Q4 2020 Badger Meter Inc Earnings Call
Ladies and gentlemen, welcome to the fourth quarter and full year 2020, Badger meter earnings conference call.
At this time all participants are in a listen only mode.
After the Speakers' remarks, there will be a question and answer session.
To ask the question during the session you will need to press star one on your telephone.
As a reminder, today's conference is being recorded.
It is 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 fourth quarter 'twenty 'twenty earnings Conference call I Hope, you're all doing well and staying safe on the call with me today are Ken by of course, Chairman, President and Chief Executive Officer, and Bob Rockledge, Chief Financial Officer the.
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 our SEC filings on today's call, we'll refer to certain non.
Non-GAAP financial metrics, our press release and slides provide a reconciliation of the GAAP to non-GAAP financial metrics for you with that I'll turn the call over to Ken.
Thanks, Karen and thank you for joining our fourth quarter earnings call. Obviously, there are many aspects of 2020 that we along with many of you are happy to turn the page on as we focus on a safer and healthier 2021. However, this morning, we do want to spend a few minutes looking back and summarizing our fourth quarter and full year 2020 results and then talk of.
A bit about the new fiscal year, and the long term opportunities at Badger meter.
In summary, we were pleased with our fourth quarter results, which demonstrated the continued stability and resiliency of our utility water end market as anticipated flow instrumentation sales were less worse sequentially, but still down year over year. We delivered gross margin improvement continued cash flow generation on EPS growth, albeit with the number of am.
Moving parts of that Bob will walk through in more detail.
I am extremely pleased with our ability to complete two meaningful acquisitions over the past several months that our strategic growth drivers for Badger meter earlier. This month, we acquired analytical technologies, Inc, or a T I combined.
Combined with Essakane, which we purchased in November 2020, we now have a great foundation on which to build the real time on demand water quality monitoring offering to customers in both utility water and industrial markets I'll talk about the the water quality offering in more detail later on the call as well as the current environment and what we see looking out into two.
<unk> thousand and 21 of them beyond <unk>.
Bob with that I'll turn the call over to you.
Thanks, Ken and good morning, everyone.
As you can see on slide for total sales for the fourth quarter for $112 3 million compared to $107.6 million in the same period last year, an increase of 4%.
This reflects the activity stabilization, we experienced in the third quarter, which was essentially continued despite the resurgence of COVID-19 cases and various regional restrictions.
And the utility water overall sales increased 8% against the difficult comparison in Q4 last year, which was also up 8% over 2018.
The acquisition of Essakane completed in November 'twenty 'twenty contributed approximately three points of the current quarter's revenue growth with core organic revenues and utility water up 5% year over year.
On an organic basis this quarter sales for the second highest in history second only to the third quarter of 2020, which of course included a sizable chunk of pandemic induced backlog catch up as we discussed at the time.
Positive revenue mix trends continued with further adoption of smart metering solutions, including increased Orion cellular radio sales and Beacon software as a service revenue along with ultrasonic meter penetration.
We also had the benefit of strategic pricing initiatives, which I'll discuss shortly.
As anticipated flow instrumentation sales were sequentially less worse down 10% year over year compared to the 18% decline experienced in Q3, 'twenty 'twenty, although activity levels continue to reflect the broadly challenged markets and applications served globally.
Operating profit as a percentage of sales was 15.1% of modest 10 basis point decline from the prior year's 15, 2% with the number of moving parts at the gross profit in S. E. T. A line that I, while I will dissect in more detail.
Gross margin for the quarter was 39, 2% up 100 basis points year over year.
Margins benefited from higher sales volumes strategic pricing actions and positive sales mix as previously discussed these favorable gross margin drivers were offset by a discrete network sunset provision recorded in the quarter as well as the natural post acquisition drag the gross margins caused by amortization of the inventory.
Fair value step up recorded for the acquisition of Essakane.
I'm going to spend a bit of extra time today on three of these items price cost the acquisition impact to margins and the discrete network Sunset provision to help walk you through the impact in the quarter and thereafter as applicable.
Starting with price cost is on.
