Q2 2024 Badger Meter Inc Earnings Call

Ladies and gentlemen, welcome to the second quarter 2024 Badger Meter Earnings Conference Call. After the prepared remarks there will be an opportunity to ask questions.

Operator: After the prepared remarks, there will be an opportunity to ask questions. If you'd like to ask a question during the Q&A, you can do so by pressing the star followed by 1 on your telephone keypad.

Speaker Change: If you'd like to ask a question during the Q&A, you can do so by pressing star followed by 1 on your telephone keypad. As a reminder, today's conference is being recorded.

Operator: As a reminder, today's conference is being recorded. It's now my pleasure to turn the conference over to Karen Bauer, Vice President of Investor Relations, Corporate Strategy, and Treasurer. Please go ahead, Ms. Bauer.

Karen Bauer: Good morning, and thank you for joining the Badger Meter 2nd Quarter 2024 Earnings Conference Call. On the call with me today are Ken Bockhorst, Chairman, President, and Chief Executive Officer, and Bob Wrocklage, Chief Financial Officer. The earnings release and related slide presentation are available on our website. Quickly, I will cover the safe harbor, reminding you that any forward-looking statements made during this call are subject to various risks and uncertainties, the most important of which are outlined in our press release and SEC filing. In today's call, we will refer to certain non-GAAP financial metrics. Our earnings slides provide a reconciliation of the GAAP to non-GAAP financial metrics used. With that, I'll turn the call over to Ken.

Speaker Change: On today's call, we will refer to certain non-GAAP financial metrics, our earnings slides provide a reconciliation of the GAAP to non-GAAP financial metrics used.

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

Kenneth C. Bockhorst: Thanks, Karen. We appreciate all of you joining us for our second quarter earnings call. I'm pleased to report that we surpassed the $200 million quarterly revenue milestone this quarter, delivering total sales of $217 million, representing 23% year-over-year growth. This result was modestly higher than we anticipated, driven by ongoing market demand and incremental backlog conversion in support of our customers. We reported record operating margins in EPS in the quarter, along with strong year-over-year cash flow growth.

Ken: Thanks, Karen we appreciate all of you joining us for our second quarter earnings call I am pleased to report that we surpassed the $200 million quarterly revenue milestone this quarter, delivering total sales of $217 million, representing 23% year over year growth.

Ken: This result was modestly higher than we anticipated driven by ongoing market demand and incremental backlog conversion in support of our customers.

Speaker Change: We reported record operating margins and EPS in the quarter, along with strong year over year cash flow growth in summary at the halfway point of the year, we remain pleased with the trajectory of our business results.

Kenneth C. Bockhorst: In summary, at the halfway point of the year, we remain pleased with the trajectory of our business results. I'll hand the call over to Bob to go through the details of the quarter, and I'll come back to talk about Blue Edge, our recently released sustainability report, and the outlook for the back half of the year.

Speaker Change: I'll hand, the call over to Bob to go through the details of the quarter and I'll come back to talk about Blue edge. Our recently released sustainability report and the outlook for the back half of the year go ahead Bob.

Robert A. Wrocklage: Thanks, Ken, and good morning everyone. Turning to slide 4, as Ken noted, our total sales in the second quarter exceeded the $200 million mark for the first time, and at $217 million, represented an increase of 23% compared to $176 million in the same period last year. The total utility water product line sales increased 26% year over year, moderating a bit from 29% growth last quarter. Demand for our innovative suite of utility smart water solutions continued to benefit from underlying secular growth drivers, and we were able to make additional headway into our backlog in support of customers. Most notably, we delivered on strong cellular AMI demand, including higher sales of meters, both mechanical and E-series ultrasonic. Orion Cellular Endpoints and Related Beacon Software as a Service Revenue

Bob: Thanks, Ken and good morning, everyone.

Bob: Turning to slide four as Ken noted our total sales in the second quarter exceeded the $200 million Mark for the first time in at $217 million, representing an increase of 23% compared to a $176 million in the same period last year.

Bob: Total utility water product line sales increased 26% year over year moderating a bit from 29% growth last quarter.

Speaker Change: Demand for our innovative suite of utility Smartwater solutions continued to benefit from underlying secular growth drivers and we were able to make additional headway into our backlog in support of customers.

Speaker Change: Most notably we delivered on strong cellular AMIA demand, including higher sale of meters, both mechanical and E series ultrasonic.

Orion cellular endpoints unrelated beacon software as a service revenue.

