Ladies and gentlemen, welcome to the First Quarter 2019 Badger Meter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference call is being recorded. It is now my pleasure to turn the conference over to Karen Bauer, Director of Investor Relations and Corporate Strategy. Please go ahead Ms. Bauer.

Thank you. Good morning and welcome to the Badger Meter first quarter 2019 earnings conference call. On the call with me today are Ken Bockhorst, President and Chief Executive Officer and Bob Wrocklage, Chief Financial Officer. The earnings release and the related slide presentation are available on our website. Quickly, I will cover the Safe Harbor reminding you that any forward-looking statements made during this call are subject to various risks and uncertainties, the most important of which are outlined in our press release and SEC filings. Finally, please note that on today’s call, we will refer to certain non-GAAP financial metrics. Our slides provide a reconciliation of the non-GAAP to GAAP financial metrics used. With that, I will turn the call over to Ken.

Thanks, Karen and thanks to all of you for joining us for our first quarter earnings call today. We have a lot of good activity this quarter, including meaningful wins that I believe demonstrate we are at the forefront of smart water technologies, improving profitability and good internal momentum building around our continuous improvement culture. The unevenness in our top line with flat sales this quarter does not hamper my enthusiasm given what we continue to hear from the marketplace. In fact, part of the tempered sales activity was due to customers that are choosing to wait for their deliveries until our new technologies are fully launched and available. We had great profitability improvement in the quarter that Bob will walk you through. He will cover the details of the quarter and after that, I will come back and talk about a few key strategic initiatives in our outlook. With that, let me now turn the call over to Bob.

Thanks, Ken and good morning everyone. As you can see on Slide 4, our overall financial results were positive with strong profitability improvement and robust cash flow. Sales for the first quarter were $104.9 million compared to $105 million in the same period last year. Unfavorable foreign currency translation was a headwind of about $700,000 and the year-over-year impact from the IMS Distributor acquisition was not meaningful to the quarter. In municipal water, our sales grew 1%. We saw higher domestic revenues, volumes of newer technology meters and related radios, as well as increased service revenue. International municipal sales were down 15% year-over-year albeit on a very small base. Flow instrumentation sales were down 3% year-over-year, largely due to the unfavorable currency translation impact that disproportionately impacts the flow product line. On an organic basis, we experienced solid general industrial demand offset by anticipated lower volumes in certain of our deemphasized end-markets. Operating profit as a percent of sales was 13.7%, a 420-basis point improvement over the prior year. Gross margin for the quarter was 38.6%, again in the upper half of what we would call our normalized range of 36% to 40% and 360 basis points above the prior year. The prior year closure costs related to the Scottsdale, Arizona facility accounted for about one-third of the year-over-year improvement. In addition, we continued to see the favorable impact of positive net pricing as brass input costs remained lower year-over-year. We also experienced favorable product mix with higher than average sales growth of ultrasonic meters, radios and service revenue. SEA expenses in the first quarter were $26.1 million, a reduction of $600,000 from the comparable period last year. We continued to invest in internal growth activities and experienced normal salary and wage inflation, but we also continue to implement effective cost control measures resulting in improved SEA leverage of 60 basis points year-over-year. We would expect to see additional SEA leverage as the year progresses. The income tax provision in the fourth quarter was 23.5% compared to 22.2% last year as we have now anniversaried the benefit of U.S. tax reform being reflected in both our tax provision and the effective tax rate. Bottom line, net earnings and EPS were $10.8 million and $0.37 in the first quarter, an increase of 42% over the prior year’s $0.26. Our balance sheet is rock solid. Free cash flow in the quarter, which is seasonally a lower volume quarter, was approximately $15.7 million compared to $3.7 million in the prior year. We are now in a net cash position, with a flexible balance sheet that provides ample liquidity to fund our dividend program as well as organic and acquisition growth. With that, I will turn the call over to Ken.