I'm sure you've seen copper prices, which are a proxy for our recycled brass input costs have increased significantly.
Currently averaging around $3 60 per pound this represents over a 30% increase year over year.
We've reminded investors debt, while meaningful the impact of recycled brass on our cost structure has been moderating over time as we sell more software and radios versus primarily meters in the past.
I will also remind you that we have and continue to offer polymer mechanical and ultrasonic meters as part of our choice matters go to market philosophy.
To give you some level of sensitivity if copper prices stay in this range for the entire year it could be of potential cost headwind of about $4 million to $5 million year over year.
Yeah.
The other side of that price cost equation is price and as we have done with working capital and operating metrics like S. SKU D. C safety quality delivery and cost we have designed more robust processes and metrics to actively manage strategic pricing for the evolving and valued solutions that we offer to customers.
In doing so we have proactively implemented a number of strategic pricing actions that resulted in positive net benefit from price in the fourth quarter in advance of the lagging headwinds from input cost increases principally copper.
It would be our expectation that we are largely able to offset commodity inflation with price during the year with perhaps some minor manageable lag effects.
The second topic is acquisitions and their impact to margins in the fourth quarter. Essakane results were included for two months you may recall on the press release announcing the transaction Essakane has approximately $15 million of annualized sales. So these two months as expected totaled approximately two and a half million in revenues.
We recorded the typical amortization of inventory fair value step up and inquired acquired intangible assets, which all told resulted in a modest loss in Q4 2020 for the short stub period.
As we look to 'twenty 'twenty, one the combination of Essakane and a T. I with total acquired revenue of approximately $37 million, we expect to be EPS accretive.
The first quarter of 'twenty and 'twenty. One will include the remaining Essakane plus a full quarter of ATI inventory step up amortization, but we expect normalized profitability on the remaining quarters, Ken will discuss the longer term opportunities for these acquisitions in his remarks.
Finally, turning to the nonrecurring discrete network sunset provision.
This relates to the sunsetting of the CDMA cellular network for the early adopters of our original cellular radio offering.
The sunset as of carrier event that is part of the natural evolution of technology and impacts of variety of Iot devices across an array of industries.
As of the innovator in cellular radios for water metering applications and as a company focused on customer care Badger meter provided protections for such circumstances.
Until recently firmed sunsetting plans by the carriers were not in place now that these plans appear more firm we've taken this provision which reduced gross margins in the quarter by approximately 300 basis points to cover future radio upgrades for these early cellular customers to be Crystal clear there is no defect in the radio itself.
The logical question then follows will this continue to be an ongoing challenge with cellular radios. The short answer is no.
The CDMA network was already well established when badger meter badger meter introduced its first cellular radio. These first networks had been in service nearly 20 years at that point.
Subsequently, we have moved ahead of the technology curve as demonstrated by the launch of Orion LTE M. In 2019, and our continued innovation around cellular radio technologies.
These technologies will be supported by multiple generations of cellular networks.
Turning to SCA expenses, the fourth quarter spend of $27 1 million increased $2 3 million from the prior year the.
This includes the addition of Essakane for two months, including the resulting intangible asset amortization.
More broadly higher personnel costs were partially offset by lower travel trade show and other pandemic impacted expenses.
Including both Essakane and ATI in 'twenty and 'twenty, one we expect ongoing SDA as a percentage of sales to average in the 25% to 26% range.
The income tax provision in the fourth quarter of 2020 was 22, 6% slightly lower than the prior year's 24, 3% rate with.
With the additions of Essakane and ATI, we don't expect the significant change in our normalized tax rate in 'twenty 'twenty, one absent any new statutory U S tax code changes.
In summary, EPS was <unk> 45 in the fourth quarter of 2020, an increase of 7% from the prior year's EPS of <unk> 42.
Working capital as a percentage of sales was 26% without with about a percent of that associated with the addition of essakane.
On an organic basis primary working capital as a percentage of sales declined about 200 basis points year over year.
Our full year free cash flow of $85 million was 10% higher than the prior year's $73 2 million and represents approximately 163% conversion of net earnings.
