Q4 2022 Badger Meter Inc Earnings Call
We remain committed to our normalized gross margin range and are confident in the overall margin resiliency of our business model.
SCA expenses in the fourth quarter were $34 5 million, an increase of approximately $2 $5 million year over year, due primarily to higher personnel and incentive compensation costs.
Research and development spend and travel.
As a percent of sales was 23, 4% a 20 basis point improvement from 23, 6% in the comparable prior year quarter.
Sequentially SBA leverage did worse than 70 basis points as our robust cash flow in the fourth quarter resulted in higher incentive compensation accruals at year end.
We expect FCA spend in dollars for 2023 to increase as a result of inflation and ongoing growth investments yet we continue to endeavor to improve SBA leverage as a percent of sales is just one of the levers for future margin enhancement.
The income tax provision in the fourth quarter of 2022 was 23, 4% compared to 24, 5% in the comparable prior year quarter.
In summary, consolidated EPS was <unk> 60 in the fourth quarter of 2022 compared to 59 in the prior year comparable quarter.
Working capital as a percent of sales was 22, 2% at year end compared to 23, 8% at the end of Q3 and down from 24, 5%. When we started the year while inventory has increased in response to supply chain complexities. The corresponding payables increased coupled with receivables collection quality resulted in the <unk>.
Overall improvement for.
Quarter free cash flow of $28 $5 million was higher than the prior year's $26 2 million. The result of our effective working capital management activities.
For the full year free cash flow was $76 6 million and free cash flow conversion of net earnings was 115%. This represents the fifth consecutive year of greater than 100% conversion of net earnings with that I'll turn the call back over to Ken.
Thanks, Bob turning to slide five I want to spend a few minutes on our recently announced acquisition of <unk> and how we believe it expands the value of our Smartwater solutions portfolio.
<unk> brings additional capabilities to our industry, leading offerings in the form of pressure monitoring hardware and software their patent protected and innovative time synchronized high frequency pressure monitoring and acoustic leak detection complements the existing pressure monitoring capabilities available in our E series ultrasonic meters.
<unk> has a history of success with network monitoring installations across a variety of utilities, most notably in the U S and UK.
Of keen interest to badger meter as their radar software, which adds to the scope of real time, and actionable data and analytics for utilities to improve their operations for.
For example time to synchronize pressure data allows for proactive versus reactive strategies to address pipe burst in other leaks saving precious time money and water loss. Additionally pressure on water quality sensors can work in tandem for example in situations, where a crack pipe has identified as a result of contaminants infiltration.
In fact, <unk> has worked closely with the ATI water quality team over the years.
From a financial standpoint, this technology startup has seen steady growth, albeit from a very small base, our acquired revenues or a few million dollars and it will start up modestly dilutive to earnings given the pre profit position upon acquisition and future amortization of purchased intangibles.
We believe over the long term, adding the <unk> capabilities are comprehensive and Tailorable digital solutions will continue to competitively differentiate badger meter in the market.
Taking a look back at fiscal 2022 in the past several years overall here on slide six we have distinguished our performance by executing our strategy is exceptionally well in the face of a multitude of macro challenges.
As noted in the release and outlined here in 2022, we delivered 12% overall sales growth and 14% utility water product line growth grew.
<unk> grew orders in backlog to new record levels generated nearly $34 million in software revenues.
Grew operating profit, 11% in the face of unprecedented inflation and delivered 115% free cash flow conversion of net earnings.
Looking at just a few of the longer term accomplishments relative to our strategic growth goals, we've grown our utility water business at an accelerating rate over the last three years.
Increased software as a sales revenue at a 45% growth CAGR, reaching 6% of revenue in 2022, even with a sizable increase in product sales we.
We reduced our primary working capital as a percent of sales freeing up capital by instilling a focus continuous improvement mindset to working capital management.
All of which enabled us to generate nearly $240 million in free cash flow over the past three years with an average free cash flow conversion of 137%.
Of that cash we deployed nearly $100 million inclusive of <unk>, three strategic tuck in acquisitions, adding water quality and pressure monitoring capabilities to our Smartwater solutions.
We returned nearly 30% of that cash to shareholders in the form of dividends achieving dividend aristocrat status with a track record of 30 years of consecutive annual dividend increases and.
