Q3 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the third quarter 29, <unk> Badger meter earnings conference call.

At this time.

All lines are in listen only mode. After the speakers presentation still be a question and answer session.

Ask a question during this time simply press star and the number one on near telephone keypad. If you require assistance press Star zero.

No that today's call is being recorded.

It's now my pleasure to turn the conference over to Karen Bauer.

Vice President of Investor Relations strategy and Treasurer. Please go ahead.

Good morning, and welcome to the Badger meter third quarter 2019 earnings conference call on the call with me today, Our 10, Bockhorst, President Chief Executive Officer, and Bob Ratledge, Chief Financial Officer.

The earnings release unrelated 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 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 press release and slides provide a reconciliation the non-GAAP to GAAP financial metrics you.

With that I'll turn the call over to Ken.

Thanks, Karen again, thanks for joining our third quarter earnings call. Today, we were pleased with the returned to growth in the domestic utility market with sales up 2% against the near record comparison last year.

You May remember from last quarter's earnings call. We stated we expected to return to growth in the domestic market in the back half a year.

We did begin shipping the three and four inch E series commercial meters about midway through the quarter.

And one of the two larger municipal Smartwater wins began to ramp as well this combined with a solid municipal utility market backdrop provided the return to growth in Q3.

I remain encouraged by customer feedback on the new technologies and the solid funnel of opportunities as we look forward. In addition, our gross profit leverage remains in the upper half of our normalized range <unk> spend was well managed and we were able to continue working capital initiatives and generate strong free cash flow again in the quarter.

Bob will walk you through the details of the quarter and after that I'll come back and talk about a few key strategic items and our outlook.

Thanks, Ken and good morning, everyone.

Slide four gives you a snapshot of the financial results for the quarter compared to adjusted results in the prior year.

Just as a reminder of the prior year amounts have been adjusted to exclude pension termination settlement and executive Richardt retirement charges for comparability.

A reconciliation of these amounts is included in the appendix to the slide deck.

Starting with sales total sales for the third quarter were 108.6 million compared to 110.6 million in the same period last year a decline of 2%.

And municipal water overall sales declined 3%.

Focusing on the domestic market, which obviously excludes our more uneven international revenues, we saw utility sales up approximately 2%.

This quarter's domestic municipal water sales, where the second highest in our history and fell just short of the record second quarter of 2018.

The increase was driven by continued adoption of smart metering solutions, including the newly launched large diameter, three and four inch E series commercial meters and Orion L. T M cellular radio endpoints.

Sales mix remains positive with increased sales of ultrasonic meters and meters with radios as well as increased Beacon service revenue year over year.

Flow instrumentation sales increased 1% year over year with puts and takes across the broad array of industrial end markets served.

Operating profit as a percent of sales was 15.1% down 100 basis points from adjusted prior year results.

Taking a closer look at the drivers gross margin for the quarter was 38.4% once again in the upper half of what we would call our normalized range of 36% to 40%.

In order of magnitude favorable product mix was the primary driver with a higher proportion of Beacon service revenues ultrasonic meters and meters with radios as well as favorable regional mix.

We continued to experience favorable net pricing as brass input costs were lower year over year, albeit at a more modest pace than the first half of the here.

During the quarter, we did record a discrete warranty provision associated with the sourced system integration module for a previously installed solutions sold only outside of North America.

Excluding the specific provision our gross profit margins would have been modestly higher than the prior comparable quarter.

I see a expenses in the second quarter were 25.2 million.

The real point Ninemillion below the adjusted 26.1 million in the comparable period last year, due primarily to lower incentive compensation and effective cost control measures. Our S. C. A leverage improved to 23.2% of sales from an adjusted 23.6% last year.

The income tax provision in the third quarter of 2019 was 22.1% essentially in line with the prior years, 22.8% adjusted rate, but the third quarter generally the lowest tax rate quarter of the your.

Bottom line adjusted EPS was 44 cents in the third quarter of 2019, a decline of 4% from the prior years, all time record of 46 cents per share.

We again delivered a solid primary working capital performance with third quarter working capital at 27% of trailing 12 months sales down from 30.4% in the same period last year and on balance with the 26.9% at the end of our second quarter.

Working capital management contributed to the 50% increase in third quarter free cash flow from 12.7 million a year ago to 19.1 million this year.

Our year to date on a year to date basis, our free cash flow to net earnings conversion is a very robust 159%.