Robert A. Wrocklage: Sales for the Flow Instrumentation product line increased 5%, with solid order trends globally within our focused water-related markets, such as wastewater. As we noted in the press release, and as we've consistently communicated, we anticipate the rate of sales growth to normalize into the high single-digit range in the back half of the year and over the cycle, with typical unevenness in that outcome from any particular quarter or year. We have a strong opportunity pipeline, bid funnel, and order book, but for the back half of 2024, we do anticipate the level of backlog conversion which benefited the second quarter. However, we do not anticipate the level of backlog conversion which benefited specifically the second quarter, which will obviously then influence sequential trend lines moving forward.

Speaker Change: Sales for the flow instrumentation product line increased 5% with solid order trends globally within our focused water related markets such as wastewater.

Speaker Change: As we noted in the press release and as we've consistently communicated we anticipate the rate of sales growth to normalize into the high single digit rain range in the back half of the year and over the cycle with typical unevenness in that outcome from any particular quarter or year.

Speaker Change: We have a strong opportunity pipeline bid funnel and order book, but for the back half of 2024, we do anticipate the level of backlog conversion, which benefited the second quarter.

Robert Wrocklage: will not anticipate the level of backlog conversion, which benefited specifically the second quarter, which will obviously then influence sequential trend lines moving forward. Turning to margins, we were very pleased with the operating margin expansion of 240 basis points in the quarter, reaching a record high of 19.2% for the second quarter. Gross profit dollars increased 15.9 million year over year, and as a percent of sales, gross margins remained in the upper half of our normalized range at 39.4%. Of note, margins have held to a floor of 38% since 2019 and have been steadily above 39% for the last six quarters, demonstrating the stability and resiliency of gross margins in the face of inflationary and other macro pressures.

Speaker Change: We will not we do not anticipate the level of backlog conversion, which benefited specifically the second quarter, which will obviously then influence sequential trend lines moving forward.

Robert A. Wrocklage: Turning to margins, we were very pleased with the operating margin expansion of 240 basis points in the quarter, reaching a record high of 19.2% for the second quarter. Gross profit dollars increased $15.9 million year-over-year, and as a percent of sales, gross margins remained in the upper half of our normalized range at 39.4%. Of note, margins have held to a floor of 38 percent since 2019 and have been steadily above 39 percent for the last six quarters, demonstrating the stability and resiliency of gross margins in the face of inflationary and other macro pressures.

Speaker Change: Turning to margins, we were very pleased with the operating margin expansion of 240 basis points in the quarter, reaching a record high of 19, 2% for the second quarter.

Speaker Change: Gross profit dollars increased $15 $9 million year over year and as a percent of sales gross margins remained in the upper half of our normalized range at 39, 4%.

Of note margins have held to a floor of 38% since 2019 and had been steadily above 39% for the last six quarters, demonstrating the stability and resiliency of gross margins in the face of inflationary and other macro pressures.

Robert A. Wrocklage: SEA expenses in the second quarter were $43.9 million, an increase of approximately $4 million year over year and up just over $3 million from the first quarter. The year-over-year spending increase was due primarily to personnel-related costs, including higher headcount, salaries, sales commissions, and R&D. Despite this increase in growth spending, SEA as a percent of sales declined 250 basis points, to 20.2% from 22.7% in the comparable prior year quarter due to the backlog enhanced sale.

Robert Wrocklage: SEA expenses in the second quarter were 43.9 million dollars, an increase of approximately 4 million year over year and up just over 3 million from the first quarter. The year-over-year spending increases was due primarily to personnel-related costs, including higher-head count salaries, sales commissions in R&D. Despite this increase in gross spending, SEA is a percent of sales decline of 250 basis points to 20.2% from 22.7% in the comparable prior year quarter due to the backlog enhanced sales.

Speaker Change: SCA expenses in the second quarter were $43 $9 million, an increase of approximately $4 million year over year and up just over $3 million from the first quarter.

Speaker Change: The year over year spending increase was due primarily to personnel related costs, including higher head count.

Salaries sales commissions in R&D.

Speaker Change: Despite this increase in gross spending FCA as a percent of sales declined 250 basis points to 22% from 22, 7% in the comparable prior year quarter.

Speaker Change: Due to the backlog enhanced sales.

Robert A. Wrocklage: The income tax provision in the second quarter of 2024 was 23.8 percent and was below the prior year's 25.8 percent, partially due to the discrete tax benefit from equity compensation transactions. In summary, consolidated EPS was $1.12 in the second quarter of 2024, a 47% improvement from 76 cents in the prior year comparable quarter. Primary working capital as a percent of sales at June 30, 2024, was 21.9% consistent with the prior quarter end, and a 20 basis point improvement from 22.1% at calendar year end. We continue to carefully manage working capital investments to support growth. Free cash flow of $34.1 million was higher than the prior year's $20.1 million, largely as a result of higher earnings.