Thanks Bob. And so, taking a look at Slide 5, I would like to highlight two smart water partnerships we established during this past quarter. And while I will highlight these two for brevity, we see similar attractive activity at utilities of all sizes providing us confidence in the market reception to our technology offerings. Columbia, South Carolina and Aurora, Colorado are two larger cities that after extensive review, including the assistance of outside consultants, have chosen Badger Meter for their smart water solutions. They chose Badger Meter for a variety of reasons, most important of which is our infrastructure free cellular offering. The market is becoming more knowledgeable about the benefits of cellular in part from the smart cities enthusiasm, but also because of the demonstrated benefits our customers are realizing. This is translating into commercial increase and contract wins. Our ORION LTE-M cellular radio offering is 5G compatible and will improve battery life, extend the range, lower costs and increase the number of daily on-demand reads and functionality for utilities. An interesting point to note on these two awards is that both cities will continue to use our industry leading Recordall mechanical meters. At the core of our business is a customer-centric focus and our unique ability to provide a broad array of offerings on the meter and radio fronts. We believe this provides us with a strong competitive advantage. At the end of the day, choice does matter. Turning to Slide 6, we remain confident that the quote activity and backlog support our growth plans as we look ahead with the occasional unevenness quarter-to-quarter still anticipated. For example, we will have a short-term gap in international municipal water activity from the sizable shipments in Q2 and Q3 last year in the Middle East region and the weather related delays we saw in Q1 do not automatically cluster completely into Q2 as municipalities only have a certain amount of labor to deploy. Execution on our strategic initiatives continues. For example, we are working to improve our SQDC or safety, quality, delivery and cost metrics. Our continuous improvement efforts on the shop floor and throughout all our processes, serves to make us more efficient in fuel savings to invest in growth. We are actively evaluating, prioritizing and enhancing our presence in select regional markets outside the U.S. for water utility penetration where market characteristics are attractive. And finally, we continue to build relationships and have dialog with potential tuck-in acquisition candidates, which you can think of a bit like purchased R&D in areas such as water quality, for example. In closing, I want to thank our employees across the globe for their agility and commitment to serving customers each and everyday. And with that, operator, please open the line for questions.

[Operator Instructions] And your first question comes from the line of Andrew Buscaglia from Berenberg. Your line is open.

Hey, guys. Thanks for taking my questions.

Thanks Andrew, yes.

Just wanted to talk about the municipal weakness, you know it grew about 1%, but looking forward some confidence that you guys are – you guys sound real confident that you are expecting some lease delays in orders to come through and what gives you that confidence? Do you have – what conversations have you had that you are or what you have on your backlog that and then timing of it rolling off that gives you that confidence to say that?

Yes, Andrew, without getting into the specifics of order rate by month, what I can tell you is the way that the month played out is we had – I am sorry, the way that quarter played out is we had pretty strong out of the chute orders throughout the month of January. As the weather really turned more difficult at the end of January through February, we did see a step change and we felt pretty confident with March. So, it tracked pretty similar throughout the quarter with the worst parts of the weather and it seemed pretty similar to how last year went. The way we saw this play out last year is cities only have so much of labor that they can deploy to install meters, so it doesn’t all roar back in Q2, but we definitely feel comfortable based on our experience with how weather has impacted us in the past that some of that’s going to roll back through in Q2 and Q3. On top of that, we didn’t see any lack of activity in terms of bid quotes, so still feeling good that municipalities or water utilities are out there doing bids and looking forward to move ahead with their smart water programs.

And as it pertains to the Badger Meter specifically, I know you talked about them waiting for newer technology that’s coming out do you have specifics around exactly what are the timing of that? Are we expecting this in Q2, Q3 where the municipalities will move forward?

Yes. So, two areas in particular, one is we have been talking about the 3 and 4-inch ultrasonic commercial meters. We did release that for order in Q1 and we should start to see those shipments roll through toward the latter half of Q2. So, that’s one of the technologies that we are, frankly I would have liked to have seen some of that in Q1, but it didn’t come through. And then on the LTE-M side, we do have a couple of what I would consider significant orders, but not to the level of significance when you think of Aurora and Columbia, but we do have some known orders that they definitely were waiting for LTE-M. We have got some pilots out there of people putting in the LTE-M radios that once those pass and we are confident they will, orders will come through. So again, I would caution you it doesn’t just all snapback right during Q2, but it’s certainly enough activity to make me feel good about the near-term and into the future.