With that I'll turn the call back over to Ken.

Yeah, Thanks, Bob I want to take a minute to discuss one of the areas that frankly doesn't get a ton of event of attention from our investors, but it's a fundamental important stuff and that's cash flow or these charts on slide five display our free cash flow conversion, our ability to translate our earnings into actual cash flow and our primary working capital as a percent of sales.

Hence Bob just highlighted one of these the nearly 160% free cash flow conversion for 2019, thus far.

One aspect of our broad continuous improvement program has been focused on working capital management and you can see the early results.

Going efforts to drive reductions in days inventory on hand improvements and payment terms and tighter collection efforts span not just financed by purchasing operations and others and serve as a great example of our continuous improvement culture. We are in a net cash position and so why is this important.

Capital allocation is one of our most important jobs and our strong cash flow supportive of our efforts to take a balanced approach by investing in badger meters future growth, both organically and be acquisitions and meaningfully returning cash to shareholders as evidenced by the August 27 August announcement of our 27th consecutive year of increased dividends.

Finally, turning to slide six as we move into the final quarter. The year, we see robust quote activity in a backlog supportive of our growth plans. The key project wins, we highlighted earlier in the year are starting to ramp demand for the three and four inch E series commercial meters has been strong and municipal spending trends are solid and from a macro standpoint, while.

Employment is still quite good trade and other uncertainty appear to be taking a toll on consumer sentiment and overall industrial demand for badger meter, we remain largely unaffected by those particular trends since we are predominantly a U.S. centric replacement driven business. We will continue to monitor the environment. The municipal spending trends remain a positive backdrop for our utility water Bill.

Yes.

Execution on our strategic initiatives continues we recently held the customer Advisory Council session.

Which is a process, we use to gain insight on emerging customer trends and how our products and technology roadmap should evolve to meet those needs operational metrics. Some processes are being improved including the addition of of SAP or sales inventory and operations planning capabilities.

And finally, the active portion of the M&A pipeline includes some some interesting technology opportunities.

In closing I want to express my appreciation to all of our employees for their hard work and dedication.

With that operator, please open the line for questions.

At this time I'd like to remind everyone in order to ask a question. Please press star and the number 100 telephone keypad.

Your first question comes from the line of Nathan Joe Your line is open.

Good morning, everyone.

Good morning, Nathan Nathan.

Maybe we could just oh on the progress here around the new technologies that are coming into the market I know weve. Yeah. It's nice to see you guys return to growth in the domestic market here gets pretty good comp.

Maybe just a few questions around that can you tell me if there is more or less customization pilot testing and there were three months ago.

When does the pilot phase taking customers begin to move more into the ordering phase out of this.

Sure sure Nathan I, I think I would characterize it rather than I count of Watson pilot versus what moved into orders versus what moved into deferrals, it's probably easier to just thinking about this more as a phase in phase out from the L.P.M. Tac technology to the more robust LTM and really what we've seen as is a return to normal right. We're all.

There's going to have people piloting it we're always going to have people doing different things just the way we did before what the LTE technology. So so what we've seen as a return to normal.

Okay.

Maybe you could talk about then I mean, you're only just ramping up the sales of LT M. When that radio is that kind of a full run rate normal kind of makes what percentage of sales of radio sales do you think will be LT E M versus other technologies.

Yeah. So so similar to what I was just pointing out there. So the L. T E radio has now been phased out replaced by the LT E. M radio. So it isn't like we're still selling the LTV technology and the LTM alright. So so if you think about technology mobile reads are always going to be out there and we like that we continue.

You to play in the mobile side and a as people make their decisions the golf to the full am I systems there'll be buying our LTE E M Orion cellular.

Got it that makes sense.

Maybe just on the on the news three and four inch commercial made is maybe talk a little bit about the initial traction you're saying from those products in the market what advantages to do they generate for customers and the project analogy.

Yeah. So so from a technology point of view, it's really a nice enhancement for customers because.

It gives them the ability to to sense for pressure temperature. So it gives them more functionality.

Also on these higher flow applications that are that are the larger meters. Here's a case, where the ultrasonic does have an advantage with the no moving parts for where has better accuracy on low flow and we've seen really strong.

Customer support out of the gate I think the thing to remember is the three and four inches just part of a total product line. So I wouldn't think of the three and four inches. Some huge stacked bar of growth. It continues to improve our overall product line and was a really important product launch for us.