Robert Wrocklage: The income tax provision in the second quarter of 2024 was 23.8% and was below the prior year's 25.8%, partially due to the discrete tax benefit from equity compensation transactions.

Speaker Change: The income tax provision in the second quarter of 2024 was 23, 8% and was below the prior year's 25, 8%, partially due to the discrete tax benefit from equity compensation transactions.

Robert Wrocklage: In summary, consolidated EPS was a dollar 12 in the second quarter of 2024, a 47% improvement from 76 cents in the prior year comparable quarter. Primary working capital as a percent of sales at June 30th, 2024 was 21.9%, consistent with the prior quarter end and a 20 basis point improvement from 22.1% at calendar year end. We continue to carefully manage working capital investments to support gross. Free cash flow of $34.1 million was higher than the prior year's $20.1 million, largely the result of higher earnings.

Speaker Change: In summary, consolidated EPS was $1 12 in the second quarter of 2024 or 47% improvement from 76 cents in the prior year comparable quarter.

Speaker Change: Primary working capital as a percent of sales at June 32024 was 21, 9% consistent with the prior quarter end and a 20 basis point improvement from 22, 1% at calendar year end.

Speaker Change: We continue to carefully manage working capital investments to support growth.

Speaker Change: Free cash flow of $34 $1 million was higher than the prior year's $20 1 million largely the result of higher earnings.

Robert A. Wrocklage: With that, I'll turn the call back over to Ken. Thanks, Bob.

Robert Wrocklage: With that, I'll turn the call back over to Ken.

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

Kenneth C. Bockhorst: Thanks Bob. Turning to slide 5, I'll take a few minutes to introduce you to BlueEdge. For those of you that stopped by our booth at this year's ACE trade show, you saw a literal representation of BlueEdge on display. It showcased our full suite of connected technologies integrating hardware-enabled software and services for customers to gain clarity and make more informed decisions for efficient water management. Blue Edge is not a new product or segment, so please don't ask us how many Blue Edges we plan to sell next quarter.

Ken: Thanks, Bob turning to slide five I'll take a few minutes to introduce you to blue edge for those of you that stopped by our booth at this year's Ace trade show you saw the literal representation of Blue add John display.

Kenneth Bockhorst: Turning to slide five, I'll take a few minutes to introduce you to Blue Edge. For those of you that's stopped by our booth at this year's Ace Trade Show, you saw the literal representation of Blue Edge on display. It showcased our full suite of connected technologies integrating hardware enabled software and services for customers to gain clarity and make more informed decisions for efficient water management.

Speaker Change: It showcased our full suite of connected technologies integrating hardware enabled software and services for customers to gain clarity and make more informed decisions for efficient water management.

Kenneth Bockhorst: Blue Edge is not a new product or segment, so please don't ask us how many blue edges we plan to sell next quarter. Instead, Blue Edge is the overarching name we've given to our tailorable suite of solutions that solve critical water challenges across the entire water cycle. It's a way to simplify for our customers, including both utility and commercial and industrial customers, the breadth of offerings available to best meet their needs and preferences today, and as they advance and change in the future.

Speaker Change: Blue edge is not a new product or segment. So please don't ask us how many blue edges, we plan to sell next quarter.

Kenneth C. Bockhorst: Instead, Blue Edge is the overarching name we've given to our tailorable suite of solutions that solve critical water challenges across the entire water cycle. It's a way to simplify for our customers, including both utility and commercial and industrial customers, the breadth of offerings available to best meet their needs and preferences today and as they advance and change in the future. I encourage you to visit our badgermeter.com website to learn more.

Instead blue edge is the overarching name, we have given to our Tailorable suite of solutions that solve critical water challenges across the entire water cycle.

Speaker Change: It's a way to simplify it for our customers, including both utility and commercial and industrial customers. The breadth of offerings available to best meet their needs and preferences today and as they advance in change in the future.

Kenneth Bockhorst: I encourage you to visit ourbadermeter.com website to learn more.

Carriage you to visit our Badger meter dotcom website to learn more.

Kenneth C. Bockhorst: At the end of May, we released our annual sustainability report, with a summary here on slide 6. The report focuses on enabling customer-driven sustainability outcomes, mitigating ESG risks, and reducing costs. With more than 95% of our revenue derived from water-related applications, we play a crucial role in enabling water efficiency and resiliency, reducing water loss, and optimizing asset life for our customers. We also strive to limit our own environmental impact by reducing emissions, energy, waste, and water usage, and, in turn, lowering our costs.