Okay, thanks.

Sure.

And your next question comes from the line of Ryan Connors from Boenning & Scattergood. Your line is open.

Great, yes, thanks for taking my call. Ken, I wonder if you could kind of – if you could sort of weight those two things that you cite, weather and these deferrals and which was more important in terms of the top line, the lack of growth and if you can provide us any kind of weighting among those two, which you thought was the bigger of the two headwinds?

Well, it’s not a cop out answer, but the kind of in equal form, based on the ones that, again, I am not going to get into the specifics of which, but we do know of some specific weather delays and some specific holdbacks on the new order. So I would say they are about 50-50.

Okay. And then as it relates to the deferrals, logically one would assume that if it’s a deferral that there is going to actually be a period of disproportionate strength later on and when those comes through, the regular course of business will also come through in those future quarters whenever that exactly might be. So, is that the right way to think about it that these are deferrals that are going to create some really strong results and volumes later in the year or do we just kind of return to normal?

Well, I think particularly with the weather we return to normal, because that isn’t a roar back, again back to the labor part, so that’s going to – as cities deploy people ought to install the meters that kind of spreads over the year and it doesn’t roar back in any particular timeframe. On the new orders, we will see those – we will see those ramp and yes, I am sure that will pickup some of that upside. We still feel good over our, what we feel for the year, but I don’t see that being a big stack bar on top.

Got it, okay. Wanted to chitchat about the cost side a minute, Bob, you mentioned the SEA expenses that you are holding that line despite the wage inflation environment you are holding that line because you have got other levers you can pull. How sustainable is that and how should we think about that line item going forward? I mean if presumably those levers run out and eventually there is some upward pressure there. So, any kind of guidance or not guidance, but outlook you can give us there will be helpful?

Yes. So, I think we are clearly taking a continuous improvement focus as we think through our SEA spend, the things we remain committed to and that will not vary is our commitment to product development and investing in innovation and so that will consistently be there. I think if you understand our longer term dynamics and how we think of our market growth over time, a big portion of that is average sell price as people move up the technology curve. So, that’s in effect a benefit to sales that doesn’t necessarily have a commensurate investment in SEA. And so I think over the long-term, we would continue to see SEA margin improvement. So I think there is definitely an element of cost control and you are right you can only get so far on that runway. That’s something that’s clearly in the short-term, but long-term it’s more the ASP dynamic. Also on the short-term front, if you will recall, we have talked in the past about duplicative executive costs in the past in 2018 and that benefiting us in 2019 and that’s certainly a part of the play here as we move into Q2 through Q4.

Got it, got it. And then one last one if I could more of a strategic question, but we have seen a lot of activity in terms of the market evolving lot of M&A by the bigger players on AMR and AMI and the underlying technology, but then also some kind of movement on leak detection and sort of home water management I guess by this, the companies like Moen and Resideo. I mean, how do you look at your M&A priorities and cadence going forward? What areas are you strategically looking to fill as those different markets evolve?

Yes, sure. The interesting thing about that Ryan is with our relationship with AT&T, we have a really strong link to understanding what’s going on, on cellular and on the AMI side. So as people move there, I think we have a pretty good idea of what’s happening on that side. And if you think about this home piece, don’t forget we have the relationship with FIN where they are using our technology and we are on that piece as well. Where I am really looking at is these potential technology type tuck-in M&A, something that I have been interested and I talked about a few times is water quality. I think putting water quality together with water quantity and what we do with metering is a pretty strong situation, and there’s pipeline monitoring for predictive maintenance is an area of interest. We’ve still got some geographical opportunities out there, so just looking at more of these technology plays, small tuck-ins, not looking at huge acquisitions and other meter manufacturers, those types of things.