Our cash flow of focus will not abate and we anticipate free cash flow conversion to exceed 100% in 'twenty and 'twenty one.
However, I would caution we do not expect to see the conversion at the robust levels of the past two years, given the structural change in working capital already achieved.
We ended the year with approximately $72 million of cash on the balance sheet after taking into account the essakane acquisition.
In early January we deployed $44 million net of cash acquired for ATI remaining in the net cash positive position.
Along with the continued full access to our untapped of $125 million credit facility, we have ample financial flexibility to continue executing on our capital allocation priorities with that ill turn the call back over to Ken.
Thanks, Bob turning to slide five I'd like to highlight the two transactions we completed since our last earnings call and how we believe they bring significant value to the badger meter portfolio.
Essakane acquired into the in November of 2020, and analytical Technology, Inc. Our ATI acquired just a few weeks ago are both pioneers and providing real time water quality monitoring solutions. This is differentiated from traditional water quality testing because of these solutions capture of real time data through sensors and systems that do not rely on <unk>.
<unk> reagents or other consumables, resulting in lower capital on the operating costs for customers.
Just as water quality, just as water utility billing moved from manual reads to advanced metering infrastructure or Ami, we believe water quality monitoring will evolve from lab sample testing to online realtime collection monitoring and reporting.
Adding real time water quality parameters, the badger meter as core flow measurement pressure and temperature sensing capabilities as to the scope of actionable data for utilities to improve operating efficiency and for industrial customers to monitor both process and discharge of water.
We see multiple avenues for growth synergies by bringing together. These two acquisitions in the Badger meter for example from of water quality sensors standpoint, with this combination we have a full product offering of both electrochemical and optical sensors from a geographic standpoint, where ATI is strong in the U S and U K essakane.
Has an installed base in 50 countries.
From a scale on coverage standpoint, leveraging customer relationships inside sales rep networks, and distributors will create a greater ability to cross sell throughout the water ecosystem, including water utilities of wastewater treatment and industrial water applications.
There's no question it will take time and investment in order to realize these long term growth strategy growth synergies.
We need to advance our communications to capture quantity plus quality data parameters online real time via our industry, leading Orion cellular radios, we will need to augment beacon and I on water to store integrate analyze and visualize information providing a holistic view of the water network. This is no small undertaking but one that we are on.
Organized to execute.
In the near term it is business as usual for the two acquired businesses. The combined acquired annual sales of approximately 37 million, where the EBITDA margins in the mid teens will be EPS accretive to our results.
Now turning to our outlook on slide six while we were all hoping that turning the calendar. The 'twenty 'twenty. One would also turn the page on COVID-19 that is obviously not the case. Despite the continued uncertainty we remain fully prepared to manage safely in support of our customers and the essential water sector as we did throughout much of 2020.
There has been no significant change in customer tone regarding utility budgets with spending on critical unnecessary activities, which includes metering solutions required for billing and reducing non revenue water. As we have stated our large and diverse customer base will have different needs circumstances and priorities, but as a whole Utah.
All of the water bid tenders and awards are largely continuing with their normal processes with limited extended timelines are deferrals.
While we don't provide guidance Bob walked through the detail on a few of the items that will impact us in 2021, including price cost SCA levels and the expected impact of recent acquisition activity.
Obviously, we had some significant quarterly swings on the top line throughout 2020, so the growth rates that are uneven in normal circumstances will be more so during 2021.
We will continue to drive cash flow, which is the fuel to invest in and grow our business. This includes both organic and acquisition driven growth with the focus on additional product and software offerings, serving water related markets and applications. For example, expanding functionality of our eye on water software App that helps drive consumer engagement.
Finally, we will continue to advance of variety of priorities on the ESG front, including relentlessly focusing out on unemployed safety, reducing greenhouse gas emissions fostering a culture of inclusion and of course promoting water conservation and quality.
The closeout, our prepared remarks, I couldnt be more proud of the badger meter team on the performance in 2020, despite the unprecedented backdrop of of health and economic crisis, we have delivered utility water revenue growth SaaS revenue as a percentage of sales growth to now 5%.