Kenneth Bockhorst: At the end of May, we released our annual sustainability report with a summary here on slide six. The report focuses on enabling customer-driven sustainability outcomes, mitigating ESG risks, and reducing costs. With more than 95% of our revenue derived from water-related applications, we play a crucial role in enabling water efficiency and resiliency, reducing water loss, and optimizing asset life for our customers. We also strive to limit our own environmental impact by reducing emissions, energy, waste, and water usage, and in turn, lowering our costs. Finally, we know that attracting and retaining engaged talent motivated by our purpose and provided opportunities to grow their careers are critical to furthering innovation and supporting our long-term growth.

Speaker Change: At the end of May we released our annual sustainability report with a summary here on slide six.

The report focuses on enabling customer driven sustainability outcomes, mitigating ESG risks and reducing costs.

Speaker Change: With more than 95% of our revenue derived from water related applications, we play a crucial role in enabling water efficiency and resiliency, reducing water loss and optimizing asset life for our customers.

Speaker Change: We also strive to limit our own environmental impact by reducing emissions energy waste and water usage and in turn lowering our costs.

Kenneth C. Bockhorst: Finally, we know that attracting and retaining engaged talent, motivated by our purpose and provided opportunities to grow their careers, is critical to furthering innovation and supporting our long-term growth. By prioritizing the value-enhancing linkage between financial and sustainability-related outcomes, we are working to ensure the longevity of our business well into the future. Finally, turning to the outlook, there is really no change to the multiple favorable macro drivers supporting the water industry growth fundamentals, with an encouraging opportunity funnel, bid pipeline, and order book voting well for continued sales and earnings growth.

Speaker Change: Finally, we know that attracting and retaining engaged talent motivated by our purpose and provided opportunities to grow their careers are critical to furthering innovation and supporting our long term growth.

Kenneth Bockhorst: By prioritizing the value-enhancing linkage between financial and sustainability-related outcomes, we are working to ensure the longevity of our business well into the future.

Speaker Change: By prioritizing the value enhancing linkage between financial and sustainability related outcomes. We are working to ensure the longevity of our business well into the future.

Kenneth Bockhorst: Finally, turning to the outlook, there is really no change to the multiple favorable macro drivers supporting the water industry growth fundamentals. With an encouraging opportunity-funnel, bid pipeline, and order-book-boarding welfare continued sales in earnings growth. As we noted in the press release in Bob's earlier comments, the second quarter did benefit from converting some of our backlog in support of our customers, which will impact sequential revenue expectations moving forward. Our focus is on high single-digit sales growth rates, taking into account general unevenness, and the more difficult year-over-year sales comparisons in the back half of the year. We have the balance sheet and cash flow generation to provide us with significant flexibility and capacity to further invest in both organic and highly strategic inorganic growth, while also providing an attractive dividend.

Finally, turning to the outlook there is really no change to the multiple favorable macro drivers supporting the water industry growth fundamentals.

Speaker Change: With an encouraging opportunity funnel bid pipeline and order book Boding, well for continued sales and earnings growth.

Kenneth C. Bockhorst: As we noted in the press release and Bob's earlier comments, this second quarter did benefit from converting some of our backlog in support of our customers, which will impact sequential revenue expectations moving forward. Our focus is on high single-digit sales growth rates, taking into account general unevenness and the more difficult year-over-year sales comparisons in the back half of the year. We have the balance sheet and cash flow generation to provide us with significant flexibility and capacity to further invest in both organic and highly strategic inorganic growth, while also providing an attractive dividend.

Speaker Change: As we noted in the press release on Bob's earlier comments, the second quarter did benefit from converting some of our backlog in support of our customers, which will impact sequential revenue expectations moving forward.

Speaker Change: Our focus is on high single digit sales growth rates, taking into account general unevenness in the more difficult year over year sales comparisons in the back half of the year.

Speaker Change: We have the balance sheet and cash flow generation to provide us with significant flexibility and capacity to further invest in both organic and highly strategic and organic growth, while also providing an attractive dividend.

Kenneth Bockhorst: In summary, the feedback we received from customers and other industry experts had a reinforced both the constructive industry backdrop and their preference for our innovative and differentiated solutions. Our team remains aligned and excited about the opportunities ahead.

Kenneth C. Bockhorst: In summary, the feedback we received from customers and other industry experts at ACE reinforced both the constructive industry backdrop and their preference for our innovative and differentiated solutions. Our team remains aligned and excited about the opportunities ahead. With that, Operator, please open the line for questions.

