Badger Meter, Inc.
Q4 2021 Earnings Call Transcript

Published: 28 Jan 2022

[Operator:]

Ladies and gentlemen, welcome to the Fourth Quarter 2021 Badger Meter Call. My name is Gemma, and I'll be the operator for today's call. . It is now my pleasure to turn the conference over to Karen Bauer of Investor Relations, Corporate Strategy and Treasurer. Please go ahead, Ms. Bower. Thank you.

[Karen Bauer:]

Good morning and thank you for joining the Badger Meter fourth quarter and full year 2021 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'll 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 filings. On today's call we'll, we will refer to certain non-GAAP financial metrics. Our earning slides provide a reconciliation of the GAAP to non-GAAP financial metrics used. Finally, during this call, we will refer to core results for various financial metrics. For example, core utility water sales, core means the designated financial metric excluding the year over year impact of the s

[Ken Bockhorst:]

Thanks Karen. And thank you for joining our fourth quarter earnings call. Our strong fourth quarter results capped off a record year for Badger Meter with sales surpassing $500 million for the first time in our history. We executed well on many fronts this past year, including successfully integrating two highly complimentary water quality acquisitions, a definitely managing ever changing supply chain challenges and the lingering impacts of the pandemic and implementing value-based pricing and other actions to offset inflationary pressures. I want thank the Badger Meter team globally for their tremendous execution and focus on the customer. I'll recap the year and talk about the current environment and our market outlook later in the call. But for now, let me turn the call over to Bob, to go through the details of the quarter.

[Bob Wrocklage:]

Thanks, Ken, and good morning, everyone. Turning to Slide four, our total sales for the fourth quarter were $135.7 million an increase of 20.8% over the $112.3 million in the same period last year. Total utility water product line sales increased 23.4%. Acquisition related water quality sales totaled $11.1 million in the quarter compared to $2.4 million last year, which included only two months of s

[Ken Bockhorst:]

Thanks, Bob. Turning to Slide five, I wanted to provide a year one assessment of our water quality acquisition integration efforts. In short, I'm extremely pleased with our progress to date. As a reminder, the strategic rationale for these tuck-in acquisitions was to add real-time water quality parameters to Badger Meter's core flow measurement pressure and temperature sensing capabilities, and to enhance the scope of actionable data for utilities to improve operating efficiency and resiliency, and for industrial customers to monitor both process and discharge water. From a financial performance standpoint at acquisition, the combined acquired annual sales of s

[Operator:]

Our first question on the line comes in from Andrew Buscaglia of Berenberg Capital Market. Andrew, your line is open. Please go ahead with your question. Thank you very much

[Andrew Buscaglia:]

So you put together a pretty good year end quarter, especially around margins and you presumably may have been through the worst. I'm curious where your thoughts are on that comment, if things have gotten worse since Q3 for you guys. Clearly you're navigating it well, but with it your visibility into next year, at this point with record backlog, how do you see those margins evolving because, if you are through the worst and you guys are clearly handling them all this supply chain challenges inflation very well then you must have some confidence that the gross margin levels are sustainable from here at these higher levels.

[Ken Bockhorst:]

Andrew, this is Ken. Yeah. Thanks for the question. Obviously, we're really proud of how the quarter and the year turned out both from a growth and a margin point of view. Clearly the inflationary environment has been difficult and it continues to be somewhat uncertain, but what we are confident in is that the solutions that we're providing to our customers are valued by them. And we have a great process in place to continue to manage throughout this period with what we view as really strong performance. In terms of how we see that plan out, I'll let Bob talk about, what he thinks from an inflationary point of view, but extremely confident that we'll be able to continue to monitor or perform very well regardless of what comes.

[Bob Wrocklage:]

Yeah, Andrew, I think the only thing I'd add to that, clearly 2021 was a tale of two halves as it relates to price cost dynamics. Clearly we started the first part of the year with more favorable price cost dynamics, as we had implemented some value based pricing actions in late 2020 arriving into 2021. Copper at the same time was still rising in the first half of 2021 and albeit capped out sort of midyear and stayed relatively steady thereafter. I would just say our price cost dynamics became more neutral to negative in the back half of the year. And I think when you contemplate that record backlog, while we've made pricing actions here in the very recent past, actually in the fourth quarter, we implemented a list price increase, which will take some time to work its way into the P&L. We do have this elevated backlog that still is, is not subject to those price increases and so there's a bit of needing to lap that and needing to lap the cost increases in 2021 that will impact sort of the year over year comparisons. We've talked historically in the past about a tightening of our gross margin performance from historically 36% to 40% than a tighter band to 38% to 40%. I think we're more comfortable with a even tighter band than that. I think the hesitation of migrating that figure north is just those current short term items that I just discussed.

