Q4 2024 Badger Meter Inc Earnings Call
Ladies and gentlemen, welcome to the Q4 2024 Badger Meter Earnings Conference Call. After the prepared remarks, there'll be an opportunity to ask questions. If you'd like to participate in the Q&A, you can do so by pressing star followed by one on your telephone keypad. As a reminder, today's conference is being recorded.
Speaker Change: 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 fourth quarter and full year 2024 earnings conference call. On the call with me today are Ken Bockhorst, Chairman, President and Chief Executive Officer, Bob Wrocklage, Chief Financial Officer, and Barb Novarini, Senior Director of Investor Relations.
Karen Bauer: In executing value enhancing acquisitions to further advance our portfolio of Smartwater solutions. The latest example of which I will discuss next.
Speaker Change: Turning to slides six and seven I will cover the smart cover acquisition announced earlier this morning.
Speaker Change: Smart cover is a leading provider of water collection system monitoring solutions, serving utility customers across North America.
Speaker Change: Smart covers hardware enabled software offerings add to the scope of actionable data used by municipalities to improve efficiency resiliency and sustainability specifically.
Speaker Change: Specifically smart cover provides sensors software and related support services to monitor sewer levels on a real time basis by.
Speaker Change: By identifying changes in patterns and alerting utility personnel to potential issues the solutions work to predict detect and prevent sewer overflow spills.
Speaker Change: Are becoming more frequent with the rise of extreme weather events like heavy rainfall and flooding.
Speaker Change: Reducing the frequency and severity of sewer overflows saves money, while protecting public health and the environment. In addition, the technology reduces the need for high frequency cleanings locates areas of influence infiltration detects intrusion and assist with managing harmful sewer gases.
Speaker Change: Smart cover also provides lift station monitoring and control hardware and software solutions to improve pump station efficiency supplementing our existing Kellogg offerings.
Speaker Change: And last but certainly not least it brings strong talent with the expertise to assist our customers in applying these capabilities.
Speaker Change: We utilize the existing cash on hand for the $185 million purchase price. This equates to about five times smart covers 2024 sales of approximately $35 million.
The macro drivers behind technology deployment in the water sector, such as labor availability aging infrastructure and regulation.
Speaker Change: Bind with the increasing occurrence of climate related severe weather events supports strong adoption rates for these technologies and to put it in baseball terms. We believe sewer line monitoring is barely in the first inning.
Speaker Change: In addition, smart covers leading market position market position, the recurring revenue dynamics and ability to further leverage the data and analytics into our full network monitoring solutions makes this a strategic deal with long term shareholder value creation.
As noted the sales today are about $35 million with high single digit EBITDA margins reflective of their scale and heavy growth investments as.
Speaker Change: As part of Badger meter and Blue edge, we can amplify the topline growth rate by leveraging our direct sales organization and by advancing overall features and functionality with our world class communication and software technologies, which will continue to competitively differentiate badger meters suite of offerings in the market.
We will also aim to enhance profitability by leveraging existing infrastructure and processes in operations and supply chain.
Speaker Change: Finally, turning to our outlook I know I said this last year, but it remains true even after our stellar 2024 results I am as excited about the next five years as I've ever been at.
Speaker Change: At a macro level, our blue edge suite of comprehensive and Tailorable solutions continues to see growing adoption as we address the variety of persistent macro water challenges customers face, enabling them to be more efficient resilient and sustainable what their water systems.
Speaker Change: Our durable business model is underpinned by replacement driven demand secular Ami adoption drivers and the expanding need for real time data visualization and analytics spanning the water network.
Speaker Change: Our order book and opportunity pipeline, along with constructive customer budgets continue to support the high single digit average top line growth we've been communicating for some time now.
Speaker Change: We also expect that positive structural sales mix and SBA leverage will continue to gradually improve margins over the strategic cycle.
Speaker Change: Specifically on gross margin, we're pleased that in the back half of the year, we delivered above the high end of the normalized range of 38% to 40% with.
Speaker Change: With the six quarters prior to that above 39%.