Strong EBITDA margin expansion robust working capital management and cash flow and successful execution of two accretive acquisitions. It's a true testament to the criticality of the water industry and the exceptional badger meter team with that operator. Please open the line for questions.
Thank you at this time I would like to remind everyone in order to ask the question Press Star then the number one on your telephone keypad again that is star then the number one on your telephone keypad low cost.
For just a moment to compile the Q&A roster.
We have our first question coming from the line of Nathan Jones with Stifel. Your line is open.
Good morning, everyone.
Morning, Nathan.
I just wanted to go back to some of that.
The network impacts on on fourth quarter gross margin I think Bob you said that the networks on getting.
The 300 basis points of gross margin in the fourth quarter and you still did 39.1.
There's going to be some impact from the amortization so default price cost you would've had.
All time record gross margins in the quarter.
You did say there was a net benefit of the price cost in the quarter. So can you talk a little bit more about how that's working you have the.
The inventory accounting impacted the fourth quarter and really what the gross margin expectation here is in the short time.
Yeah, I think as you know I'll speak generally about those different pieces, but you're exactly right with the 300 basis point impact of the network Sunset provision that would imply we were in that low low 40% range before that.
You know really let's talk the pricing actions I talked about strategic pricing initiatives. Those were largely began late in the third quarter and really started in earnest before copper started getting a little a little volatile here in recent months, so really the price impact that you see in the fourth quarter as a result of those late September.
Timber changes and basically that price impact is coming through in the fourth quarter without a commensurate impact of the copper price increase which really for us started to be seen in December and will be seen more more evidently in January based on just how our supply chain works and how we procure our copper related components.
I think.
Again, I've talked historically about you know our business does not have the margin stairway to heaven and I think the pivot point that we're at now between the fourth quarter and the first quarter is a good indicator of that meaning the 40 to 40 for low 40 per cent range that we saw of pre nut network sunset provision in the fourth quarter, we don't anticipate anticipate to be sustainable.
Moving forward.
And in a large part of that is the pacing of the price versus cost dynamics in Q4, I don't Wanna say reversing in Q1, but effectively the cost piece catching up and so.
Youre also exactly right in regard to the inventory accounting coming off of peak production level at the end of Q3 and how that then plays out through the through the end of Q4 also was a modest benefit I would say the acquisition impact that you referenced and that we referenced in the pre prepared comments is real but that's not the most sizable impact I think that the bigger drivers.
Of the sort of pre networks on sunset provision margin profile as the price cost dynamics combined with really the mixed trend that we've seen you know throughout the last year or two in terms of the mixed dynamic being favorable on margins over time, So I know I sort of meandered through all of that but hopefully that answers your question yes.
Yes, I think that you're realizing the price equal you're realizing the additional cost and Thats just a matter of the accounting convention you guys of.
I've said, 30% to 40% gross margins are and have been consistently in the upper half of that over the last few years. The business did get down briefly into the lower half of that kind of range. The <unk>.
<unk>, we saw a spike up back in 17 18 do you I think you can maintain gross margins in that kind of upper half of that 36% to 40% range or is it more reasonable to think that we might get down into the lower half. He just in the short term as you see some of the day price cost price cost dynamics play out.
Yes Nathan.
As things are evolving and we've talked over the past couple of years about the structural shift to more of software as a service and more radios.
That that is a structural change that that is a positive mix factor going forward and we continue to grow in those spaces that we're that we're very pleased about.
This is more dynamic view of pricing and really getting more granular. If you will on our pricing models to make sure that we're providing value for customers at a price that they're willing to pay for while still winning new business. It is a balance that we're really starting to find we're being I think of little bar of pre active about getting out in front of those things.
So long story short I think what the positive mix actions the way that we're going to market with how we think about price we still feel like we're going to be able to stay in the upper half of of that range certainly more challenged with the things that you're aware of but we feel comfortable we can do that.
That makes sense and I think these pricing initiatives here are pretty self evident that there are working a little bit better than the company has historically, so congratulations on that and I'll pass it on.
Yeah. Thank you.