And we continue to invest in R&D and innovation to build on our leading portfolio of Smartwater solutions.
I couldnt be more proud of the team's achievements.
Finally, turning to our outlook I remain excited about the opportunities ahead and at a macro level badger meter is uniquely positioned with our broad and expanding portfolio of smartwater offerings.
This includes our industry, leading cellular communications real time water quality and pressure monitoring as well as tailorable software to enable customers to be more efficient resilient and sustainable with their water systems.
A replacement driven demand macro Ami adoption drivers and growing proportion of stable SaaS revenue are supportive of durable multiyear growth against an uncertain economic backdrop.
We continue to remain constructive on the bid funnel and order rates with record orders in the fourth quarter, and a record backlog, which bodes well for future sales growth.
Im also encouraged by the current trajectory of supply chain easing.
Coupled with some anticipated leveling off of input cost inflation and continued price realization this should bode well for gradual gross improvement.
Gross margin improvement in 2023.
Our cash flow generation and debt free balance sheet provide us with ample capacity to execute our capital allocation priorities, including an attractive funnel of organic and inorganic strategic growth investments I want to again, thank the entire badger meter team for their tremendous efforts and accomplishments in 2022, and I look forward to executing on the many.
Opportunities ahead with that operator, please open the line for questions.
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Our first question comes from the line of Nathan Jones with Stifel. Your line is now open.
Good morning, everyone.
Nathan.
Uh huh.
Slide six.
The chart, there working capital SaaS coming down and especially the free cash flow conversion over the last couple of years with all the supply chain, John you've been pretty aggressive.
Maybe you could talk about a little bit more about the supply chain.
What youre seeing what youre expecting to see there.
No doubt all of the supply chain disruption has had a negative impact on the productivity within your facility.
Talk a little bit about.
What that impacts being what kind of margin expansion you might be able to see as you improve productivity with more reliable supply chain.
Yeah. Thanks, Nathan so supply chain as we've talked about I think in the last couple of quarters. It continued to improve again.
I wouldn't say that we're completely out of the woods yet across the entire industrial space still seeing some challenges with electronics here and there but for the most part.
Definitely in a better position than we've been and expect that to continue to improve.
Youre right the supply chain complexities, certainly add have added a lot of inefficiencies and other other issues throughout our facilities, but we've handled it very well and I expect to see some improvement there, but nothing that I think you can model is a huge improvement.
I think the takeaway Nathan should be exactly what we said in the prepared.
Oh, sorry in the prepared remarks, which is with that supply chain easing continuing with the opportunity for greater efficiency, we're still staying resolute in our normalized margin range, but we would expect.
A modest improvement in 2023 versus 2022.
And you talked about.
Expectation.
Some flattening inflation.
Some additional price reading through in 2023.
Can you give us whatever color you are prepared to on price cost.
In 'twenty, two and then what your expectations are in <unk> price cost be.
Yes.
Better in 'twenty trade and it was in 'twenty two.
What they say.
So a lot of moving pieces there as you know when we talk about price cost oftentimes. In addition to what people. Most traditionally think of there is always always a.
A mix or an average sell price dynamic that plays into that that said I think the way we would look at 2023 simply versus 22 modestly better price cost dynamics 2023 versus 2022, we know we've had leading or lagging effects of price actions relative to cost.
But that's why we're still staying resolute with that targeted.
Comfort zone or margin profile of 38% to 40%.
Great. Thanks for taking my questions I'll pass it on.
Thank you Mr. Jones.
Our next question comes from the line of Thomas Jonsson with Morgan Stanley .
Your line is now open.
Sure.
Hi, Thanks, and congratulations on another strong quarter here.
To start can be helpful.
Maybe get some incremental color on the demand outlook obviously.
Language on year over year comps is reasonably conservative, but constructive although you did mention record fourth quarter exit.
Ordering.
And it's pretty clear that recent results have been delivered in the face of some pretty strong operational headwinds, which we.
We kind of would assume are easing in 2023. So what are some of the underlying assumptions that are kind of causing that conservatism on the 2023 outlook just on year over year basis.
Well I'll go first and I can see Bob chomping at the bit here to get into but if.
I'll bring you back to slide six and if you look at the upper right corner, we have got the chart there on utility growth.
