Ladies and gentlemen, welcome to the Second Quarter 2024 Badger Meter Earnings Conference Call. After the prepared remarks, there will be an opportunity to ask questions. [Operator Instructions] As a reminder, today's conference is being recorded. It's now my pleasure to turn the conference over to Karen Bauer, Vice President of Investor Relations, Corporate Strategy and Treasurer. Please go ahead, Ms. Bauer.

Good morning, and thank you for joining the Badger Meter second quarter 2024 earnings conference call. On the call with me today are Ken Bockhorst, Chairman, President and Chief Executive Officer; and Bob Wrocklage, Chief Financial Officer. The earnings release and 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. On today's call, we will refer to certain non-GAAP financial metrics. Our earnings slides provide a reconciliation of the GAAP to non-GAAP financial metrics used. With that, I'll turn the call over to Ken.

Thanks, Karen. We appreciate all of you joining us for our second quarter earnings call. I'm pleased to report that we surpassed the $200 million quarterly revenue milestone this quarter, delivering total sales of $217 million, representing 23% year-over-year growth. This result was modestly higher than we anticipated, driven by ongoing market demand and incremental backlog conversion in support of our customers. We reported record operating margins and EPS in the quarter, along with strong year-over-year cash flow growth. In summary, at the halfway point of the year, we remain pleased with the trajectory of our business results. I'll hand the call over to Bob to go through the details of the quarter, and I'll come back to talk about BlueEdge, our recently released sustainability report and the outlook for the back half of the year. Go ahead, Bob.

Thanks, Ken, and good morning, everyone. Turning to Slide 4. As Ken noted, our total sales in the second quarter exceeded the $200 million mark for the first time and at $217 million, represented an increase of 23% compared to $176 million in the same period last year. Total utility water product line sales increased 26% year-over-year, moderating a bit from 29% growth last quarter. Demand for our innovative suite of utility smart water solutions continued to benefit from underlying secular growth drivers, and we were able to make additional headway into our backlog in support of customers. Most notably, we delivered on strong cellular AMI demand, including higher sale of meters, both mechanical and E-Series Ultrasonic, ORION Cellular endpoints and related BEACON Software-as-a-Service revenue. Sales for the flow instrumentation product line increased 5% with solid order trends globally within our focused water-related markets such as wastewater. As we noted in the press release and as we've consistently communicated, we anticipate the rate of sales growth to normalize into the high single-digit range in the back half of the year and over the cycle, with typical unevenness in that outcome from any particular quarter or a year. We have a strong opportunity pipeline, bid funnel and order book. But for the back half of 2024, we do anticipate the level of backlog conversion, which benefited the second quarter will not -- we do not anticipate the level of backlog conversion, which benefited specifically the second quarter, which will obviously then influence sequential trend lines moving forward. Turning to margins. We are very pleased with the operating margin expansion of 240 basis points in the quarter, reaching a record high of 19.2% for the second quarter. Gross profit dollars increased $15.9 million year-over-year, and as a percent of sales, gross margins…

Thanks, Bob. Turning to Slide 5, I'll take a few minutes to introduce you to BlueEdge. For those of you that stopped by our booth at this year's ACE tradeshow, you saw the literal representation of BlueEdge on display. It showcased our full suite of connected technologies, integrating hardware-enabled software and services for customers to gain clarity and make more informed decisions for efficient water management. BlueEdge is not a new product or segment, so please don't ask us how many BlueEdges we plan to sell next quarter. Instead, BlueEdge is the overarching name we've given to our tailorable suite of solutions that solve critical water challenges across the entire water cycle. It's a way to simplify for our customers, including both utility and commercial and industrial customers, the breadth of offerings available to best meet their needs and preferences today and as they advance and change in the future. I encourage you to visit our badgermeter.com website to learn more. At the end of May, we released our annual sustainability report with a summary here on Slide 6. The report focuses on enabling customer-driven sustainability outcomes, mitigating ESG risks and reducing costs. With more than 95% of our revenue derived from water-related applications, we play a crucial role in enabling water efficiency and resiliency, reducing water loss and optimizing asset life for our customers. We also strive to limit our own environmental impact by reducing emissions, energy, waste and water usage and in turn, lowering our costs. Finally, we know that attracting and retaining engaged talent motivated by our purpose and provided opportunities to grow their careers are critical to furthering innovation and supporting our long-term growth. By prioritizing the value-enhancing linkage between financial and sustainability-related outcomes, we are working to ensure the longevity of our business well into the future. Finally, turning to the outlook. There is really no change to the multiple favorable macro drivers supporting the water industry growth fundamentals with an encouraging opportunity funnel, bid pipeline and order book boding well for continued sales and earnings growth. As we noted in the press release and Bob's earlier comments, the second quarter did benefit from converting some of our backlog in support of our customers, which will impact sequential revenue expectations moving forward. Our focus is on high single-digit sales growth rates taking into account general unevenness and the more difficult year-over-year sales comparisons in the back half of the year. We have the balance sheet and cash flow generation to provide us with significant flexibility and capacity to further invest in both organic and highly strategic inorganic growth while also providing an attractive dividend. In summary, the feedback we received from customers and other industry experts at ACE reinforced both the constructive industry backdrop and their preference for our innovative and differentiated solutions. Our team remains aligned and excited about the opportunities ahead. With that, operator, please open the line for questions.