Now for our next question coming from the line of Ryan Connors with Boenning and Scattergood. Your line is open.
Hey, good morning, Thanks for taking my call sure Hi, Ryan.
So on my question is are actually.
I actually kind of big picture you know.
Wonder if you can comment on the federal situation, obviously, we got the new administration in place since your last call and in a lot of talk about stimulus on infrastructure spending some of it presumably related to two of your your.
The product lines of focus areas any update on what your expectations are there and.
And how it how it could impact badger, both tactically and strategically.
Yeah, so the the thing about.
The changes in the federal government and the stimulus and our infrastructure.
Kent whenever theres more money that comes in and is available for water utilities, particularly given all of the you know the macro drivers of aging infrastructure and aging workforce. It can only be helpful for the long term and midterm, where it can be challenging in and then I think we've talked about this before is if it tends to drag on.
Can be vague, sometimes utilities, particularly now could have potential to wait and see how that plays out but for the most part.
We think that will work itself out where we're confident in our growth drivers. We think we think that the the positive things that are happening with the market and what we're offering we have we have the ability to grow anyway, but we do think for the long term that that this could be potentially positive.
Got it okay. Okay and then my second my next question was.
Obviously, a lot of volatility in the market you know your stock has been caught up in that sometimes it seems like there's no rhyme or reason you've got a great quarter today, you beat earnings of stocks of stocks down.
What I'm curious on your reaction of that volatility and especially how it relates to M&A.
Because you've been acquisitive, you've got great cash flow, presumably you want to remain active there.
How of the seller expectations in the private company side been impacted by all of the volatility, especially some of the increase in valuations on some of the the public equities have you seen that flow through in valuations or is there. Some arbitrage there where were you able to capitalize on your currency.
With the more stability in the in the private valuations.
You know if you just look at the couple of deals that we just did I I'm very pleased with the fair I would say multiples that we got to really quality assets at so.
We don't see wild changes in the valuations in the seller's expectations.
It's been it's been a relatively stable and I think good.
And then just lastly, do you think.
I think that the the water quality side I. Appreciate your comments there I think of it is.
Pretty compelling strategic area for for you to be exploring is there more to do there I mean is there or do you sort of you feel like you've got the the.
Footprint, you need and then you grow organically or do you think there'll be more.
The opportunities to add to that via further M&A.
So so one of the one of the hallmarks of Badger meter that I've been proud of is our ability to execute and now that we've acquired two great companies are are tremendous focus right now is on doing a great integration and so for now as we talked about it's business as usual for them, they're already really strong company. So we want them to keep operating.
And we're going on we're going to be investing in all of the things that we need to do to incorporate into beacon over time and do the different things, they're going to be able to grow organically already because of their strong companies and brands and we're gonna be able to to get some synergy throughout the strategic cycle here.
I don't I, you know I would caution you that doesn't happen overnight the industry is still risk averse and slow moving.
But we think these these businesses have the opportunity to continue to grow at an impressive organic rate and that for the mid to long term, we're going to have really exciting synergies.
Great well thanks for your time this morning.
Yeah. Thank you.
We have our next question coming from the line of Richard Eastman with Baird. Your line is open.
Yes.
Couple of questions just to kind of a follow up here on Essakane and a T I.
Well the you know, let's get past the purchase accounting here that we saw on the fourth quarter and then again in the first quarter now with a T I, but.
The GAAP gross profit margin here.
Accretive from those two acquisitions to badger meters.
Yeah. So the specific to the gross margin line I would say S. K a T. I R above line average at the same time, they carry a bit heavier S. P. A a and so again as we talk about those two pieces are.
You can think of them I know, we're talking apples and oranges because one's operating profit in one's EBITDA, but think of think of you think of the EBITDA profile of those two companies being a kind of mid teens. If you will but as you speak to GAAP operating profit you you'd have a little bit of a mismatch to the base business, but overall a good blend.
So when you say mismatch so the GAAP the GAAP EBIT again, just kind of on a normalized basis here.
Current quarter and beyond.
Is that run at something like low <unk>.