Remembering that utility is 85% of our revenue and even in 2020 of the Covid year. We grew 4% last year. We grew in 'twenty. One we grew 9%. This year. We grew 14. So we are absolutely excited about the market. The market is great. We continue every single quarter or two.
To have record shipments and the backlog has increased every quarter the bid funnel is strong.
We're winning more than our fair share of Ami in this market. So we feel as great as ever about the utility market, which is the largest portion of our business and we feel really good about our ability to grow 10% in flow instrumentation that other 15% so.
We don't feel challenged by markets, we're just saying, perhaps maybe the rate of the percentage of growth may not be 14% again right. So that's the clear takeaway should absolutely be hear optimism about the outlook moving forward, but just incremental rising on a year, where you just delivered 12% growth to think that that rate.
Change on a law of big numbers is going to be in excess of what we just delivered the conservative comes from just anniversarying. The increases of 2022 still very robust growth, but just not at the level of in excess of what we just delivered and to be very clear I mean, we are very confident in 2023 and the longer.
Term with what we see in the markets.
Thanks for the color.
Just shifting to capital allocation here really helpful information on slide seven and clearly you've put some capital to work in the first quarter of the year, but still sitting on.
Pretty high levels of cash here, so just from an M&A perspective, and maybe the pipeline of deals there.
Post this recent acquisition.
What other areas are you focusing on for it for inorganic growth here in the near term.
Yes.
We've built and have maintained a really interesting funnel of companies that are in the water quality space software space much like <unk>. The recent acquisition.
And anything that brings some sort of a global customer base and footprint with it is.
As in that target zone. So we remain disciplined we look for value I think we certainly have found that with the with the three acquisitions. We've done in the last 26 months.
So so we're not in the mode of just trying to get bigger because we can but there is certainly a new.
Number of interesting opportunities out there for us that we continue to work. So the Laneways. Ken mentioned are the same as they've been really for the last.
Couple of years.
And you can tell that those laneways are very core to where we play today. So this idea that perhaps with the with the available cash we would all of a sudden stray too far from the fair way in which we operate right now.
Most not likely not likely we're staying very core to where we play on those laneways are unwavering really over the last few years.
Understood. Thanks for the helpful responses and I'll pass it back.
Alright. Thanks.
Thank you Mr. Johnson.
Our next question comes from the line of Rob Mason with Baird. Your line is now open.
Yes, good morning all.
Robin.
Good morning, you mentioned the book to Bill.
Over one I'm, just Ken could you square or Bob could you just square up where backlog.
Sits at year end relative to 12 months ago year end 'twenty one.
The order of magnitude I guess increase what im looking for.
Yes, so we don't we don't specifically disclose backlog and actually and in light of kind of the the imbalance that has really been in the supply demand environment over the last 24 months I think quite frankly sizing it would be not all that relevant and actually might create more confusion obviously.
Obviously, if you take the last several quarters of book to Bill in excess of one of one you can obviously conclude that backlog is higher at the end of 2022 than it was in 2021, but yes, we don't we aren't going to size that and we haven't typically disclosed it.
Because I think this isn't a traditional backlog business.
Granted we do have more line of sight too.
Immediately actionable orders now than we have in years prior but we think thats a temporary scenario.
And so yes, we're not going to size it Rob.
Is.
And can you tell me if the backlog the bookings book to Bill.
Over one in the flow measurement business also or how does that comparatively how does it look.
Yeah. It was it was slightly better than than one.
Just I guess remaining of course reminding you of course, all that's 15% of the business and not necessarily.
We're a very fragmented and those many markets. Many small markets. So if you're trying to draw conclusions of that data point to other industries challenging to do.
And to Bob's point earlier, the small and remember that now we have more of a primary focus in that group on water related.
Industry. So its not if youre thinking back in time, our portfolio has gone from 70 30 utility flow instrumentation to now $85 <unk> and then even within that 15, it's more water focus than it used to be the other market. So.
So it is quite different than it used to be I think when people thought about recessionary times or other challenges.
No understood understood.
Ken.
Good color on <unk>, but I'm curious if you could go a layer deeper it looks like a very interesting business. It just.
Help me understand how how that product gets to market, maybe what the sales cycles would look like what a typical deployment would look like.
Just within that product category or how you envision it.
Yes, so the way that we view a lot of these small technology.