Speaker Change: While some might view that as a reason to increase the range. The reality is we're in a heightened state of macro uncertainty, especially as it relates to potential tariffs the scale scope timing and duration of which are unknown.
Speaker Change: As such until there's further clarity we believe it's prudent to keep the current range as our comfort zone, while continuing to drive improvement actions in the areas within our control.
Speaker Change: While we continue to anticipate that our <unk> as a percent of sales will improve over the long term. The addition of a smart cover will reset the bar higher than 2024 levels.
Speaker Change: This is a result of the higher than line average FCA as a percent of sales in their underlying operations as well as the added intangible asset amortization, which based on very preliminary estimates are preliminary estimates could be in the $6 million to $7 million range annually.
Speaker Change: Separately I'll remind everyone that in the first quarter of 2025 margins for smart cover will be muted by the amortization of inventory fair value step up. Additionally, interest income will decline year over year with the use of cash.
Speaker Change: Finally, even after acquiring smart cover will have cash on the balance sheet of over $100 million.
Speaker Change: Along with the untapped revolver, we have significant financial flexibility and organizational capacity to further execute on our growth strategies, including both organic and inorganic investments.
Speaker Change: I wanted to again, thank the entire badger meter team for their tremendous efforts and accomplishments in 2024 and to welcome our new smart cover colleagues to Badger meter.
Speaker Change: Look forward to executing on the many opportunities ahead together with that operator. Please open the line for questions.
Speaker Change: Thank you. Please press star followed by the number one if you'd like to ask a question and answer all your devices on mute you like any sort of time to think.
Speaker Change: Our first question today comes from Andrew Quail with Deutsche Bank. Please go ahead. Your line is open.
Andrew Quail: Hey, Thanks, good morning, everyone.
Speaker Change: To ask on tariffs.
Speaker Change: Just could you help sidewall more explicitly in your Mexico manufacturing exposure I believe is around like 30% of the square footage which is anymore.
Speaker Change: Clarification on that would be helpful. And then if we do have widespread tariffs put in place tomorrow.
Speaker Change: Could you give us some color on the contingency plans you have in place and maybe how long it might take to adjust price.
Speaker Change: Thank you.
Speaker Change: Yes, so that's that's a bit of a of course loaded question. These days with so much uncertainty about what the impact of tariffs will be what where they'll come from how it all works. So I'll tell you what we do know and what we can control and first of all.
Speaker Change: Clearly everyone would have some impact from tariffs regardless of however, this comes through but the things to remember are from from a China point of view, we source very little we've done a considerable amount of re shoring. If you will back to North America over the last several years.
Speaker Change: We certainly have capacity in some of our U S facilities that we can continue to use and yes, we're very proud of our outstanding operation that we have in Nogales. So.
Speaker Change: I have no idea, yet, but what the administration will do or how that will go but the thing I would remind you through the last several years is.
Speaker Change: We've done a great job of being able to control what we can we've seen over the last several years the threat of tariffs in the first Trump administration, we been through Covid, we've been through supply chain challenges and I think our hallmark has been understanding what we can control.
Speaker Change: Acting with urgency around mitigating those actions and having a best in class operating model. So.
Speaker Change: I don't know how to tell you. How this is all going to work out and it's hard to model something when you have no idea of what the impact is actually going to be.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: And then just on the broader end market demand.
Speaker Change: Okay.
Speaker Change: Do not give explicit guidance, but I thought the choice of using Brazil OEM.
Speaker Change: Operative word in the press release, what's interesting it's in Asia.
No there is multiple years of very impressive growth.
Speaker Change: Confidence.
Speaker Change: Higher now than it was when you reported third quarter earnings that maybe 2025 could be a high single digit growth year.
Speaker Change: So it's not higher but it's as good as it was in Q3. So we continued.
Speaker Change: It's another it's another quarter, where you know I'm really proud of the results that we had and what we were able to get in revenue.
Speaker Change: Certainly pleased with the order rate that we saw in the quarter certainly pleased with still seeing several rfps out on the street for AMRI and water quality and other pieces of the blue edge portfolio and engineers are still working on projects in the future. So.