Okay, and then just one more on a on these warranty charge.

Yeah, Bob said, you know gross margin to be up slightly without that which implies that was about a four cents headwind on exiting the quarter.

<unk> is it sounds like you did a third party component that had issues are you confident that thesis contained to the third quarter isn't likely to see any others I know they prospects you to recover the damages from the supply given it sounds like just upon you assaulting.

Yes, so from the standpoint or the technology, it's very much quarantined.

Two specific region. So from the standpoint of charges in future charges, we would expect minimal moving forward as it relates to pursuing recovery at this point in time, that's not something that that we're pursuing so think about it broadly.

In our mind, it's a Q3 event in the Q3 Ventolin.

Okay. So it's a onex, Josh Thanks, I'll pass it on.

Alright. Thanks.

Your next question comes from line of Tate Sullivan Your line is open.

Hi, Thank you on the U.S. revenue increase I mean, you've had a consistent streak of the U.S. revenue growth to last for a five all of what five years I think it's been around 6% of year. I mean can you talk about I mean with the positive Muni backlog backdrop, you mentioned I mean any in.

Expectations for growth and your primary U.S. market.

Yeah. So so as we as we transitioned into this a new release on the LTE I'm again, we were back we feel like we're back to normal in that phase in phase out mode.

You know of the two large ones that we announced in terms of projects relative to Colombia in Aurora.

Columbia kicked off in Q3 or will begin to kick off in Q4, we are seeing robust demand in general for for what we're offering. So so yeah, I mean, I I feel I feel like with how we felt coming out of Q2 and what we indicated a on the last call I feel like we've returned to what we expect.

And that not pitching how you think do a specific quarter I think as we talk long term growth right multiyear growth rate I think we're still very confident in that.

Low mid mid single digit range for the utility portion of the business as we move forward. So.

No no change in that sentiment no change in that signaling as we talk longer term.

Great. Thank you and then you mentioned the D. and integrating the deal flow technology into the three to four inch ultrasonic <unk> are there other future deal flow integration efforts or are you done to integrating de flow on all your products.

No. That's that's one of the things that I'm actually excited about yet is that we're going to continue to build out the larger sizes. So the three and four was just the first release will start to move into the six and eight send even larger which well watch will really help build out the the full portfolio on the commercial side and then we still have the opportunity in front of us to.

Incorporate into the smaller residential meters and and have a.

You know I am.

A reasonable cost reduction that we'll be able to use whether that's for taking more share and or improving margin. So we have to really strong uses of the deal flow technology still going forward. So Ted I would think about the larger size being product line extension and expansion that opens us up to bids we didn't participate in previously.

But I would think of what Ken mentioned in terms of the integration of that into the residential metering is being a cost improvement that will be used for combination of.

Competitive global pricing as well as a margin enhancement.

Has that has the integration been on schedule has on the residential effort. What do you flow has that been consistent the tight your timeline expectation on that since acquisition.

Yeah, I'd say, so when it comes to implementing something that's going to reduce our costs, it's never fast enough and my point of view, but.

No I mean.

We expected that we would've done it this year later second half that we're looking more now first half next year.

Okay. Thank you. Thank you have a good day.

Sure. Thanks.

Your next question comes from the line of Chip Moore Your line is open.

Good morning, Hey, guys.

Hi, Jeff want it to wanted to circle back to a pilot activity I you know it sounds like things are normalizing a bit but how are you thinking about.

You know any sort of elongation in the sales cycle is that really are we pass that any seasonal considerations I guess as we enter into into a you know that the harder time here.

Yeah, that's a.

Let me break that into a couple apart. So so first again reiterating on the LTM.

Phase and phase out of the LTV, we're feeling that's into a normalized phase again, we're always going to have people piloting where I was going to have people ordering. So so I don't think we're gonna see more elongated and there.

The second part of the question I forgot already so what was that [laughter] well it sounds like no, but just any you know in terms of elongation are piling cycle to help factor in terms of seasonality.

Yes, that's right, so seasonality or seasonality can be interesting when it comes to weather impacts and some of the other things, but I think to think rolling forward here now that we've got a couple of really large am I integrations. The seasonality I think as we go through the next year two years three years it may not be as impactful as it had been in the.

Past.

Got it and.

Another one on Ah, yes, I see a leverage very strong any puts and takes there to take into account.