Got it. Okay, very helpful. Thanks for your time.

Yes, thank you.

[Operator Instructions] Your next question comes from the line of Nathan Jones from Stifel. Your line is open.

Good morning, everyone.

Good morning.

Good morning, Nathan.

I just want to follow up a little bit on some of the expectations going forward here and the impact of weather and deferred orders and stuff. You talked about bad weather in 1Q ‘19 and we clearly had bad weather in 1Q ‘18 and you said there’s labor constraints on that coming back. So, say maybe the seasonality there or the catch-up there is probably equivalent to what it was last year, maybe there’s a little more deferrals in the first quarter for people waiting for these new products, should we anticipate a better than average kind of rebound from 1Q to 2Q? I mean, it was up 8% sequentially last year. Is that a number that we should expect to be better this year, all else equal? Just any color you can give us on how we should think about that?

Well, I would tell you to think about it similarly to last year, because again it’s hard to know – the weather thing, I was only here last – I wasn’t here in ‘18 to see firsthand how that plays out. But again, I feel like that’s a 2Q weather type catch up. So, I think that’ll be the same as it was last year and probably the same as it was the year before. We will get some of this technology pull-through. But again, I think it will be somewhat incremental, but I would not – I guess I would think about it pretty similar to last year on how we saw Q2.

Okay.

I think the other piece – Nathan, just the other piece on that, just from a sequential comparison and you’ve heard in Ken’s remarks, just the reference to the somewhat lumpy Middle East order that we started shipping in Q2 of last year, that’s an order that we don’t have a backfill for currently. So, that’s a differential year-over-year that would offset those other items we just discussed.

Got it. Is there any quantification you can give us on what that –what that was in 2Q and 3Q in Middle East last year?

It’s $2 million to $3 million.

Okay. Then I just wanted to talk a little bit about these project wins in Columbia and Aurora, a nice picture of my city there. Are your win rates on these kinds of projects higher or lower than say what your current market share is? And then can you maybe talk a little bit about what customers are telling you when you win like why they’re picking Badger and what customers are telling you when you lose, why they’re not picking Badger?

Yes. So, Nathan, over the past year, one of the things that I think our sales and marketing team has done a really nice job is really refining the selling process around Smart City technologies and bringing in the AT&T strategic city alliance, having a better engagement with the consultants, has really helped us to be able to sell this better. So, I think – I think in essence what we’re doing is really doing a better job of doing a team selling approach and quantifying the benefits for cities and why they should be choosing us and Cellular. Second piece on why we’re winning, there’s a lot of talk in the industry about new entrants in ultrasonic technology, but at the end of the day, we are extremely excited about ultrasonic technology. As you know, we’re the leaders on it, but that’s why I thought it was important to point out to you here that they still chose our best-in-class mechanical meters. So, choice really matters. That’s helpful for us for sure against not just new entrants, but also against our competitors that we’ve competed with for 100 years. We’ve got the broadest array of meter. We’ve got the Cellular technology that gives them the infrastructure free start-up, keeps them in line with technology for the next 20 years. So overall, I think just the benefits are becoming more known and we’re telling the story better and we have better partners. In terms of why we lose, I’m not going to get into the entire funnel, but these are the two really big ones that we’ve been working on right now and we won on both. So, we’re feeling really good about that. There is other large ones in the funnel, I can’t predict we’ll win them all, but we’re feeling pretty good about our situation right now. So, when we lose, I’ll tell you.

Fair enough. One last one on the gross margin level, you had in the last 6 months of last year copper was sitting in that to $2.60 to $2.80 range using that as a proxy for brass costs. Are you guys now running that lower $2.60 to $2.80 kind of copper cost in terms of your brass costs through the P&L now i.e. have you realized – are you realizing the benefit in the P&L of that lower copper cost?

