. So we anticipate that we will have the first orders yet this year and we are looking forward to increased sales next year.

And Brian the customers that have committed to the BEACON package, we are talking tens of thousands of meters and millions of dollars.

Okay. Thanks guys. Appreciate it, good job.

Okay. Thanks.

(Operator Instructions) Your next question comes from the line of Chip Moore with Canaccord. Please proceed.

Thanks, hey, Rich and Rick. Just on some of the residential strength this quarter. Did you see any of that use it or lose it spent for those June year end municipalities?

Usually we hear some type of an anecdotal story about that and the honest answer is we have heard none.

Okay.

I'm sure it's out there. You always have these cities that have a June 30th year-end that have a budget expiring and they are rushing out to use it. But, we really didn't hear a lot about that this time.

Okay.

I'm looking toward my sales people and they are all shaking their heads they didn't hear much at all about it.

Sure. And that jives well with what you are seeing so far in July it sounds like. On international, can you talk about some of the mix there for meters and radios this quarter?

There was probably – it was probably just under $1 million of sales to the Middle East in this particular quarter. Remember when we talk international we are talking outside of North America. We consider Mexico, U.S. and Canada all is kind of our domestic market if you will, I know the terms aren't quite correct.

Right.

So when we talk about international water meter sales it's really – we got a couple of things going on, one is that that opportunity in the Middle East. And the other is, we have started shipping private labeled ORION radios to a partner in Europe who is reselling them. And again, that's tens of thousands of dollars at this point, but the Middle East was a little over a $1 million.

And just to be clear when he says that okay, when sales to Canada, Mexico, we do report them as international.

Oh, yes. In the 10-K we comply. But for our own discussion purposes, we tend to report as Canada and Mexico, North America as one market.

Okay. That's helpful. And then on the reseller agreement with Itron, is that – maybe that come up next year and then when should we be thinking about a potential renewal on that?

I thought it was 2016.

They are looking at each other right now. It's either 2015 or 2016, we are not sure.

I want to say 2016. It's 2016. Early 2016.

I think they believe it comes up in early 2016, we are not really concerned. We have a very good relationship with Itron. We continue to sell a lot of their radios and so we are not concerned about any change in that relationship.

Okay. And then just lastly on the balance sheet, the pick up in receivables just – what was driving that?

The sales in the quarter were more skewed towards the end of May and early June. And especially when we presented against the end of the calendar year, the end of the fourth quarter receivables are generally at their lowest level. So it's a factor of the recent sales.

We don't feel, we have any collection issues at all.

Yes. Okay. Thanks guys.

Okay.

Your follow-up question comes from the line of Richard Eastman with Robert W. Baird. Please proceed.

Hi, guys. I threatened I'd be back. Just on the gross margin side, could we just discuss maybe given that we don't give guidance on gross margin, can we just discuss some of the variables that went in there, I think Rick you have mentioned, absorption and the improvement in volumes which I understand because I'm looking at the gross margin sequentially quarter-to-quarter and a plus 170 basis points I think was the sequential improvement. And obviously, absorption and volume, but can you just comment, with some of your pricing gains, were you able to hold some of your pricing improvements. And then also the mix within residential, was there a better AMR or just automation quarter – this quarter versus last?

The latter one, no, the automation was there. The pricing was negligible.

Okay.

The primary impact was volume in this quarter. One of the things that kind of affected margin negatively was the mix because we had a higher percentage of municipal water compared to flow instrumentation.

Yes. That was actually a negative. So all the improvement really came out of the volumes, it really wasn't a mix issue, wasn't a pricing issue, I mean obviously, copper, again, you don't break it up. But, that was more favorable.

Well, copper was not as big as you think in this particular quarter because the prices weren't substantially different from year ago. Now, the fact of the matter is, last year I think we are on the tail end of the 81 brass…

Yes.

We are still at 81 brass in the second quarter of last year this year for the most part it's all by alloys, so that's not an issue.

Okay. So our gross margin, as long as the bottom don't fall out of our volume, our gross margin should be sustainable and maybe improve a little bit if we can get our mix up industrial flow improves.

Yes. This I mean – and Rick I will also add that I have now seen a few renewals for former Elster customers come across my desk.

Yes.

And we are being aggressive to try to improve that pricing more up to market pricing from what Elster was charging. You recall that we – when we got into – a lot of the Elster customers, we say we had a one year or 18 month contract and we are going to try to move them along each time. I have seen those increases, I can't say that we are capturing market prices yet, but I think our plan is over several years to get them there.

Okay. Okay. And just the last question again, just I know it's small but the specialty business anything going on there, I know we got the concrete vibrator business that's a good thing. The gas meters that seem to be more and more like a one-off opportunity in sale?

I think Rick, we have always said that it was – way back when we got Duke that was kind of a lottery ticket.

Yes.

To the extent we – remember we are not selling gas meters, we are just selling the radios that attached to the gas meters.

Yes.

And those opportunities are not out there as much because many of the gas utilities are aligning themselves with electric.

Okay.

The provider of the electric radio the Itrons, the Sensas of the world, they generally have a solution for water.

Okay. Yes. So this really not – there is nothing in there that could really propel that the growth rate they are half of the small base, I mean for the time being?

No. Unless there is – unless somebody big comes along and even if there – if it's a combo, if they pick someone would doesn't have a water solution has was what happened with Duke, we are more than able to do it.

Sure.

It's kind of – if it happens we will take it.

Yes. Okay. Fair enough. All right. Thank you, again.

Okay. And before you take another question just to clarify on Chip's question before we have verified that the Itron contract expires in January of 2016. So Stephanie, you can take the next question.

Okay. With no further question in queue, I will turn the call over to Mr. Rich Meeusen for closing – I'm sorry, we do have a follow-up question from the line of Brian Rafn with Morgan Dempsey Capital Management. Please proceed.

Guys, I had to slip a couple under the rug here. Let me ask you, Rich talked a little about BEACON. Is your sense that those orders are being driven by utilities in western areas that might be looking at droughts, are do you think that there is a residential pull through from customers that want to look their own individual water usages.

Actually Brian that is what I would classify as one of those insightful questions. We are not seeing right now the BEACON order kits are pretty much coming from across the U.S. But clearly, one of the big advantages of BEACON is the ability of a customer to take iPhone or an iPad and see what their water usage is and look for potential ways to reduce water usage. And I would think that we would see a lot of the drought stricken states and cities that have major water problems wanting to push this technology or even customers saying to their utilities, hey, we want this technology. And I do believe in the long-term over the next several years, we are going to see that trend. And right now, I can't say we are seeing right now.

Okay. Thanks guys.

Okay. Thanks.

With no more questions in queue, I will turn the call over to Mr. Rich Meeusen for closing remarks. Please proceed.

Thank you, Stephanie. And I want to thank everybody for joining us today. Obviously, Badger is very pleased with our results. We feel like the products that we are offering to the market are gaining good acceptance and we are seeing good strength out there in addition to just basic strength in our overall markets. So we are very optimistic about where things are going in the future in the long run. And we appreciate everybody – all the support from everybody. Thank you.

Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect and have a great day.