You know sustainability.

We look forward.

You know I think I think we've been pretty consistent and telling the story here on on being able to leverage the a assay a particularly as we transitioned to higher average selling prices larger am I implementation. So I think we're feeling good about the SK leverage and I think it's a it's progressing as we expected.

I think just to reiterate that Ken Ken mentioned again, our ability to leverage associate overtime as a large part of our topline stories about average sell price increase.

I will say the one thing that won't change in the thing that we will remain steadfast in is to continue to invest in the in the business organically to stay as a technology leader so to the extent, we find opportunities where we can accelerate new product development to keep us in a better competitive advantage or to bump as to the top on a particular technology, we will not waiver in that.

So that's not meant to the buffer hedged the earlier comment I still believe in the long term prospects of Sta leverage, but there may be bumps, along the way, where we decided to.

Put put more into organic investment in new product development.

Oh, that's that's great and maybe that's a good segue into one last one you're in a pretty strong.

Net cash position.

How should we think about some of those organic investments and then potentially any assets you're looking at thanks.

Yeah. So so you know over the years, we pride ourselves on the innovation that we brought to the market. So we will continue first and foremost to invest in R&D is Bob just pointed out.

We're proud of our 27 year history of increasing dividends year over year that we'll continue to be a capital allocation priority for US and then the third part is is continuing to you know ready the organization with our organizational capability in improving our acquisition funnel and finding meaningful strategic.

Rick acquisitions to to improve the technologies and solutions, we bring to our customer so.

Internal R&D.

Still sticking with our dividend history, and and investing in M&A.

Great. Thank you.

Thanks.

Your next question comes from the line of Richard Eastman. Your line is open so yes, good morning, I'm, Ken Eric wondering.

Equally good morning.

Bob.

He just a question no I just want to get maybe your perspective here a little bit we talked about the domestic business the municipal business water meter business being up plus 2% when we.

Pull out the international impact of the comp.

Could you just give us a sense of what the residential versus commercial did against that 2% domestic.

Yeah. So so the lions share of the revenue was on the residential side. So so the commercial doesn't really swing it that much one way or the other I guess I don't have the specific number in front of me but.

But I'm just curious I mean with the three and four introduce that kind of would be more of a commercial products. So I'm just yeah I'm just curious if if commercial.

It was up 10% in residential was flat to up just I guess trying to get some shots of that.

It was really consistent with <unk> with a normal quarter. So there wasn't a spiking in commercial that would have you know covered for residential was very consistent.

And so when I when I look at the number that you know 2% domestic community water. What's your what's your take on that number that growth rate relative to what a market growth rate would have been in the third quarter.

Oh.

Well I would I would go back to the point that you know we expect.

For the long cycle to grow in the you know mid single digits. You know mid six to eight ish percent. A fact is we were up to this quarter. We're proud of being up to this quarter last the last year year over year, we were up 12. So so it wasn't really tough comp and so we still think the market might have been above our too, but we're certainly not feeling.

Add about our too.

Okay, Okay and in the international business I know the swing factor has mostly come from the middle East.

But I'm curious with that business down I think the comp was somewhere around three to 4 million.

In the middle East, but that business down as much as it is what is the the run rate.

Of the international business, including Mideast I mean, if you look at the third quarter here.

Collars times for just just curious where that run rate is that.

Yeah. So so the interesting thing about the international markets compared to the U.S. as in the U.S. right. We have 50000 municipalities that are.

Yeah that are that are generally doing replacements and and you have a lot of people doing a lot of different types of activities. Some up some down depending on where it's at when you look across the world you're looking at individual countries are cities that are implementing new systems. So the replacement business isn't there right. So it it tends.

It will tend to be more lumpy and the fact that it's more integrations that our large and then they happened one year and they may or may not happened the next or so it'll it'll continue to be uneven it doesn't dampen our enthusiasm for what we're finding for utility water utility opportunities around the rest of the world, but I don't think you're going to.

See a consistent run rate from us over the couple of next couple of years right.

Well, but I'm just curious when I look at I mean, maybe maybe stated another way if I look at utility sales in the quarter.

You know around 84 million and I'm, just trying to figure out what what percentage of that do you count is international because my understanding is international is I think its middle east, but isn't it also don't you throw in Mexico in there and.

So we've talked about what percentage of that so internally when we talk domestic and when we're using the term domestic here today, it's basically in America's number.