Low teens GAAP EBIT contribution.
From the two would be like 12 13.
But I think when you when you factor in the purchase accounting aspects of now.
A higher level of amortization, it would be a little bit lower than that but.
Yeah, I think you can think of it that way.
Tim maybe 10, 12% the bring it into the model and then maybe the other question would be and Ken I think you referenced this but some of the cost here to get integrated technologies into your technology base of installed base does that does that pool.
Non-GAAP op.
Percentage down or is there enough.
The overhead synergies here that you can kind of offset that.
The investment.
Yeah. So I think Rick I think the way I'd think about it is let's let's just go through the line items, if you will.
We think as we talked about in the script, putting the whole of the whole bundle together a S. P. A and the 25 to 26 per cent range.
Looser of of what Ken mentioned for in terms of the long term R&D investment to get there.
I think it's off of a fundamental change in the overall EBIT level of the business in aggregate when.
When you think about it over the medium and long term.
Okay, Okay fair enough.
And then.
Also just maybe the thought here do we.
As we bring a T I N S Canyon.
Do we utilize their sales force I mean, other any synergies here.
In the in the.
Near term <unk> and <unk>.
Terms of go to market leveraging badger's install base of our sales effort any anything that maybe he can to jumpstart their growth rate or step up their growth rate.
Those two acquisitions.
Yeah, absolutely Rick so so we've already begun that we've owned Essakane now for about 90 days and the ATI for 30, but we've been bringing them together to talk about their channels and certainly what I'm really excited about is when you think about these companies and when I talked about of geographically.
The ATI is very strong in the U S, which has continued and will be the the best Smartwater market in the world and they're in the U K, which is of great growth opportunity for US there with 10 of the 11 largest water utilities in the U K, where the strong brand name. So as I think we of opportunities. There S. Can also with their sensing opportunities.
They're very small in the U S. So from an optical sensor point of view plenty of opportunities to get some synergy and pull through going there and what their install base and 50 50 different countries that also have smart metering needs. We certainly will have opportunities at every point along the way to leverage the badger meter.
Sales force and brand name in the U S along with Hei utilizing essakane and I know, they're small companies, but they really have strong brand equity and we are going to be able to leverage all three of these based on their individual strengths, but that's the multiyear journey yeah. Yeah, Yeah, Yeah, no. That's the spirit. It's just again, a really nice companies that seem like they are.
Really nice technologies, but you look at their their their tenure their history and the obviously, having grown double digit for 20 years and so it seems like you know the strength of those two franchises Essakane a T. I is more around the technology and I would think you could help them.
Kickstart the growth rate of little bit.
Yep Yep and you know on end.
The thing about that is as you know remember we always say this.
Broken record for sure you know slow moving risk averse industry, they're on the they're on the innovative ended the technology, which is why we really like them.
And they just didn't have the same are the same channels that we have so we certainly think we can help there.
The short summary is brand channel and a scalable software enablement is what gets US all of those things I see okay. Okay.
Two more quick questions one of the system the.
The industrial flow business.
We have some easy comps.
But do you envision that business or is it in maybe the the 'twenty one plan that we can squeak out growth for the full year I mean can we can that business be.
Low single digits to mid single digits for the full year with the you know the comps that it has in any any signs of recovery in demand there.
Yeah, I would expect that to be in the low to mid single digits. It's it's still going to be a challenge for us I think here in the first portion of the year, but Youre right. Then we certainly start to get into some some easier comps that I that I am pretty confident we can get over.
And then just lastly for me.
The when I think about the.
The business overall for Badger.
Exclusive of the best candidate ATI.
How does the business feel through January.
The typical seasonality you got more selling days you know on the first quarter than you have in the for the typical seasonality with puts you up mid single digits exclusive of the acquisitions.
I mean, just just through January.
Is that a reasonable tone or how do you feel about like this first quarter.
The acquisitions and weather aside.
Yeah. So so so let's let's take it this way so you know throughout this entire pandemic we've spent.
I'm sure you could realize the amount of time, we've spent talking to customers and trying to understand activities and behaviors and what would happen.