Speaker Change: I would just say nothing has changed our ongoing positive tone remains the same.
Speaker Change: Okay, great. Thank you.
Sure. Thank you.
Speaker Change: Question comes from Rob Mason with that.
Speaker Change: Please go ahead your line's open.
Speaker Change: Hi, Yes, good morning, Ken.
Speaker Change: Kent can you talk a little bit about smart cover.
Speaker Change: What are the demand drivers there of kind of the catalyst I am just curious.
Speaker Change: How much is maybe compliance driven whether thats CSO overflow mandates.
Speaker Change: What's the catalyst for adoption, primarily been to date for for that solution.
Speaker Change: Yeah. So it is it is a mix of things. So one of the areas is of course regulation and critical system overflows, where you've got mandates to to be monitoring. This in real time of course labor availability as a driver of many of the same macro drivers that we see on the on the rest of the business.
Speaker Change: Where labor availability critical.
Speaker Change:
Speaker Change: Rising extreme weather events are adopting technology.
Speaker Change: It's one of the reasons. We're excited about it is it's the same macro drivers are similar outstanding outlook for growth and then the ability to sell that through our existing channel is is what has us pretty excited about it but.
Speaker Change: I would say the drivers are very similar to what has driven our growth over the last several years.
And I would say, adding to that whole equation that Ken just mentioned is obviously the market opportunity, meaning the rate of adoption of this technology at this stage as we alluded to in the earnings script was a first inning analogy and so there's plenty of runway here in terms of the number of monitored manhole covers in North America, and we believe the market leading position.
Speaker Change: Smart cover positions us now to take advantage of that collectively across star leverage sales channel and customer base.
Speaker Change: And it's not just the regulation side, but when you can get into the the reduction of the frequency of cleaning there's financial payback. So there's many benefits to this that are as Bob said, just really scratching the surface.
Speaker Change: Mhm.
Speaker Change: Much of the $35 million in trailing revenue would be recurring in nature.
Speaker Change: Yeah, so from a pure kind of.
Speaker Change: What I would classify as recurring revenue so the software in.
Speaker Change: And maintenance service business is roughly a third I would say there's also another 20% or so that's more aftermarket product replacement service, which again is not recurring but as a certain amount of durability to it.
Speaker Change: Very good.
Speaker Change: Maybe just last question.
Speaker Change: Just shifting over to your your business itself you called out Bob the excellent working capital performance in the quarter I'm, just inventory did come down a fair amount from where it had been tracking through the year just I'm just curious what the enabler of that was in I mean is that a level that.
Speaker Change: Yeah.
Speaker Change: Which.
Speaker Change: Should trend out as we go forward or does that come back up.
Speaker Change: Yeah. So I'll go first and then I'm sure Bob will have something to add but but Rob what I what I've been proud about is for several years now we've really talked about our continuous improvement mindset across the business and we mentioned to you at the beginning of the year that we thought.
Inventory was still an opportunity for us to continue to improve our processes and frankly, that's what we've seen we've got a great team working really hard at it.
Speaker Change: Improving to get to a better sustainable rate that just happens to be lower.
Speaker Change: Yeah, I would say that what you saw in the fourth quarter is the byproduct of multiple quarters of focus and thankfully for free cash flow purposes that all came together and lined up in the fourth quarter.
Speaker Change: I would say theres nothing anomalistic about that we still know we need inventory to support the business and to support our high single digit growth outlook. So that's not to say that the dollars are fixed by any means but certainly we're at an optimum level as we exit the year.
Speaker Change: Very good I'll get back in the queue. Thank you.
Speaker Change: Our next question comes from Nathan Jones with Stifel.
Speaker Change: Please go ahead.
Nathan Jones: Good morning, everyone.
Speaker Change: Good morning, Nathan wanted too.
Speaker Change: So I wanted to start off with a quick just a question about the cadence of revenue through 2024, you did see revenue taken in the second quarter sequentially. It was down in third quarter and fourth quarter.