Speaker Change: In summary, the feedback we received from customers and other industry experts at Ace reinforced both the constructive industry backdrop and their preference for our innovative and differentiated solutions.

Speaker Change: Our team remains aligned and excited about the opportunities ahead with that operator. Please open the line for questions.

Operator: With that operator, please open the line for questions. Thank you. Please press *#1* all above the number one if you'd like to ask a question, and ensure your devices are muted locally when it's your turn to speak.

Speaker Change: Thank you.

Operator: Please press star followed by the number 1 if you'd like to ask a question and ensure your device is unmuted locally when it's your turn to speak. If you change your mind or your question has already been answered, you can withdraw your question by pressing star followed by the number 2. Our first question today comes from Nathan Jones with Stiefel. Please go ahead, your line is open.

Speaker Change: Questor, followed by the number one if you'd like to ask a question Julia devices, Amit likely limit your attentiveness.

Operator: If you change your mind or your question has already been answered, you can withdraw your question by pressing staff all above the number two.

Julia: Have you changed your mind or your question has already been on thank you. Julia question by question followed by the number today.

Julia: Yeah.

Operator: Our first question today comes from Nathan Jones, the steeple. Please go ahead; your line is open.

Julia: Our first question comes from Nathan Jones with Stifel.

Speaker Change: Please go ahead your line is open.

Nathan Hardie Jones: Good morning, everyone.

Nathan Jones: Hey, Nathan. I guess I'll start off with the question about the higher single-digit target in the back half of the year. I mean, you guys have talked over the years about more long-term targets that I think you've ever kind of given a specific target for a second half of the year.

Nathan Hardie Jones: Hi, Nathan.

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

Speaker Change: I guess I'll start off with.

Speaker Change: About the.

Nathan Hardie Jones: The high single digit target in the back half of the I mean, you guys have talked over the years about mall longtime targets, but I think you guys had kind of given a specific target for a second half of the year.

Nathan Jones: So clearly, you know, trying to manage expectations here with the backlog conversion in the second quarter. So I guess the question is, can you talk about what the contribution of kind of a 1x backlog burn-off in the second quarter was. And should we just kind of think of that as a headwind to what a run rate second half is.

So clearly trying to manage expectations here with the backlog conversion in the second quarter.

Speaker Change: The question is can you talk about what the contribution is.

Speaker Change: Kind of a one H backlog burn off in the second quarter was.

Speaker Change: And should we just kind of think of that as a headwind to what our run rate second hobbies.

Robert Wrocklage: Yeah, Nathan, I'll go first here, and I'm sure Bob will have something to add on this, but, you know, fundamentally, the positive outlook that we have on the markets hasn't changed at all. I just think we're heading into a period here where, you know, you're over year the comps get stronger each additional year. I think we were up in Q3 last year, 26% the previous year, up 15.

Kenneth C. Bockhorst: Yeah, Nathan, I'll go first here, and I'm sure Bob will have something to add to this. But fundamentally, the positive outlook that we have on the markets hasn't changed at all. I just think we're heading into a period where, you know, year over year, the comps get stronger each additional year. I think we were up in Q3 last year, 26%, and the previous year, up 15%. So the comps get more difficult.

Bob: Yeah, Nathan I'll go first here and I'm sure Bob will have something to add on this but.

Bob: Fundamentally the positive outlook that we have on the market Hasnt changed at all.

Bob: I think we're heading into a period here where year over year. The comps are getting get stronger each additional year. I think we were up in Q3 last year, 26% the previous year up 15, so so the comps get more difficult in just in terms of returning to the idea of we deliver when our customers want products from us.

Robert Wrocklage: And so the comps get more difficult, and just in terms of returning to the idea of, we deliver when our customers want products from us. And we've always been an uneven, you know, business in the past and just don't want people to start thinking about sequentially every quarter's larger than the next.

Kenneth C. Bockhorst: And just in terms of returning to the idea that we deliver when our customers want products from us. And we've always been an uneven business in the past, and we just don't want people to start thinking that, sequentially, every quarter is larger than the next.

Bob: And we've always been an uneven business in the past and just don't want people to start thinking about sequentially every quarter is larger than the next.

Kenneth C. Bockhorst: And Bob's shaking his head no, so I must...

Bob: And Bob's shaking his head no so I must admit okay.

Kenneth C. Bockhorst: I mean, no meaning he agrees, yes. I got it.

Bob: No no no I agree.

Bob: Hi.

Speaker Change: Got it.

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

I think we've seen over the last couple of quarters as well.

Speaker Change: The incremental margins have kind of hit that 30% level, which I think is kind of higher than you guys had guided historically our expected historically.