And we've been very pleased that throughout this cycle things that had been in the bid funnel have converted into orders.
We so we're sitting here now with with a strong we feel good through the fourth quarter on how we were doing with orders.
Backlog is still healthy bid pipeline is still there. So I would just say generally it's relatively stable.
What we don't you know what we don't have is I just wanted to be clear.
I wanted to spell we we don't have pent up demand, we don't have you know.
Inside set type things that are holding us back so don't don't model any pent up demand into the future I would say, yes, yes, yes, okay.
So again, you kind of carried the tone out of the third quarter, where it was kind of the the day to day business had normalized.
And maybe the bid pipeline is solid or stronger strengthening but are some of those releases kind of coming to fruition here or is that kind of what we're still watching as the the wildcard.
It's it's it's pretty stable I mean, I you know, we're still seeing you know the activity customers still have all of the same issues that we talked about three months ago right. There's still maybe it's difficult doing work, it's not as efficient as it used to be but generally things continue to move forward. We feel we feel good about the stabilization of the market as good today as we did three months ago.
And when we talk about stabilization of where we're viewing that in aggregate, we're not we're not differentiating between.
I think what you call kind of the normal flow of business and project business, we're talking about it in general that that stabilization is there.
Okay, Gotcha, alright, well, thanks, Susan Thanks for the time.
Yeah. Thanks, Rick.
Yeah.
Again in order to ask the question simple Press Star then the number one on your telephone keypad. If your question has been answered or want to remove yourself from the queue press the pound key.
Yes of our next question coming from the line of Andrew Buscaglia, We'd Wehrenberg capital management. Your line is open.
Good morning, guys.
Andrew wanted to I wanted to go through.
Your your velocity of M&A has really picked up here and you have the cash flow debt to do yes.
Recent years the the.
Do more M&A and it sounds like your kind of full now or you got what you wanted and water quality monitoring but.
Bigger picture do you.
Do you foresee once you digest these.
You know smaller acquisitions in the next couple of quarters.
Adjacent technologies beyond water quality monitoring or or.
Some of that you can't go much deeper and water quality monitoring you got what you want.
Look out five years, the like what what is badger meter.
They've got kind of a whole if the portfolio.
Yeah. So so our M&A strategy hasn't changed we've acquired two really are exciting quality assets in the water quality space.
We're going to continue to look to grow in water quality organically and we'll continue to keep an active funnel of opportunities there.
On the software side, we've been we've been I think pretty open about our desire to continue to invest in and grow organically as well as as well as M&A around bringing more.
Monitoring and control type abilities to our to our end users.
Certainly things with the global component, where we can continue to leverage that was why one of the things. We're excited about of bringing a T. I N. S. Can together is getting more and more global in nature. So you know as we continue to go through here I mean, the the areas that we have.
Brought through our funnel, where we think we see value we're going to continue to I guess fishing that pond, if you will.
And just to reiterate.
I'll be a little bit of a pause here before you resume activity in M&A right.
So so let's just take that in two pieces. So financially there's no need to pass I mean, clearly where we're still in the net cash position. We've got full access to the revolver and we're a really strong cash flow of business. So there's no need to pause whatsoever from a capital allocation point of view.
And from a pause point of view.
We would not stop ourselves from acquiring another great strategic asset if it were available today, we continue to look at companies, we continue to do things.
So we're not saying that we are taking in any way of deliberate pause. We're just making sure that we're doing a very thorough quality integration of these companies and if the right strategic asset becomes available and the yeah.
Right now we would be on it.
Okay and in your remarks, but when did you say that is that the percentage of your revenue currently I.
Believing asset did you yeah we.
We finished the year at 5% of total revenue for total revenue total right for them.
Okay, and yeah with with water quality monitoring what.
Should we keep our eyes on any headlines around with.
With the bottom and administration of any specifics around regulations or is there anything you guys are talking about your you know a little bit more excited about the new were a month or two ago.
Well you know so I just think this is a trend that has been growing you hear more and more people talking about having access to real time information about water quality and and then just the innovation and being able to do it more efficiently that that these types of companies and solutions can provide so whether it's the biting the administration or whether it's just.