Whereas rest of world would encompass middle east and other countries, but largely our international President when you go presence when you look across the entire book of business has historically been more about flow instrumentation than it has utility.

So, let's say relative <unk>. It is a very small piece of that a full utility number that that you just mentioned.

So so when not if if my comp numbers right somewhere around let's say three to 4 million was the middle East shipment last year does that in this quarter does that three to 4 million number go to zero.

No I was at that.

No no I would swabbing. It is fair I mean again, we're kind of splitting hairs here, but with a middle east number of three to 4 million.

Our international number a year ago was modestly higher than that three to 4 million and then the current year and then the current year, it's basically a million. So the largest part is that nonrecurrence, but it is very very small numbers.

Okay I understand it's trying to get order magnitude and then there was a there was a reference ken to the to the to run rate around you know beacon recurring revenue subscription revenue.

Is that number you know.

Started to register on the scale at all.

I'm sure, it's a big growth rate, but I'm curious.

You know.

<unk> order magnitude is it a few you know is it.

A few million boxes. It is you know.

What kind of number.

It has grown to.

Yes.

So generally we've been we've been running obviously, you're right exactly because it's running from a small base received larger percentage increase currently operating right around 3% of consolidated consolidated revenues being that kind of recurring base and obviously, we've talked openly about with the adoption of and the migration to am I systems at all.

So the adoption of cellular as a preferred technology internally, we measure to wanting that to be 10% of utility based revenues over our five year strategic plans. So that's not a secret, but we're sitting currently at about 3% of total consolidated sales of utility sales 3% of consolidated.

Total okay. Okay fair enough. If you have a good okay, great. Thank you very much.

Yeah, you're welcome.

Your next question comes from the line Richard Verdi Your line is open.

Hi, Thank you for taking my call. So basically <unk> My company level increase has been addressed I just had a couple of broad questions remaining you know kind of I kind of heard from a few clients. They feel the the Orion LT and technology is somewhat inferior to other technologies and so can you kind of literature of address why the.

But he feels choosing the right LTV and technology. This best in kind of compare to your pure offerings.

Yeah, So I'm I'm certain that the people who expressed that to you aren't our customers. So [laughter] have because because the benefits are many reits. So so initially there's zero infrastructure investment required to be able to to ramp up and am I system. There is no time base limit where you have to build out that system.

First you can continue to improve at the rate of technology would cellular which which involves faster than a fixed network.

In in specific natural disaster communication issues. If you have a problem with with the your fixed network getting damaged cellular comes up faster.

There's a different rate at with with which you can pay your subscription fee for the software as a service, which our customers really value. So I'd love to spend a lot more time with you explained that in more detail, but it is in no way inferior to the other option. Okay. Okay. Great you kind of answered my second question, there I'm going to jump out. Thank you very much for the time yeah.

Your next question comes from the line of Andrew VESCO idea. Your line is open.

Yeah, Hi, Andrew that was close right [laughter] like the new one [laughter] can you guys talk a little bit more about what you're saying you had some commentary.

In the call we didnt municipalities are.

Showing interest you're encouraged by their interest level.

How much of this is related to.

New technologies like five Gee, I mean online how much of it is a function of how they feel about the environment.

I just trying to get inside the nine to you know what municipalities are thinking right now looking out into 2020 kind of what.

Where you get confident that things will improve.

Yes, I think the way that municipalities are looking at am I adoption is that it's helping them solve a lot of their problems right. So it's helping them be more efficient and and how they're able to do there you know there their billing reads, it's making them more in tune with the supply demand within their their system, it's helping them identify leaks and can.

Serve water, which is really important then several parts of the country in the world. There's many benefits to an A.M.I. solution that that are driving customers that way and then on top of that generally they're feeling pretty good about their ability to spend money. So I think it's a convergence of the technology really as solving problems for customers at a time when they.

In spend money to do it.

Okay.

Okay, and then you know you've made a point on the prepared remarks talk about your cash flow.

And it really has been building over the last year.

What were your thought them.

Painting, you're letting that continue to build.

To fortify sort of your balance sheet.

Or you know what what are you. If you are spending it you know that M&A, what kind of R&D or kind of stuff would you be spending on exactly.

Yes, so we can start from the R&D front and a one of the things that we will continue to do is build out our our ultrasonic large meter line you know to have the the full line on the ultrasonic side.