Speaker Change: Im talking more about mid twenties kinds of kind of incrementals.

Speaker Change: Should we expect that to normalize back down to more of a mid twenty's level. If the organic growth is lower I mean, obviously, you should get higher incrementals on higher organic growth just any thoughts you have around that.

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

Speaker Change: Yes, I would say no fundamental shift Nathan to what we say our normal incrementals are you're exactly right in the diagnosis of really the last two quarters with the robust growth and then the pace of growth investment being modestly slower than that of course, youre getting the operating and EBITDA margin leverage and of course, then a byproduct of that is the incremental margins.

Speaker Change: But no real change to our mid twenties. It just so happens the two most recent quarters have been above that for those reasons.

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

Speaker Change: Okay, I guess I'll, just slide one more in on Blue edge without asking how many blue Ags youre going to sell.

Putting this suite of technologies and marketing this suite of technology kind of let you leverage that in terms of.

Speaker Change: Maybe selling a little more of these technologies are going to market with the broadest suite of technologies that could be leveraged capable to increase revenue increase market share. How do you think about the ability to leverage that platform to generate additional revenue.

Kenneth C. Bockhorst: Yeah, so you're exactly on the right path there. So obviously, over the last four years, with the entry into water quality with ATI and SCAN, Cirenix for pipeline monitoring, and bringing on the Telog brand and RTUs, we've clearly gone beyond the meter. And this BlueEdge platform is a way for us to talk with customers about the full extensibility that we can provide throughout their network system. So if someone's been a metering customer with us for 50 years, now we have a simple, easy way across the organization or through our distributors to talk to those customers about the rest of the portfolio that they could put in place by adding the sensors and then bringing it through our Beacon software platform that they already use, or vice versa.

Speaker Change: Yes, so you're exactly on the right path there. So obviously over the last four years with the entre into water quality with ATI in Essakane <unk> for the pipeline monitoring, bringing on the <unk> brand and <unk> to use <unk>.

Speaker Change: We've clearly gone beyond the meter and this this blue edge platform as a way for us to.

Speaker Change: Talk with customers about the full extensibility that we can provide throughout their network system. So.

Speaker Change: If someone's been a metering customer with us for 50 years now we have a comprehensive easy way across the organization or through our distributors to talk to those customers about the rest of the portfolio that they could.

Speaker Change: Put in place by adding the sensors and then bring it through our Beacon software platform that they already use our vice versa. If it's a customer that we've acquired through.

Kenneth C. Bockhorst: If it's a customer that we've acquired through one of the acquisitions and they haven't been a metering customer, similar thing. So it's a really nice way for us to meet the customer where they are in their technology journey and figure out how we can enable them to meet their goals and sell more of our products.

Speaker Change: One of the acquisitions and they haven't been of metering customer.

Other thing so it's just a it's a really nice way for us to meet the customer where they are in their technology journey and figure out how we can enable them to meet their goals and sell more of our products.

Kenneth C. Bockhorst: Awesome, thanks very much for taking my question.

Speaker Change: Awesome, Thanks, very much for taking my questions.

Speaker Change: Thank you.

Speaker Change: Yeah.

Operator: Our next question comes from Andrew Krill with Deutsche Bank. Your line is open, please go ahead.

Andrea <unk>: Our next question comes from Andrea <unk> with Deutsche Bank. Your line is open. Please go ahead.

Andrew Jon Krill: Hi, thanks. Good morning, everyone.

Andrea <unk>: Hi, Thanks, good morning, everyone.

Speaker Change: Last quarter.

Speaker Change: U S government stimulus related to water was helping slightly at the margin with demand.

Speaker Change: Indirect by freeing up capital on the larger utilities.

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

Speaker Change: Just is there any update on that Hasnt changed at all perhaps accelerated through <unk>.

Speaker Change: And also I guess in your discussions with customers like are there any dynamics that play ahead of the election.

Speaker Change: Scrambling to use these funds are perhaps sitting on their hands more until after the election, and therefore can be a little bit of an air pocket to contend with.

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

Speaker Change: Yes, Hi, Andrew I don't recall exactly what we said about that last quarter, but the one thing about our growth that has been consistent for.

Speaker Change: For the last several years is that virtually none of it has been aided by any of the infrastructure funds.

Speaker Change: The funding the macro drivers of the fundamentals of what's happening in the market and our team's ability to execute on our portfolio.

Speaker Change: Has been the driver of the growth.

Speaker Change: As we think about election cycles, and what we think the future can bring.

Speaker Change: If and when some of these <unk>.

Speaker Change: We do start to come through we think there could be.

