Q3 2021 Badger Meter Inc Earnings Call

Ladies and gentlemen, welcome to the third quarter, 2021 Badger meter earnings conference call. My name is Jolly and I'll be the coordinator for today's call. You have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star. Followed by 1 on your telephone keypad. As a reminder. Today's conference is being recorded. It is now my pleasure to turn the conference over to Karen power. Vice president of investor relations, corporate strategy and treasurer.

Please go ahead, Miss Bauer.

Good morning, and thank you for joining. The badger meter, third quarter 2021 earnings conference. Call on the call with me today are coming 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 or subject to various risks and uncertainties and most important of which are outlined in our press release and SEC filings.

This call will refer to certain non-gaap Financial metrics our earnings slides, provide a Reconciliation of the gaap to non-gaap financial metrics used finally. During this call. We will refer to car results for various Financial metrics. For example, core water, utility sales, core means a designated Financial metric, excluding the impact of the recent Afghan and ATI acquisition. We believe this reference point is important for your of your comparability with that. I'll turn the call over to Ken.

N thanks Karen and thank you for joining our third quarter earnings call. I'm not sure how often terms supply chain challenges or inflation are going to be referenced during the quarterly earnings cycle over the next month, but I can only imagine it's going to be an all-time record while we clearly faced, our fair share of those challenges. I want to focus my introductory comments on recognizing the tremendous execution of our Badger meter teams globally for their proactive and constructive dialogue with customers to manage priorities, expectations and build trust for their

Leti and effectively redesigning, certain product components to provide greater flexibility on Supply sources for their unrelenting, diligence, and supplier and Logistics management. And for their collaboration across functions, to maximize, our deliveries to customers be strategic and tactical actions by our world-class team allowed us to deliver record sales and earnings this quarter. While we added to our already record backlog. I'll talk about the current environment and our Outlook later in the call, but, for now, let me turn the call over to Bob to go through the details.

Of the quarter. Thanks Ken and good morning everyone. Turning to slide for our total sales for the third quarter. Or one hundred and twenty eight point, seven million dollars an increase of 13.3% over the one hundred and thirteen point six million in the same period. Last year, total utility water product line. Sales increased 12.2% excluding approximately 10 million of sales from the S. Can and ATI Acquisitions core utility water revenues increased 1.7 percent year-over-year, a great

Result, considering both the difficult prior-year comparison and current year supply chain challenges. As we remind.

You and our prepared remarks on the July earnings, call during the third quarter last year. Our manufacturing operations were recovering production. After the initial COVID-19. Lockdowns. And therefore our sales and profits reflected the benefit of a sizable backlog recovery and lower pandemic. Impacted SCA costs, in addition to the difficult comparison. Our manufacturing output in the current quarter continued to be limited by supplier shortages of certain electronics, and other components along with Logistics challenges.

We did experience growth in mechanical meter cellular radio and Beacon Software as a service levels. And we continue to realize the benefit from strategic value-based pricing actions, strong orders continued in the third quarter of 2021. And we exited the quarter with another record high. Backlog. Our water quality solution sales were also impacted by supply chain challenges on a more modest basis. Yet. Still delivered results in line with our expectations.

The flow instrumentation product line did not escape the impact of production limitations from component shortages, but delivered, a strong 18 and a half percent year-over-year. Increase in sales, improved. Amman Trends across the majority of global end, markets, and applications as well as an easier. Comparison led to the increase year-over-year.

We were very pleased with the margin performance in the quarter, in light of widespread inflation, difficult comparisons and the dynamic supply chain impact on manufacturing operations, starting with gross margins. We increase gross profit dollars by 6.2 million. And as a percent of sales, gross margins improve 20 basis points to 39.8%. From 39.6 percent margins benefited from favorable acquisition mix as well as the higher volumes and puts positive product sales mix named Lehi.

SAS revenues along with favorable. Value-based pricing realization.

These factors combined more than offset. Increasing cost head winds across purchase components, including higher brass, resin and other materials, as well as Freight and Logistics.

As our margins demonstrate, we have executed. Well thus far in proactively implementing pricing mechanisms to offset existing cost increases. However, it has as has been, well, publicized the breath and pace of inflationary pressures is increasing. We will continue to actively monitor, pricing in light of these circumstances. Recognizing they'll be leading and lagging impacts in this Dynamic environment.