Second piece that will continue to work on is building the rest of world meter portfolio that we need.

Third thing there will continue to be a evolutions in cellular technology LTM was last a and B I O T is also coming.

We are working on releasing in the early half of next year, our flow limiting valve, which we're getting a lot of great feedback from our customers.

So there's there's a lot of great R&D actions and continuing to build out our software as a service platform. If you recall, we acquired Aquacue in 2013, we've got a great team of software engineers out in Silicon Valley, and we continue to develop new a new ways to help utilities be more efficient and real time with software. So.

We have a full plate of R&D activities that we're excited about.

And then on top of that we're going to continue to look for really nice M&A tuck in and technology extensions like we've done before with deal flow and that we've done a really good work with and similar with Aquacue. So so we have plenty of great things that I think weekend continue to invest in at the appropriate rate that our customers are looking for.

Okay.

Got it maybe just one last one we talk a little bit about the international markets and you guys focus on a lot of discussions around the middle East what about the UK.

Can you talk a little bit about that marketed with you here that is a good opportunity for you too.

Yeah. So the UK is certainly interesting to us it's a market with a 15 utilities. There's a there's a lot of a growing I think need and discussions there around am I type solutions. The fact that we have and are continuing to build out our rest of world a meter offering I think that.

It will be an opportunity for us rolling forward as well as building on middle East some pockets of Southeast Asia. I mean, that's just one area that we think we can play, but but yeah, I think you're right about that and certainly the legislative and regulatory environment. There is definitely driving toward a more smart metering applications and so yeah right overall.

I think what we've done internally is obviously had to rally the resources infrastructure in channel to support that market, which is very early stages for us.

Got it alright, thanks, guys.

Thank you.

Your next question comes from the line of Nathan John Your line is open.

Good morning again.

Yeah, well come back.

Still the spot highlighting it in your slide show Nobody's talking about cash flow.

So I'll talk about cash flow.

It looks like a lot of the improvement he has been in payables and receivables you just have pretty high levels of both in Three Q1 8 can you talk about a little bit more about the kind of process improvement that you've made a toms and conditions potentially that youve that you've made on both the payables.

Receivable side, that's driven that that primary working capital number onto that kind of 27% level.

I really just think it's up a bit more focused than has historically existed and that's not to throw anybody else under the bus I think it's just a win with new perspective come new processes and so I think it's it's a little bit of motherhood and Apple pie on the receivable side, it's just staying closer to collection status, having more frequent touch points.

With customers really identifying pockets of payer behavior that we could improve one at one area being are on the flow instrumentation a line of business in Europe , just having a renewed focus on historic agreements in terms, so very much motherhood and Apple pie as it relates to receivables and I would say the same.

Holds true from a payable standpoint, I think we've long prided ourselves on being a good payer.

And we'll continue to do that.

I'd, just rather be a good payer at 60 days than I would at 30 days and so we've taken a targeted approach with our supply base to identify a top 100 top 150 type suppliers and pursue at what I'll call advantageous terms discussions about extending our payment terms, which I think is.

It is clearly very common within manufacturing just a an idea we're bringing to the table now so but you're exactly right. Those are the two pockets of improvement and that's a big part of what we've been able to do here in the last really three quarters.

Of that focus and that's been a a tailwind for cash flow and is certainly contributing 259% a free cash flow conversion to net earnings per spend perspective that we just talked about and if I can add anything. So we I mentioned also that we've kicked off the sales inventory and operations planning.

System. So you know, we're really investing in trying to make sure that we optimize our inventory.

So we can continue to keep the service levels that we have but we certainly think we can do better on the inventory side, yet as well.

So that was going to be where I was going next I mean, I normally think of world class a primary working capital management Bantered about 20% sales I would imagine badgett meda given the type of business given that you know short a ton around that you can have on some of these made it would require a higher level of inventory than that so I don't think.

Yeah, 20 would probably be too low and your service levels would safa at that point, but 27, probably still feels a little bit higher as well. If you were operating ultimately where would you think that that primary working capital number should be.

Well well first let me tell you why youre right that we would that we would generally have a higher number so.

As we believe we pride ourselves on the choice that we offer our customers. We have the full line of mechanical meters and whether that's in brasseur polymer we have the ultrasonic. So so we we generally are going to carry more inventory to support our customers with choice.