We are. And so I think if we – you think about our commentary in the past, we’ve always said, it takes a little bit for that pricing to work its way through our supply chain, through our inventory. Typically, a quarter lag, if you will. So, there is a benefit in the quarter as we talked about to lower cost price – copper price, I should say, brass price on a year-over-year basis. Sequentially, obviously we saw an uptick in the quarter in terms of copper pricing and how that plays out versus last year. I think you can basically schedule out, if you look at copper pricing as a proxy for our input cost, which is really brass ingot.

Okay, that’s helpful. Thanks very much.

Alright, thank you.

And your next question comes from the line of Richard Eastman from Baird. Your line is open.

Yes, good morning.

Hi, Rick.

Hey, Rick.

Real quickly Bob – Bob, just to follow up on that last question, can you just give us a sense of what price contributed to the top-line in the quarter just across Badger’s product lines on a consolidated basis? And then also if there was a – any sense of what from a basis point standpoint it contributed to your gross margin?

That’s a deep topic, Rick, and I think in some cases we may – we may have fumbled that question in the past. And the reason I say that is because when we think about pricing in our model, there is effectively two elements. There is an element tied to list price increases and consistent with what we’ve talked about in the past, we have – on the water utility side or the municipal water side of the business, we’ve typically done an increase there when needed kind of the January 1st timeframe. We talked about last quarter having done about a 2% list price increase on the water utility side effective January 1, 2019. That certainly flows through and is effective into the distribution side of our business, and as you know with the distributor roll-up we’ve done in recent years that portion of our business is shrinking in size in terms of external distribution. So, while there is an impact, certainly it’s not as sizable as one might expect. Flipping that same concept of list price increases over to the flow instrumentation side of the business, we did an increase in October 1st of 2018, so, certainly there is some benefit to the quarter from that, but that’s really the smaller element of price. The other element of price for us is average sale price as we’ve talked about just a short while ago, that’s clearly the bigger impact as folks move up the technology curve and our mix of sales shifts from, say mechanical meters to E-Series or Ultrasonic. And likewise, as the concentration of the radio portion of our sales increases particularly to proprietary radios versus maybe say affiliate partnerships that we’ve used in the past. So, it’s somewhat of a challenging question. It’s difficult to quantify, but certainly there is a benefit. I would attribute it effectively of the 360 basis point increase in margin, I would say that’s about a third of the increased benefit. Long answer to a short question, sorry Rick.

But a third of – a third of the 360 benefit is mix or combined price and mix, you’re saying?

Mix, price, cost can all lumped together.

Yes, okay, it’s a third, roughly a third, okay, alright, fair enough. Hey, and then, I just wanted to ask you, Ken, with the color around the Aurora, Colorado project and then also the Columbia, South Carolina project, the wins there earlier this year, did it – how do you view those? Do you view those as incremental to your 2019 plan or do you view those as being captured in your 2019 plan as you entered the year? Just curious how we should think about that from a modeling standpoint?

Yes, so, Rick, I would say captured. So, the last couple of quarters when I’ve been talking about my optimism and how we’re doing with selling the cellular solution into smart cities, I was pretty confident when I was putting that out there that we were going to win these two.

Fair enough. Yes. And then industrial flow, speak to us a little bit about – I presume industrial flow kind of missed revenue plan for the first quarter and that could be weather and some of these other issues. But I’m curious when you look into this year and through this year, there is some discretionary, it looks like we’re downsizing some products or end-market emphasis, and I’m curious – just your thoughts on that? How does industrial flow look for the full-year? I mean do we run out flat with the efforts to reduce our exposure in some areas? How should we think about that product line for the – or that product segment for the whole – for the whole year at this point?

Yes, Rick, so how we generally feel about it with just the moving parts of going faster in the four target markets going a little slower in the non-target markets, some of the – some of the work can be somewhat project related. We still feel very good about kind of a mid-single digits throughout the year. Some quarters are going to be flat or a little lower, some quarters are going to be really high. Q4, we were up 9%, right, so it can kind of be up and down because it’s a small part of our business frankly. It’s a part of the business that we enjoy, but the numbers, the percentages can move pretty quickly.