Some some pockets of goodness in water quality and some of the other areas, but we really don't need that for our growth. So so it puts us I think in a pretty good position that we don't we don't have air pockets that have been created by that therefore, we're not expecting.

Speaker Change: Any air pockets to burst I think the key part of your question is exactly what you stated it was on the fringes the extreme fringes and generally more indirect in terms of effect. So that's kind of where things are at I would say no real delta quarter to quarter.

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

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

Speaker Change: Okay, Great. That's helpful. And then just the second question I think the copper and the movement and it has been a topic and I think over time for you guys.

Speaker Change: And less important as an input, but just wanted to get your pulse on should we be expecting that to be a little bit of pressure, perhaps on gross margin in the back half and maybe that keeps you from being at the very high end of that 38% to 40% range a target overtime.

Robert A. Wrocklage: There's obviously a lot of drivers of our gross margin beyond just copper, and you highlighted the key point, which, of course, has less and less of an impact as we continue to sell more and more things that aren't as copper focused. But clearly, it's a fact that if you just looked at quoted copper pricing, quarter over quarter, second quarter average 2024, it's 18% higher than we were a year ago. Thankfully, it's a bit lower than the peaks of mid-May, but absolutely, that's one of the items that would be on the headwind side of the category.

Speaker Change: Yes, I mean, so there's obviously a lot of drivers of our gross margin beyond just copper and you highlighted the key point, which of course less and less of an impact as we continue to sell more and more things that arent as copper focus, but clearly it's a fact that if you just looked at quoted copper pricing quarter over quarter second quarter average.

Speaker Change: 24, its 18% higher than we were a year ago thankfully, it's a bit lower than the peaks of mid may.

Speaker Change: Absolutely that's one of the items that would be on the.

Speaker Change: The headwind side of the category.

Robert A. Wrocklage: In addition to a variety of other things, as the markets read, certainly inflation is improving, but there are still inflationary cost pressures in the system, whether that be copper, whether that be transportation, energy, and other things. But ultimately, we still remain resolved to our normalized gross margin range, and quite frankly, if you look at the last six quarters of performance, as we noted in the script, we've been in a pretty tight band, and I think we would expect that to continue, but definitely that copper piece is a pressure.

Speaker Change: In addition to a variety of other things.

Speaker Change: The market's read certainly inflation is improving but there's still inflationary cost pressures.

Speaker Change: In the system, whether that be copper, whether that'd be transportation.

Speaker Change: Energy and other things, but ultimately we still remain resolve to our normalized gross gross margin range and quite frankly, if you look at the last six quarters of performance as we noted in the script, we've been on a pretty tight band I think we would expect that to continue but definitely that copper piece is a pressure.

Andrew Jon Krill: Okay, great. Thank you.

Speaker Change: Okay, great. Thank you.

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

Speaker Change: Thank you. Our next question is from Nathan with Baird. Please go ahead.

Robert W. Mason: Yes, good morning Ken and Bob. I just wanted to go back to the commentary around Backlog conversion. Within the high single digit or so focus that you have for the back half of the year, does that assume that backlog comes down further? I'm just kind of curious about your level of visibility around the high single digit.

Nathan Hardie Jones: Yes, good morning, Bob.

Nathan Hardie Jones: Wanted to go back to the commentary around.

Nathan Hardie Jones: Backlog conversion.

Bob: Within the high single digit or so.

Bob: Focus that you have for the back half of the year.

Speaker Change: I would assume that backlog.

Speaker Change: <unk> down further.

Speaker Change: I'm just kind of curious what's your level of visibility is around the high single digits.

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

Yes, so as you know we never have a size of the backlog in.

Speaker Change: What I would characterize it is we're still really excited about the level of order rates and what we have in the backlog so.

Speaker Change: I don't I don't think that anything really fundamentally changes in our view on that.

Speaker Change: Sure.

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

Speaker Change: Can you just mentioned earlier.

Speaker Change: There has always been.

Speaker Change: Rather than the business you ship the product when your customers need them.

Speaker Change: But I'm just curious over time.

Speaker Change: Whether your revenue is growing at a 20% clip or high single digit.

Speaker Change: That is a little bit higher than historical and.

Speaker Change: Largely viewed as a replacement business that your utility customers they are replacing.

Speaker Change: <unk> or <unk>.

Speaker Change: Radios as well.

Speaker Change: They adopted or adapted their staffing models over time or maybe in the last few years.

Speaker Change: Able to support that kind of deployment pace.

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

Speaker Change: Yes.