SCA expenses. In the third quarter were 31 point 7 million consistent with the first two quarters on a dollar basis with sequentially improved leverage, as a percent of sales to 24.7% SCA expenses. Increased 6.2 million dollars a year over year with the inclusion of the water quality Acquisitions, as well as more normalized. Pandemic. Impacted expenses, such as travel.

As a result of the above overall, operating profit margin was 15.1 percent compared to a record 17.2 percent in the prior year quarter.

The income tax provision in the third quarter of 2021 was 18.3 percent below. The prior Year's 23.9% and are normalized rate in the mid twenty percent range. Due to a discrete favorable income tax benefit related to equity compensation transactions in summary. EPS was 54 cents in the third quarter of 2021 and increase of 6 percent from the prior Year's EPS of 51 sensus.

Since.

Working capital as a percent of sales was 25.6 percent and increase of a hundred and 40 basis points compared to the prior quarter end, the modest elevation in accounts, receivable and inventory are temporary byproducts of the current supply chain environment. For example, we are strategically maintaining higher levels of certain inventory components and work-in-process capitalizing on spot availability and capacity.

In addition certain customers are understandably deferring payment on partial shipments. We believe these are transitory repercussions of the current environment. Free cash flow of Thirteen point. Nine million was lower than the prior year. The result of this higher working capital on a year to date basis. Free cash flow conversion of net. Earnings is a hundred and twenty-five percent.

With that. I'll turn the call back over to Ken. Thanks Bob turning to slide 5. We've updated the quarterly sales comparison chart which highlights the key factors driving. Uneven, you're over your Top Line Trends, the growth rate. We experience this quarter excluding. The Acquisitions, was the result of strong customer demand, which was muted by headwinds from the varied supply chain, challenges, and difficult, prior year. Core, utility water comparisons as we enter fourth quarter and looked at 2022, our backlog.

Supportive of continued sales growth with the level of quarterly sales. Quite frankly, dependent on the level of supply chain disruption while this could lead to variability in the Cadence of sales. It is important to recognize two things with regard to our execution. One. Our performance. Thus far is delivering total sales growth. Despite the significantly Supply challenged environment into that our orders and awards are not being canceled or postponed but simply shifting to the future. We feel very good about our

position and the underlying driver supporting our markets,

In summary here on slide 6, we believe that our strong order momentum and backlog, confirms the underlying market demand for our Solutions which combined data Communications and analytics into, tailorable solutions to enable customers to be more efficient, effective and sustainable throughout the water ecosystem.

The water quality Acquisitions continue to perform well and the integration work that has been underway. Including customer discussions confirm, the growing need and acceptance of online low maintenance and reagent free solutions for real-time water quality monitoring. These distributed Solutions will be a game changer for utilities Wastewater and Industrial customers alike. We remain optimistic about our future prospects, as we continue to execute on our growth strategy. But in tandem, we are acutely aware of the challenges presented by the current.

Option to the supply chain and Global shortage of electronics and other components accelerating broad-based inflation, as well as the potential for a few further impacts from the pandemic.

The breadth of these challenges is greater than what we've experienced previously. But the playback playbook for addressing them is not new. As I discussed, in my opening remarks. We're working all aspects of the Playbook within our control with the best team to mitigate the challenges and deliver Sustainable Solutions for our customers. Finally. I want to mention our work with AT&T, on the connected climate initiative. They launched in August. We are one of several partners that AT&T highlighted for our efforts to reduce the impact of climate change.

Change via the water and Energy savings associated with our Smart Water offerings. Using infrastructure free to Cellular technology in our Orion LTE, AM radio enables. Our am I Solutions deliver more resilient, efficient and sustainable Water Solutions. You can learn more about the AT&T initiative, as well as the resiliency of the cellular Ami Solutions in the wake of extreme weather events. Highlighted in a recent Badger meter, smart water, show by clicking on the links on today's slide presentation.

With that operator, please open the line for questions.

Of course. If you'd like to ask a question, please press star. Followed by 1 on your telephone keypad. If you'd like to withdraw your question, please, press star followed by 2. When preparing to ask your question, please, ensure you are muted locally.

Our first question comes from Nathan Jones of stifle Nathan, your line is now open. Good morning everyone. Hi, Nathan.

I didn't think that would come up today. So I thought I was getting ahead of it.

Your captions are and how you think they'll help to mitigate some of these challenges.