Small technology acquisitions as that.
With our strong brand name with our sales coverage and in North America, we can usually sell anything to our existing customer base to new customers and even.
Even utilities that might use a different metering manufacturer. So <unk> can fit right into our direct sales channel are our utility distributors can sell it they know the product they have the right context. So so in terms of being able to get some sales synergy in the U S. We certainly feel that and then were.
Excited about the fact that it also comes with the software components. So now when you think about our beacon software that we.
We built out here really significantly over the last five six years.
It was primarily AI data now we added Essakane ATI and now people can go to beacon and get their water quality data and now with the radar software that will incorporate into beacon utility now can come get their quantity quality pressure acoustic leak detection all in one place. So we think we've got.
Really good leverage and we can integrate it relatively easily into our sales force and then on top of that we're really excited about the <unk>.
Again small companies similar like ATI, essakane, except even smaller but longstanding great relationships with people like Tom is water.
American water if you go to their website youll see some some really good customer test cases so.
I've said this before.
Technology deals for us at all.
Obviously with big deals are always flashy, but no deal is too small with what we can do with our customer base.
Yeah.
And then I wanted to.
Hello.
I am sorry, sorry, right. So the one piece that maybe we didn't touch on there was you talked about.
Deployed.
Ken covered channels, but from a deployment standpoint, this largely becomes a starts I'm going to call. It a pilot for lack of a better term maybe a focused effort on leak detection in a particular part of a defined distribution network and once that successful from that model and gets replicated in other areas of zones. So basically you have customers starting with a small footprint of.
But that that customer grows that installed base.
Both hardware and software overtime.
I see I see.
To the extent that you've noted it might be.
Modestly dilutive this year I'm, just curious what would be the impact on the gross margin.
At the gross margin line. This this is above line average, but again to size. What we've said in the commentary we're talking about a couple million dollars of sales at acquisition.
Sure sure Okay very good thank you.
Sure.
Thank you Mr Mason.
Our next question comes from the line of Tate Sullivan with Maxim Group. Your line is now open.
Thank you. Thank you good morning.
Im sure next falling up is it additive to the existing real time water quality measurement businesses, you have or is it the other way around.
Yeah Tate.
It's really exciting and that we have known <unk> for several years.
But they have had a longstanding relationship with ATI. So so this equipment works hand in hand, a lot of times with the water quality equipment, because as I mentioned in the prepared comments.
Sometimes you can understand a leak because you can see the contaminants in the water first.
And vice versa. So.
They really help each other out.
Plus you can get it into the drinking distribution system. So it goes all the way across the portfolio.
Okay.
And on the real time water quality opportunity can you give an update there.
The customers currently can't comment industrial customers for that technology and also can you update on the process of integrating the software capability into the real time water quality market.
Sure yes so.
So the water quality.
The water quality applications do have the wide ranging effects of drinking water distribution and wastewater industrial processes. So yes.
It fits all aspects of what we cover.
And in terms of software yes. It is it is available it is online and customers are.
Now ordering water quality sensing plus software.
Both on the industrial and utility.
Yes, yes, yes.
That is correct and then on the international opportunity to I mean U S with such good growth in 2022 and understanding of moderating.
Percentage growth in 'twenty, three I mean.
Internationally should we expect it to grow as a portion of revenue going forward given I mean, many of these acquisitions that one.
Yes, I am getting a little bullish on percent of percent of.
The portfolio because North America is growing so great that sometimes it gets hard to size something and say, it's going to be X percent of revenue because we're doing so well.
Right in the core.
But yes, we do we do expect every year international growth.
It can it can tend to be a little more uneven than the U S piece, but we.
We remain just as interested and excited about global opportunities as we had previously.
Alright, Thank you very much.
Youre welcome. Thank you Mr. Sullivan.
There are no additional questions waiting at this time so as a reminder, it is star one on your telephone keypad.
Yeah.
There are no additional questions waiting at this time, so I'll pass the conference back over to MS. Bauer for closing remarks.
Great. Thank you all for joining our call today for your planning purposes. Our first quarter 2023 call is tentatively scheduled for April 20th I'll be around all day to answer any follow up questions. You may have have a great day.
That concludes the fourth quarter 2020 to badger meter.
Earnings Conference call.
Participation have a wonderful day.