Speaker Change: I'm, just hoping to get some color around what the dynamics were there.
Speaker Change: Customers were.
Speaker Change: Buying inventory or something in the second quarter or that would project shipments in the second quarter.
Speaker Change: Whether it was bad in the fourth quarter.
Speaker Change: Just anything that would help us set the bar for what 'twenty that cadence for 2025 might look like.
Speaker Change: Hey, Nathan Yeah. So thanks for pointing out how we've always pointed out that the business can be uneven from quarter to quarter from year to year. You know in that particular quarter. You may recall, we talked about are having.
Speaker Change: You know a bit of a deeper.
Speaker Change: Yeah.
Speaker Change: Dive into our backlog than we traditionally have seen in most quarters, which is why we we did caution do not just take that run rate for the rest of the year or so.
Speaker Change: Excuse me.
Speaker Change: Yeah.
Speaker Change: I'm I'm not strategically, losing my voice now, but I'm going to turn to Bob Yeah. So I would say the.
Ken Bockhorst: A quarter that had if youre talking absolute dollars Nathan the only quarter that had some quote unquote noise and it would have been the second quarter as Ken mentioned, two let's say everything else is more of the general.
Ken Bockhorst: General trend and unevenness that that kind of alluded to if you're talking about rates of growth change I would say the biggest impact on the second half is just having lapped an anniversaried a more robust increase last year. So bye bye just basic math the rate of growth slows.
Ken Bockhorst: I'll just tell you that on a go forward basis over our strategic planning horizon, we're still laser focused in that high single digit growth with the reality that there'll be noise quarter to quarter and year to year.
Ken Bockhorst: Yes, no I was talking about the absolute dollars of revenue.
Ken Bockhorst: A few numbers little bit elevated because youre, taking down some backlog, that's probably just around supply chain improvements.
Ken Bockhorst: I guess I had one on smart.
Ken Bockhorst: Just wanted to look at this from a high level.
Ken Bockhorst: You guys done Celsius pumps, why couldn't the sewer pump manufacturer just put something on the sewer pumps that we would do these kind of monitoring.
Ken Bockhorst: I guess the questionnaire as wide as smart color has the right to.
Ken Bockhorst: That 50% market share in that kind of beaten what couldnt.
Ken Bockhorst: Competitor or somebody like us to a pump manufacturer list Asian manufacturer.
Ken Bockhorst:
Ken Bockhorst: Put something similar on that would have been closer to the cost there and maybe give them an advantage over a business like small cover.
Ken Bockhorst: Yeah. So I'll start with I think the underlying assumption of the question is that somehow we don't play in the collection network today or the sewer system network today, and that's just not true certainly across zero next to log a T. I S. Can more recent acquisitions. There is a certainly a presence in collection systems already. So this is not a fair way reach where we're reaching.
Ken Bockhorst: Over to play in a space that we don't already playing so theres a presence there already today I would say specific to smart cover and the sewer line aspect of that essentially what we're doing here is monitoring at the manhole, so call it a depth and level sensing in flow sensing from the manhole to essentially produce analytics too.
Ken Bockhorst: Drive those for outcomes that we mentioned in the earnings release that being prevention of spills optimize cleaning product and predict infiltration and inflow as well as then monitor toxic gases. So I would say I'm not sure that other people can't do it I can just tell you that after 20 years in the marketplace Mark covers done at best and that's why.
Ken Bockhorst: This is the most attractive asset in terms of expanding our presence in the collection network and we're super excited about the ability to leverage that technology to enlarge part a similar decision maker at the North American utilities that we've already participated for a very long time with this is that the definition of a near adjacency that brings greater scope in <unk>.
Ken Bockhorst: Scale to not only our hardware solutions, but our software solutions to integrate as a critical data analytics and solution provider to utilities in North America, and the rest of the world.
Speaker Change: And if I could add to that Nathan compared to the people that you're referencing which of course, we spent a lot of time understanding who's in this space and who could be.
Speaker Change: No one will have the opportunity with our core competency around commute communications and software to be able to build on this the way that we already have with our beacon portfolio and am I and what we've done with radar and and the other software and communications products and services, we already have.