Yeah, so I think one of the probably the most impactful ones that you're hearing other companies talked about as well is that our engineering team has been really engaged tightly with our supply chain team. So, you know as we're identifying some of these challenges that are going to be, you know, a little more impactful or perhaps longer-lasting we've done really effective job of re-engineering some components out and finding alternate replacements and dual sources for

I so been really proud of the Nimble response there. I think maybe not as strategically so, but just in terms of tactical communication, you may recall, I think we were talking about, you know, upcoming challenges before others in in the industry. So we've had a really strong communication line between our customers and our, in our group and I just couldn't be more proud of how we've managed through it. Both in strategic actions and tactical work.

Follow up on that volume with probably down a little bit. Can you talk about just how much lower productivity? You're getting? What kind of impacts do? They supply chain challenges? They're having on, you know, scheduling and production. We're hearing things about you. Don't know what's going to be late. And then until it's

In this environment, which I'm sure makes it difficult to schedule production and creating efficiencies. And if so, what kind of productivity are you losing from these kinds of things?

Well, it's a, it's a good point that you bring up on, on the in efficiencies because it isn't just about component availability. It's also about logistics being able to get it to you. And that that certainly has been has been an inefficiency challenge that. Again, I couldn't be more proud of our team is as overcome that, but certainly a factor when it comes down to pricing. It's not quite as simple. As you know, we sold the widget last year for a price and this year, we sell it for something more. You know, we're

We get more sophisticated with AMI Solutions of selling the different mix of meters. That could be mechanical versus ultrasonic, or radios and and software. This is why we talk about our pricing programs as value-based pricing. We're really focused on making sure that we provide great solutions to customers that we get all the value for it that we deserve. And, and that we win at least, or more than our fair share in a really strong growing market. And I,

I feel like we're executing on all aspects of that.

Is there any kind of, you know, range of color that you can give us around what kind of productivity you think you're losing? Because of all of this supply chain disruption.

Well, first off, I know a lot of people are talking about Labor shortages and that impacting. So, let me just take that first off. We're not having labor related challenges. And, you know, our our, our labor workforce is here, doing a great job knocking things out, in terms of quantifying. I haven't, I don't know. I'm looking at Bob, but I just know that there's disruption there that we're working through, but I frankly haven't thought to quantify it. Yeah, so I would, I would think of it more not necessarily, I would think more, not necessarily as lost.

Deduction. But more the the dog pedaling under the surface that has to occur to sort of reorganize.

Chuck's depose production prioritization. So I think it's not as simple as the to death. Two dimensional question that you that you allude to, but obviously there's impacts underneath the surface, but we're navigating them as best we can.

Thanks for the color. I'll pass it on.

Perfect. Thank you. As a reminder. It's star followed by 1 on your telephone keypad to submit a question. Our next question comes from color. Connor liner of Morgan Stanley. Connor. Your line is now open.

Yes, thanks. I suppose. We'll we'll stick with that. It's like any topic as you anticipated. I guess. I'm curious. If you could just quantify, well, quantify might be the wrong word, but it points to the areas that you see in the most tension within the supply chain. And I, mostly curious the evolution of that as we've moved to the quarter. And as we sit here today and to what degree of visibility on some of the major pinch points are they, are they getting worse?

Are they getting better and what sort of expectation in the near term here?

Yeah, yeah, that's an interesting question. So, you know, we've we've seen this evolved and I know there's, you know, when you read the news, there's all the talk about semiconductors, but it really is quite a bit more broad-based than that. You know, it's it's I would say it's Electronics in general is is the largest challenge as we work through this. And, you know, there's several components that go into making a radio or an ultrasonic meter. And while you might be chasing one today, it could be a different one tomorrow. So I would just say in general.

Are all the electronics challenges. Haven't really gotten better or worse. It's a matter of just working through and making sure you can secure your supply throughout the year because the Deep Freeze there have been challenges with resins. Both, you know, inflationary and availability. I think what we're starting to see there is availability, is starting to get better on the resin side. But inflation is still real. They are some of the bigger challenges are just on the

Sticks, as I mentioned previously, you might think you've got components showing up today and then all of a sudden, maybe they don't for a few days. So, our supply chain guy refers to it as whack-a-mole and that probably is the best example that I could use to describe it.