Okay, alright. So, growth nonetheless, okay.

Yes.

And then maybe just last question, you had referenced the commercial piece of the utility business. How did that fare in the quarter then? I can probably try to weight this out, but my guess is it was down double-digits?

No, actually the commercial business did fine in the quarter. It’s just we expect to get more out of the ultrasonic commercial meters. I mean the benefit in – for ultrasonic in commercial is really strong. So, once we launch that, we feel better about that than perhaps the mechanical commercial meters.

Okay, fair enough. So – okay, very good. Thank you.

You’re welcome.

And your next question comes from the line of Tate Sullivan from Maxim Group. Your line is open.

Hi, thank you. Thanks, Ken, and on your last comment there on the commercial target market within the muni side for the 3-inch to 4-inch ultrasonic. Can you give examples of what customers are those? Are those water treatment plants or what kind of customers can those be?

Well, yes, I mean that could be one example, it could be anyone in the industrial space that’s using these large meters. So, it’s a pretty broad-based customer grouping.

But all for water?

Correct. Yes, correct, yes.

Okay. And then on the – thank you for the comments on the potential tuck-in acquisitions, but do you currently or have you historically had internal R&D efforts on the water quality side or opportunity?

You know I – no, right – that’s a tough question, so I’m going to speak of it from my 18 months of experience. We’ve had a lot of funneling activity around it on the M&A side. I would just characterize it as more of our activity has been there than internal development.

Understood. Okay, thank you. And then on the international, just looking at international Middle East had good growth in the last 3 years, but with no backfill, but are you still optimistic on that market or is – you’re not guiding to be more U.S. focused going forward than historically? Are you or any context there?

No, we still feel as optimistic about the Middle East as we did before. The issue with the Middle East can be as you get into Ramadan and the Eid holidays, the timing of when the orders come through becomes really critical to when you can actually recognize – realize the revenue. So last year the orders came early, this year we would expect the orders to come later.

Yes, so it’s more timing than anything.

Yes.

Okay, great. Okay, thank you for taking those follow-ups.

Sure.

And your next question comes from the line of Jose Garza from Gabelli Asset Management. Your line is open.

Hey, good morning guys.

Hi, Jose.

Jose, how are you?

Good. Just wanted to get your thoughts, Ken, on – just on these two big wins the Columbia and Aurora, just – once again, just kind of talk to us about how long those kind of were in the pipeline for and just to get a sense of what it takes for these kind of 3-year, 4-year long project?

So, when we first make contact and get started on, probably anywhere between 7 to 9, 8 to 10 months from the time we start talking to the time we get the award. Then it takes a few months before it rolls off. So, I guess from start to by the time you finally start rolling it out, it’s probably a year. But every city can be different, that’s just the recent two examples.

Okay.

And then –

Go ahead.

No, no, you first.

And I guess is that changing in any way or shortening maybe with some of these, I guess, strategic partners that you have now?

No, it’s not shortening. We’re still driving it, right. So, the strategic partners are great partners, but they are in it with us, right. So, the municipality still comes through us first. It’s the same process it was before. We just have I would say an enhanced selling process now.

Okay, excellent. And then just give – just let us in terms of your expectations for the E-Series and what’s going on there as you are getting some of these larger, larger diameters?

Yes. So that’s where – again we are going to start to see some added growth on commercial ultrasonic meters. We are going to continue – we have just released the 3 and 4-inch for sale in Q1. We will start shipping in Q2. We are going to continue to expand that line. So we can continue to capture more revenue in the 5 and 6 and 7 and 8 over the next few years. So, this is just the first launch of the first couple of sizes.

Okay, thanks very much.

You bet.

And there are no further questions at this time. I will turn the call back over to Ms. Bauer for some closing remarks.

Well, thanks everyone for joining our call today. For your planning purposes, our second quarter 2019 call is tentatively scheduled for Thursday, July 18. I will be around all day to take any follow-up questions you may have. Have a great day.

And this concludes today’s conference call. You may now disconnect.