So that's one too as we ramp up the columbia's into euros, they're gonna be specific times, where we're ramping up inventory or to handle some of these large integrations, where we've not received any revenue yet. So so those are a couple of factors that that are pretty pretty large on it.

I think we can continually improve as a percent of revenue over the next few years, what the endpoint is I don't know, but I do expect to get better every year, Yeah, I would say rearview mirror Weve rearview mirror, we've operated in the high Twentys, sometimes even at 30% will never I'll I'll never give you a 22.6%.

The ideal level, but what we will be committed to is that continuous improvement and just so happens out in the last three quarters, we've been able to move that number down.

200 basis points, and we're pleased with that progress, but we're going to keep rolling to to enhance that each year through a little bit of motherhood and Apple pie and then some a systematic implementation of site up and other things that'll drive impact further.

Okay, maybe inventories a little bloated at the moment as well.

In Colombia in Aurora ramping up and that my last through.

Early next year kind of thing and we should maybe expect to say the inventory roll down a little bit. After those two are focused got off to run right.

Because not all three elements primary working capital Nathan So I'm thrilled with the 160% free cash flow conversion year to date.

[laughter] no.

[laughter] illustrates light.

[laughter] I just thought I'd remind you of a [laughter] thought I'd come back to remind you that for awhile, but no I. Your your point your points are valid, but I think the thing that you should recognize as Bob and I and the rest of the team here. We you know we've spent the majority of our career working on maximizing our cash and so that's one Bob just talk.

About new processes and different things, it's something that's in our DNA and we'll continue to work to improve it.

Okay, perfect I'll leave it there thanks.

Sure.

Again, I think I'd ask a question. Please press star number one I'm telephone keypad next question comes from the line of case element.

Okay.

Hi, Thank you. Thank you for the follow up and I think it will just can you give a little more clarity on the warranty provision in the quarter and I mean, just it's outside the U.S. can you talk about what it well what a system integrators integration module is and last <unk> sorry for the list of questions last when was the last time, you took a warranty charge and the U.S.

If you can't disclose too please.

Yeah. So so first I would just say that this is definitely an outlier as Bob mentioned before you know it's its a part that goes into a system that yeah. Unfortunately, didnt work, we moved on and we don't expect it to repeat.

And in terms of U.S. I mean, yeah, I mean, we generally don't disclose there's nothing large enough to disclose I think we I'm looking and Bob now, but let me just come back to modify one thing or what Ken just said in terms as we move down when we when he says that we when we moved Dod is we're still supporting our customer or were going up above and beyond to support that cuts.

<unk> and make sure we can make right the performance of that system and the communications of that system. So we're doing what's right and we're encouraged by the fact that that even with that our gross margin profile still landed at 38.4% in the quarter still in the upper half of our our normalized range, but then to yourself.

Nondairy question of course, just like any other manufacturer we have warranty provisions. It's just this tends to be an outlier burst versus our normal rate of accrual.

Is that a unique system to the foreign clients and country to or yes, yes. It was a unique system to that foreign client and and we've come out with a new product than its adds behind us.

Okay, great and just on that guided I think you've guided before gross profit margin range or I don't want to say guidance, because you don't but all of about 30, 840%, but your comments I mean without the warranty charge you get back up close to last year's gross profit margin level of 40, and then you have beacon growing which I imagine it's higher margin.

Should we just stay with that 30 to 40 expect so well we've talked about openly as a normalized range historically of 36% to 40% with copper where it's at today and some of the margin enhancement initiatives that we're focused on we've talked about being able to tighten that historic range, but I continue to reinforce with.

Investors and others that the like that we're still operating in primarily in North American oligopoly, and so the expectation that that range or that tight range continues to move to the right I'll always use that it's not a stairway to heaven, a we're still competitively in the marketplace, where the enough for player oligopoly here in North America.

Well, we're rational and we're all good competitors. The so to think that we can keep stringing together margin expansion into the 40 40, 142% ranges just not realistic overtime. So I would keep your laser focused on the upper end Oh the upper.

Range of that range, if you will particularly with where we're copper is today.

Okay. Thank you for that.

That thanks.

There are no further questions at this time I turn the call back over to presenters.

Great. Thank you all for joining our call today for your planning purposes, our fourth quarter and kind of year end 2019 calls tentatively scheduled for February 5th.

I'll be around all day to take any follow up questions. You may have have a great day.

This concludes today's conference call you may now disconnect.