That's awful. It certainly strikes me that you guys have been doing very well relative to some other peers out there has that translated into any opportunity to to take share via it on a, you know, an incremental contract or or just, you know, backfilling where others can't. I know you describe the industry as well as typically rational and oligopoly, like, so curious if that's really altering, the competitive Dynamic at all. Or if you're really, not seeing that,

Well II, think I would characterize it this way. So the oligopoly is still very strong. Customers are still very sticky and loyal but at the end of the day, sometimes they just need a meter, right? And or a radio. And we have with our choice matters that we like to talk about, with our portfolio of being able to produce mechanical meters both composite or brass ultrasonic meters for on the static side, all the different variations of radios. We're offering a solution for

For any problem. And

In many ways that has helped us through this. I would say, I think opportunistically I know that we've picked up some additional orders will that translate into sure that we keep, I don't know, but I do feel like we've got enough information in the market to know that that our portfolio was helping us pick up some additional quarters, the think of that, as on the fringes, not necessarily wholesale conversions.

Okay, makes sense.

Thank you as a reminder. It's stall for led by one on your telephone keypad to submit a question. Our next question comes from Robert Mason of bed. Rob. Your line is now open.

Yes, good morning around. Oh, good morning. I wanted to know Ken how you're thinking about just seasonality here in the short-term from the demand side. I know, you know, you from the supply side you'll that may be dictated or the Cadence will be dictated. But what comes in. But, you know, historically, there is some seasonality from the demand side and just given that you have elevated backlog. You know, what your customers.

Kind of buck that seasonality, if the supply is available.

So so a couple things on that. I think, you know, over the past few years. The the idea of seasonality is become less of an issue for us as we sell more, you know, more radios and sophomore year becomes a bigger part of the portfolio, you know, we don't only sell in in weather related areas, obviously, you know, people in the South and the West continue to work so. So, I think the seasonality has been naturally muting anyway, and now with our backlog, if you recall, we talked about other than Q1 B

Record, then we talked about in Q2 being another record. And and now we added to it again here in Q3. So I think it's, it's really, really a difficult situation to talk about what to expect given the supply chain, but I wouldn't, I would expect seasonality to continue to be less of an issue for us, you know, as you think about Q4,

Okay, okay. On the gross margin in the quarter. Is there a way to quantify? What the inflationary your you know your overall cost bucket, how that might have impacted gross margin and the so typically we don't get that granular, you know, if I just if I just diagnosed kind of the year-over-year comparative certainly, you've got a variety of Dynamics taking place.

We have the structural mix that we talk about every quarter, you know, you here to your heard us mention selling more radios, year-over-year and selling more software year over year. So that's a, that's a buoy to gross margins. And then, of course, we've talked in the past about acquisition mix being a favorable contributor to to our our margins on a, on a, on a year-over-year basis and that naturally just giving the talk on inflationary and cost pressures and pricing. I think we started out 2021 with a great, you know, move with with strategic.

Icing initiatives, and I would say, for the first half of the year. We outpaced price cost in that in that world.

And I would argue that in third quarter that that Gap narrowed and because the inflationary cost pressures have have cropped up. So when you when you mold all that together, you got some pluses and minuses and that's real. It's really driving the outcome in the quarter. I think you can tell from our tone and from the from the script that we've talked about with with with inflation continuing, you know, as we look forward, I would expect that, you know, be a pressure in the fourth quarter.

Value-based pricing is a recall that you know, it was, it was around September last year that you started to work some elements of that into the into the business. Does that still give you that, that approach? Still give you the Tactical flexibility. You need to address some of these pockets of inflation?

Yeah, absolutely. So while the The Lion's Share of the effort was, you know, a year or so ago that that isn't the point in time and then we're done we're continually revisiting that each and every month and will continue to do that as we move forward. So there's still opportunity. So we've talked in the past three quarters about, you know, they'll be times of leading and Times of lagging in the price cost Dynamics. And so we're still able to pull those levers and we will be as we move forward.

Word. Very good. Thank you.

As they fund a reminder. It's awful at by one on your telephone keypad to submit the question.

At this time, we currently have no further questions. I'll hand back over to miss Bauer for closing.

Great. Thank you. I did want to let you know that today we posted to the investor section of our website, a report from our board of directors, addressing the topic of board diversity. I encourage you to read that report, and please feel free to reach out to me with any questions or comments on the report finally for your planning purposes. Our fourth quarter year and 2021 earnings call is tentatively scheduled for January 28th. 2022.

Thanks everyone for joining our call today. I'll be around all day to take any follow-up questions. You might have. Have a great weekend.

Ladies and gentlemen, thank you all for joining. You may now disconnect your lines.