Speaker Change: And while we're certainly talking a lot about sort of I guess there isn't.
Speaker Change: Sure.
Speaker Change: Sorry, I was just going to say I just want to make sure. We didn't leave out of that answer was very focused on sewer line. Martin there is a big part of this business. That's at the lift station and again similar to my earlier answer we already play at the lift station in many respects in those same technologies and so it's absolutely a perfect marriage between the sewer lift sooner.
Speaker Change: And lift they should monitoring to collectively address not just the sewer, but the full collection system.
Speaker Change: Thanks for that I guess, one final one high single digit EBITDA margins, obviously, it's a pretty small base is at the moment.
Speaker Change: And you talked about investing for growth and things like that it doesn't seem like a business that at scale should have significantly higher margins than where it is today, maybe if you look at I don't know how long you want to look out five to 10 years, where you think the margins for these patients could get to.
Speaker Change: So you you hit the nail on the head at acquisition here It is in.
Speaker Change: And EBITA margin profile less than our core I would say in large part.
Speaker Change: The strategy under X P vs ownership are.
Speaker Change: To date was to position for growth and so theres been a heavier investment in FCA and that's why we talk about in the script on a go forward basis, whereas we've been leveraging SCA or levering FCA overtime, Theres, probably a temporary step back here in 2025 as we bring in this $35 million of revenue with a higher than average.
Speaker Change: U S C. A but we think that through kind of the growth synergies and bringing our channel to bear we can take what's already a great organically growing business in the double digit range.
Ken Bockhorst: And augment that and make it grow faster and similarly, as Ken alluded to we can bring to bear a larger corporate functions, whether it's around supply chain.
Ken Bockhorst: Engineering costs down and other things to essentially.
Ken Bockhorst: Increase the profitability so as we look out.
Ken Bockhorst: We certainly think this is a business that has a well above line average EBITDA margins compared to where we operate on the core business today.
Speaker Change: Awesome, Thanks for taking my questions.
Speaker Change: Thank you as a reminder, if you'd like to register your question or rejoin the queue for follow ups. Please press star followed by one on your telephone keypad.
Speaker Change: We'll move to our next question from Scott Graham with Seaport Research partners.
Speaker Change: Please go ahead Scott your line is open.
Speaker Change: Yes, hi, good morning, I wanted to understand a little bit more about.
Speaker Change: How you're deploying backlog I know you said you had a little bit of extra juice in the second quarter of last year because of <unk>.
Speaker Change: Some backlog.
Speaker Change: Our deployment I'm, just wondering as you look at sort of your orders and excluding the second quarter of your backlog.
Speaker Change: How will that ran through what that dynamic was.
Speaker Change: Are you seeing any sort of unevenness.
Speaker Change: Or is there an unusually high higher number of either.
Speaker Change: Faster than expected slower than expected deployments or has that been kind of fairly normal for you again away from that to Q.
Speaker Change: Yeah, Hey, Scott So so with 50000 utilities of various scales and sizes. It's it's always difficult from one quarter to the next or one year to the next.
Speaker Change: To really predict what that replacement cycle can be which is why we're always feeling like.
Speaker Change: Reminding people of the unevenness is the prudent thing to do so so what we're seeing in terms of our backlog and how order rates are flowing through I would say is very normal and you know again, it's it's it's not like we're.
Speaker Change: Digesting big chunks and trying to get another big chunk with 45000 small utilities 4500 medium is 500 largest.
Speaker Change: It just kind of flows in and in what I would call a normalized.
Speaker Change: Uneven uneven but exciting pattern.
Speaker Change: Understood. Thank you know I'm sure your customers.
Speaker Change: They've obviously had ample time to digest the results of the election.
Speaker Change: Are you hearing them talk about any pauses in deployments or even ordering patterns. I know you said that you were pleased with your fourth quarter orders.
Speaker Change: With regard to you know sort of.
Speaker Change: From two point and the potential for some regulatory rollbacks.