[Operator Instructions] Our first question today comes from Nathan Jones with Stifel. Please go ahead. Your line is open.

Good morning, everyone.

Hi, Nathan.

I guess I'll start off with the question about the high single-digit target in the back half of the year. I mean you guys have talked over the years about more long-term targets, but I don't think you've ever kind of given a specific target for a second half of the year. So clearly, trying to manage expectations here with the backlog conversion in the second quarter. So I guess the question is, can you talk about what the contribution of kind of a 1x backlog burn off in the second quarter was? And should we just kind of think of that as a headwind to what a run rate second half is?

Yeah, Nathan, I'll go first here, and I'm sure Bob will have something to add on this. But fundamentally, the positive outlook that we have on the markets hasn't changed at all. I just think we're heading into a period here where year-over-year the comps are -- get stronger each additional year. I think we were up in Q3 last year 26%, the previous year up 15%. So the comps get more difficult. And just in terms of returning to the idea of we deliver when our customers want products from us. And we've always been an uneven business in the past and just don't want people to start thinking about sequentially every quarter is larger than the next. And Bob's shaking his head no, so I must have did okay. No meaning he agrees, yes.

I got it. I think we're saying over the last couple of quarters as well and over the last period here that the incremental margins have kind of hit that 30% level, which I think is kind of higher than you guys have guided historically or expected historically, talking more about mid-20s kind of incrementals. Do -- should we expect that to normalize back down to more of a mid-20s level if the organic growth is lower? I mean obviously, you should get higher incrementals on higher organic growth. Just any thoughts you have around that.

I would say no fundamental shift, Nathan, to what we say our normal incrementals are. You're exactly right in the diagnosis of really the last two quarters with the robust growth and then the pace of growth investment being modestly slower than that. Of course, you're getting the operating and EBITDA margin leverage and of course, then a byproduct that is the incremental margins. But no real change to our mid-20s. It just so happens the two most recent quarters have been above that for those reasons.

Okay. I guess I'll just slide one more in on BlueEdge without asking how many BlueEdge's you're going to sell. Does putting this suite of technologies and marketing this suite of technologies kind of let you leverage that in terms of maybe selling a little more of these technologies or going to market with a broader suite of technologies that could be leverageable to increase revenue, increase market share? How do you think about the ability to leverage that platform to generate additional revenue?

Yeah. So you're exactly on the right path there. So obviously, over the last four years with the entree into water quality with ATi and s::can, Syrinix for the pipeline monitoring, bringing on the Telog brand and RTUs, we've clearly gone beyond the meter. And this BlueEdge platform is a way for us to talk with customers about the full extensibility that we can provide throughout their network system. So if someone's been a metering customer with us for 50 years, now we have a comprehensive easy way across the organization or through our distributors to talk to those customers about the rest of the portfolio that they could put in place by adding the sensors and then bring it through our BEACON software platform that they already use or vice versa, if it's a customer that we've acquired through one of the acquisitions and they haven't been a metering customer, similar things. So it's just -- it's a really nice way for us to meet the customer where they are in their technology journey and figure out how we can enable them to meet their goals and sell more of our products.

Awesome. Thanks very much for taking my questions.

Thank you.

Our next question comes from Andrew Krill with Deutsche Bank. Your line is open. Please go ahead.

Hi, thanks, good morning everyone. Last quarter, it was noted the US government stimulus related to water was helping slightly at the margin with demand. I know a lot of this was indirect by freeing up capital at the water utilities. So just, is there any update on this? Has it changed at all, perhaps accelerated through 2Q? And also, I guess, in your discussions with customers, like, are there any dynamics at play ahead of the US election such as scrambling to use these funds or perhaps sitting on the hands more until after the election, and therefore, maybe there could be a little bit of an air pocket to contend with? Thanks.

Yeah. So, Andrew, I don't recall exactly what we said about that last quarter. But the one thing about our growth that has been consistent for the last several years is that virtually none of it has been aided by any of the infrastructure funds. The fund -- the macro drivers, the fundamentals of what's happening in the market and our team's ability to execute on our portfolio has been the driver of the growth. As we think about election cycles and what we think the future can bring, if and when some of these funds do start to come through, we think there could be some pockets of goodness and water quality in some of the other areas, but we really don't need that for our growth. So it puts us, I think, in a pretty good position that we don't have air pockets that have been created by that. Therefore, we're not expecting any air pockets to burst.