Speaker Change: As we talked about so many times like that there's there's no yes or no answers to any question and everything is not standard. So when you see I think in many cases more and more installation companies working for utilities, where a lot of utilities used to do the installations themselves or are you still have a lot of people that are trying to staff up.

Speaker Change: Fundamentally it's still one of the things that's a huge driver for US is this aging or.

Speaker Change: Less stable workforce and that's why people have been adopting technology so much.

Speaker Change: So again I don't think I can give you just the standard answer of how each utility is reacting but what I.

Robert A. Wrocklage: Well, I do think what we could say, and again, this hits close to your question, but maybe not precisely, is that with the labor shortages that we've all talked about over the last two, three years, we haven't seen an elongation in the more generalized standard deployment of a full system replacement. Generally, those tend to be three, four, five years.

I do think we could say and again this gets closer to your question, but maybe not precisely as well.

Speaker Change: With labor shortages that we've all talked about over the last two or three years, we havent seen an elongation in the more generalized standard deployment of a full system replacement generally those tend to be 345 years. So the labor has been be able to be kept in place to set such that we're not seeing an extension of deployment schedules I think the point.

Robert A. Wrocklage: So the labor has been able to be kept in place such that we're not seeing an extension of deployment schedules. I think the point Ken's making about when we deliver to our customers is the high dependency of our sales channel on direct sales, which maybe is different than our competitors. And so this is not a distribution game. This is a very much a direct relationship.

Ken: Ken's, making when we deliver to our customers.

Ken: The high dependency of our sales channel and direct sales, which maybe is different than our competitors and so this is not a distribution.

Ken: Game. This is a very much direct relationship which by default then brings in project schedules more so than others.

Ken: A degree what creates some of the unevenness that we often talk about just so happens. This most recent quarter at an uneven miss to the favorable side.

Robert W. Mason: I should have let Bob go first. Well, just to conclude on your last question, so your SEA expenses, as you commented, did step up sequentially a fair amount. Your outlook for modest operating margin expansion in the second half of the year kind of suggests that they stay at this level. Is that a fair interpretation, or was there anything, you know, more one-time in nature in the second quarter?

Ken: Yes, I should have left I'll go first.

[laughter].

Ken: Just to conclude here last question.

Speaker Change: So your SDA expenses as you commented did step up sequentially.

Speaker Change: Yes, a fair amount your outlook for modest operating margin expansion in the second half of the year kind of suggests that they stay.

Speaker Change: If this level is that.

Speaker Change: Is that a fair interpretation or was there anything.

Speaker Change: More onetime in nature in the second quarter.

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

Speaker Change: Yes, I think the comment that you specifically latched onto their modest improvement that is really a year over year comment and not a sequential comment.

Speaker Change: Absolutely we're continue to be organically investing in the business and differentiating our market position through being an innovative innovative company that invest in the business. We just continue to believe we can do that at a rate slower, which we can grow the top line and that continues to be an operating lever for us moving forward, but that comment you've latched onto is more year.

Robert A. Wrocklage: But that comment you latched onto is more year-over-year than sequential. Full year. Excuse me, full year.

Speaker Change: Over a year, then sequential full year excuse me full year.

Robert W. Mason: Very good. Okay, thank you. Thank you.

Nathan Jones: Very good. Okay, thank you.

Speaker Change: Very good okay. Thank you.

Speaker Change: Yeah.

Operator: Thank you. As a reminder, if you'd like to ask a question today, it's star followed by one on your telephone keypad.

Operator: Thank you. As a reminder, if you'd like to ask a question today, it's star followed by one on your telephone keypad. We have no further questions in the queue, so I'll turn the call back over to you Karen for any closing comments.

Speaker Change: Thank you as a reminder, if you'd like to ask a question today itself followed by one on your telephone keypad.

Speaker Change: Okay.

Speaker Change: Okay.

Operator: We have no further questions in the key, so I'll turn the reader, and thanks everyone for joining our call today for your planning purposes.

Speaker Change: We have no further questions in the queue. So I'll turn the call back over to Keith <unk> for any closing comments.

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

Keith: Great. Thank you operator, and thanks, everyone for joining our call today for your planning purposes, our third quarter call is tentatively scheduled for October 17.

Operator: This concludes today's call. Thank you for joining us. You may now disconnect your line.

Operator: Our third quarter call is tentatively scheduled for October 17th. I'll be around all day to take any follow-up questions you have.

Speaker Change: I'll be around all day to take any follow up questions you have have a good weekend.

Operator: Have a good weekend. This includes today's call. Thank you for joining.

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

Operator: You may now disconnect your line.

Speaker Change: Yeah.

Speaker Change: Yeah.