Happens are already has been occurring.
That's a positive trend with or without the biting and administration, but certainly it seems like the Democrats agenda is focused around these types of activities, so that could be positive but.
See how they come out.
Alright, thank you.
We have our next question coming from the line of Jose Garza with Gabelli. Your line is open.
Hey, good morning, guys.
The Jose morning, Hey, and just for the record on the floor should have gone for it.
Ah, Yes, yes, I, even had the I even had one of our British employees asked me why did they go for the three pointer.
[laughter] yeah well.
Moving on.
Just a quick question for me on on your pricing initiatives I'm, just wondering if you could get a little bit more.
Granular on that just.
Some of the things that you guys are doing and maybe kind of where you are on the on that journey is as you guys noted you guys are are more per active there.
Yeah, you know I think as you think about the history of of price management of here, it's been kind of a list price increase and you know in the old days of of primarily selling meters that would flow through but as our product line has become more evolved and more about solutions and software as a service and full of Ami with radios and meter.
<unk>.
It has become more complicated than just passing of list price and hoping to realize something so.
You know we've had a strong focus over the past several years on operational excellence throughout the business. That's not just the thing on on the shop floor, So and all of our processes of two now and including pricing. We're trying to just be more dynamic again about finding that balance of what's the true value to the customer debt that they're willing to pay for that.
We can win work for.
Provide of true valued service to our customer and try to extract as much value from that for badger meter as we can.
That's a very high level view, but theres, a lot of mechanics and pieces to it but just using more data and analytics and and making it more of a living process rather than an annual list price bump.
Makes sense and kind of.
Where would you be on kind of the journey today.
Yeah.
I I think I think if I just reflect on the success that we've had early I feel really good about where we are on the journey, but we're pretty early in the so I think we've had some really strong early results.
But there's certainly more work to do.
Okay excellent thanks, guys and congrats on the results.
Thank you.
We have a follow up question coming from the line of Nathan Jones with Stifel. Your line is open.
Good morning again.
Hello, I just wanted to I just wanted to get a clarification, Bob I've heard you say a couple of times on these calls talking about SCA and the 25% to 26% range.
Can you just clarify.
Talking about the whole company.
At 25% to 26% and that would be higher than we've been running at here for pretty much ever what's getting us to that kind of level.
Yeah, So when I say, 25% to 26% I'm talking of consolidated with with the acquisitions effectively the two contributing factors are exactly what we just described in terms of let's take the two acquisitions. They tend to run above line average at the SCA line naturally and then you've got you know basically amortization of the inquired of acquired.
<unk> rolling through that line and so when you roll that together with the Anniversarying. If you will of some of the costs.
Covid related cost activity and in 'twenty versus 21 plus of those two pieces, that's what's driving the consolidated up to $25 26 per cent.
Got it.
Of those business is high enough on the gross margin level to mix that gross margin upside that you.
You know you're kind of holding operating margins here on a day.
Acquisitions themselves, the gonna be a little bit dilutive to operating margins.
Just given the amortization of that maybe we can talk about it at an EBITDA level.
On the businesses are they two acquisitions going to be accretive to EBITDA margin level.
So, let's just do simple math the base business as you know this past year our EBITDA.
EBITDA margins in the low twenties.
Just acquired two businesses that out of the gates without synergies are mid teens. So naturally it's going to be a drag on EBITDA margins. Obviously absolute dollars of is a different story and and of course are are the equation is where being able to improve those over time.
So that answers the EBITDA question.
Again, we view, we believe the acquisitions to be accretive in year, one and of course thereafter, as well EPS accretive.
Got it thanks very much for the clarification.
The.
There are no further question at this time I will now turn the call back over to carrying the hour.
Well great. Thank you everyone for joining our call today for your planning purposes, our first quarter 'twenty, one 'twenty 'twenty one call is tentatively scheduled for April 20th I'll be around all day to take any follow up questions you might have have a great day.
This.
Today's conference call you may now disconnect.
Okay.
[music].
Okay.
[music].