Speaker Change: Yeah. So we're not hearing any change in tone at all so keeping in mind that you know 75% of our revenue sells directly we talked directly to customers and we get a feel for that.
Speaker Change: So that dynamic probably sooner than most people.
Speaker Change: I've recently been with our distributors, who are all feeling as excited about next year as they've been about previous years and the the out phases. So.
I'm very confident that if there were discussions or talks about utilities pulling back we would be the first to know.
Speaker Change: I think if your question Scott is specific to a pause or a temporary slowdown in government funding or infrastructure spend if you listen to anything we've talked about over the last three years about our reliance on infrastructure money. It's just not there in the metering space quite frankly, and so if that's the question angle here I would say certainly historically we've seen.
Speaker Change: Very little benefit from that money flowing to the market and a pause wouldn't necessarily have any immediate impact on us.
Speaker Change: Yeah, No I mean, I'm talking about regulations, perhaps more broadly not necessarily the infrastructure related but.
Speaker Change: Thank you for that I just have one more question.
Speaker Change: T J relative to <unk>.
Speaker Change: Smart cover.
Speaker Change: Is there an opportunity to.
Speaker Change: Take your sort of digital product line.
Speaker Change: And the competencies there and the advantages there.
Speaker Change: Two smart cover or vice versa and by extension is there.
Speaker Change: Can you start to.
Speaker Change: So maybe.
Speaker Change: More like a larger solution this year under a contract that you do with your Ami like you do with your EMR.
Speaker Change: Yeah. So this is a this is one of the reasons last year, we started talking about the blue edge portfolio because.
Speaker Change: Yes, whether that's all in one package or whether that's a utility that plans out. The next three to five years on how they want to implement their technologies and manage their budgets, we clearly see the opportunity to bundle sell even if that bundle isn't immediate again, we think about our utility customers in 510 20 years.
Speaker Change: So this fits squarely in the ability to sell more to customers we already sell to.
Speaker Change: And your question on <unk>.
Speaker Change: The software and the things that we can do one of the things we like about smart covers there already a really strong company that just needs to grow as we talked about so it isn't it's in no way a fixer upper so it's got it's got a strong management team spend it's been run well and it's just.
Speaker Change: As we talked about a bit subscale. So I think we can help that with our cross sales leverage I think we can enable that with some operational improvements and I think we're really excited about it as I'm sure you can tell from the commentary and everything that goes with it but being able to pick up both as Bob pointed out.
Speaker Change: Sewer line monitoring and lift station enhancements in in one transaction was really attractive to us.
Speaker Change: Thank you for all that I appreciate it if I can just sneak this last one in do you have a view on whether this will be modestly accretive dilutive to earnings this year.
Speaker Change: So in the short term when you factor in the opportunity cost on the interest we're saying for 2025. It is as EPS dilutive and then it turns to accretion in year two.
Speaker Change: That's that's really where we're at.
Speaker Change: Very good thanks a lot.
Speaker Change: Thank you we have nice out of the question. So I'll pass you back to Campbell for any closing comments.
Speaker Change: Great. Thanks, operator, and Bob referenced this earlier, but I did want to call your attention to the slide in the appendix, where you'll find the historic primary working capital recast for the pro forma balance sheet reclassification. We did on the current portion of deferred revenue. So we've reclassified this.
Speaker Change: Ada element from accounts payable to other current liabilities beginning in Q4, 'twenty 'twenty four and going forward.
Speaker Change: So as you can see on the slide while the general trajectory of Pwc improvement remains there is a slight difference in absolute pwc as a percent of sales as noted on those charts in the appendix.
Speaker Change: This reclassification does not change in any way cash from operations or free cash flow.
And then in closing thanks for joining our call today for your planning purposes, our first quarter 2025 call and my last at the helm of IR here at Badger meter with my retirement in early May.
Speaker Change: Is tentatively scheduled for April 17.
Speaker Change: Please don't hesitate to reach out with any questions you might have have a great day.
Speaker Change: Okay.
Speaker Change: Thank you. This concludes today's call. Thank you very much for joining you may now disconnect your lines.
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