I think the key part of your question is exactly what you stated. It was on the fringes, the extreme fringes, and generally more indirect in terms of effect. So that's kind of where things are. And I would say no real delta quarter-to-quarter.

Okay. Great. That's helpful. And then just as a second question, I think the copper and the movements in it has been a hot topic. And I think over time for you guys, it's become less and less important as an input, but just wanted to get your pulse on, should we be expecting this to be a little bit of pressure perhaps on gross margin in the back half and maybe that keeps you from being at the very high end of that 38% to 40% range you target over time? Thanks.

Yeah. I mean, so there's obviously a lot of drivers of our gross margin beyond just copper, and you highlighted the key point, which, of course, less and less of an impact as we continue to sell more and more things that aren't as copper focused. But clearly, it's a fact that if you just looked at quoted copper pricing, quarter-over-quarter, second quarter average, 2024, it's 18% higher than we were a year ago. Thankfully, it's a bit lower than the peaks of mid-May. But absolutely, that's one of the items that would be on the headwind side of the category. In addition to a variety of other things, as the markets read, certainly, inflation is improving, but there's still inflationary cost pressures in the system, whether that be copper, whether that be transportation, energy and other things. But ultimately, we still remain resolved to our normalized gross margin range. And quite frankly, if you look at the last six quarters of performance, as we noted in the script, we've been in a pretty tight band. And I think we would expect that to continue. But definitely, that copper piece is a pressure.

Okay. Great. Thank you.

Thank you. Our next question is from Rob Mason with Baird. Please go ahead.

Yes, good morning, Ken and Bob. I just wanted to go back to the commentary around backlog conversion within the high single-digit or so focus that you have for the back half of the year. Does that assume that backlog comes down further? I'm just kind of curious what your level of visibility is around the high single-digit.

Yeah. So as you know, we never have sized the backlog. And what I would characterize it as we're still really excited about the level of order rates and what we have in the backlog. So I don't think that anything really fundamentally changes in our view on that.

Sure. Ken, you had mentioned earlier, and I mean this has always been resident in the business. You ship the product when your customers need them. But I'm just curious, over time, whether your revenue is growing at a 20% clip or high single-digit. That is a little bit higher than historical. And this is largely viewed as a replacement business that your utility customers that are replacing existing meters or radios as well. How have they adopted or adapted their staffing models over time or maybe in the last few years to be able to support that kind of deployment pace?

Yeah. So that's -- as we talk about so many times, like there's no yes or no answers to any question and everything is not standard. So when you see, I think, in many cases, more and more installation companies working for utilities where a lot of utilities used to do the installations themselves or you still have a lot of people that are trying to staff up, fundamentally, still one of the things that's a huge driver for us is this aging or less stable workforce, and that's why people have been adopting technology so much. So again, I don't think I can give you just a standard answer of how each utility is reacting, but...

I do think what we could say, and again, this hits close to your question, but maybe not precisely is with labor shortages, as we've all talked about over the last two, three years, we haven't seen an elongation in the more generalized standard deployment of a full system replacement. Generally, those tend to be three, four, five years. So, the labor has been be able to be kept in place to such that we're not seeing an extension of deployment schedules. I think the point Ken is making when we deliver to our customers is the high dependency of our sales channel on direct sales, which maybe is different than our competitors. And so this is not a distribution game. This is a very much direct relationship, which by default then brings in project schedules more so than others. And that's a degree what creates some of the unevenness that we often talk about just so happens this most recent quarter had an uneven miss to the favorable side.

I should let Bob go first.

Well, just to conclude, last question, so your SEA expenses, as you commented, did step up sequentially a fair amount, your outlook for modest operating margin expansion in the second half of the year kind of suggest that they stay at this level, is that a fair interpretation? Or was there anything more onetime in nature in the second quarter?

Yeah. I think the comment that you specifically latched on to the modest improvement, that's really a year-over-year comment and not a sequential comment. Absolutely, we continue to be organically investing in the business and differentiating our market position through being an innovative company that invests in the business. We just continue to believe we can do that at a rate slower on which we can grow the top line, and that continues to be an operating lever for us moving forward. But that comment you latched on to is more year-over-year than sequential, full year -- excuse me, full year.

Okay. Thank you.

[Operator Instructions] We have no further questions in the queue. So I'll turn the call back over to you, Karen, for any closing comments.

Great. Thank you, operator, and thanks, everyone, for joining our call today. For your planning purposes, our third quarter call is tentatively scheduled for October 17. I'll be around all day to take any follow-up questions. Have a good weekend.

This concludes today's call. Thank you for joining. You may now disconnect your lines.