[Andrew Buscaglia:]

Okay. Very helpful. And another question I have specifically on the water utility sales side, really impressive organic growth there this quarter and for the year in general, and if you're heading into the year with record backlog. So how do we think about concerns around was this sort of a pulse forward grab? And this is like a, maybe over earned for a period of time, and then things are going to reverse in the mean, or in that record backlog, do you -- is there something that gives you confidence you can grow at a high than historical growth rate maybe for the foreseeable future?

[Ken Bockhorst:]

Yeah, so first off, as we think about the macro drivers for the utility space and in particularly AMI digital solutions, the macro drivers were strong going into COVID. And in 2020, we drew the -- grew utility sales 4%. This year, we grew sales 9% could have been more without some of the supply chain dynamics. And we absolutely feel confident that the -- those macro drivers now with aging or frankly, even very difficult or non-existent workforce is even a stronger driver now than it was before aging infrastructure didn't get any younger. So that's still an issue replacement business. So we feel very confident about the direction of the market and our position to capture at least our fair share of a really strong market.

[Operator:]

The next question on the line comes from Nathan Jones of Stifel. Nathan your line is open. Please go ahead.

[Nathan Jones:]

I wanted to just start off with a question on the backlog. You guys haven't historically reported backlog. I know you've been reporting it because it's elevated due to the supply chain challenges. What is your current view for the timeframe for you to be able to work that backlog back down to a more normal level? Are the supply chain challenges likely to continue to see that backlog build? Do you think that you're in a position now where, either you'd like to deal with it well enough that it can stay flat or you can begin to start working it down, just how you're thinking about getting that back into a more normalized level.

[Ken Bockhorst:]

Yeah, it's interesting. As you pointed out we haven't talked about it before, and frankly I didn't expect to be talking about it still, but we just still find it relevant to point it out. We won't always talk about backlog but it's got a long tail on it. Our customers were working very closely with them on making sure that we're filling all the most important demands. There may be some aspect of pull forward to Andrew's question before, but that really isn't the main driver in the backlog being elevated. But I expect that it will be elevated for quite some time. We'll manage through it effectively, but this isn't going to be a situation where we're back to a normalized backlog in Q1 or Q2, or maybe even Q3. But we won't talk about it forever because at some point, supply, the way that we see supply playing out this year is there's still going to be challenges in the first half of the year. We're certainly better off today than we were six months ago. But the first half of the year we view will be more challenging than the second half. So probably see more recovery in the second half of the year than the first.

[Nathan Jones:]

That's helpful. Thanks. So second one, I wanted to go on with balance sheet capital deployment. You got $87 million of cash, no debt, you could probably comfortably deploy $250 million of capital today and cash generated after dividends about $50 million annually. Can you just talk about the plans to put that capital to work, to generate value for shareholders and what the most likely outlets to get a reasonable amount of leverage on the balance sheet?

[Ken Bockhorst:]

Yeah, sure. So our capital allocation priorities will remain the same. So first is continuing to invest in our core R&D services, including software. I talked during the prepared remarks about continuing to invest in software initiatives to bring more water quality parameters and more use cases to our utilities and their end users investing in new product developments. So that's still number one. Number two, we've increased dividends now for 29 consecutive years, and we fully expect to continue to increase dividends annually. And then the third one is to do more acquisitions like s

[Nathan Jones:]

Are there enough out there to do that? Internally investments, new product development, new increasing the dividends is not going to be sufficient to put capital to work to the level that you have available on the balance sheet. And you would have to do quite a fair number of s

[Ken Bockhorst:]

Sounds like you're implying that we've created the first class problem. So yeah…

[Nathan Jones:]

That's a very high class problem.

[Ken Bockhorst:]

Yeah. So, there's definitely a lot of targets out there. There's a lot of things that we're working at, but you accurately point out a challenge that we do see there's not an over-abundance of targets available, but we continue to work diligently and we feel confident in our ability to do this. Maybe not at the pace that some would expect, but we have a discipline process we follow and will be successful when we do it.

[Nathan Jones:]

Okay. Thanks for taking my questions guys.

[Operator:]

Rob Mason from Baird, you have the next question. Please go ahead with your question.

[Rob Mason:]

Yes, good morning. And I finished through the year. Ken, a question regarding a comment you made in your press release. You talked about just speaking about the industry, you talked about customer requirements to enhance operational efficiency, security, and awareness. And I'm just curious, over the last year, has there been anything that has changed, on the requirements side? Has it been to say mandate, but there were some security events we've seen. I'm just curious if there's anything that's evolved over the last 12 months that you can point to on that front.

[Ken Bockhorst:]

I would say nothing has evolved from a regulatory point of view, but just from a practicality point of view from an efficiency point, fewer laborers and employees are costing more than they did before. So that's only pronounced. In terms of cybersecurity and awareness, you can't read any story online without hearing people being concerned about and the water industry. So definitely a growing drumbeat of interest in some of these other digital aspects of the business that makes us so excited about our software offering and what we can continue to build to fill those gaps because they certainly are trends that are going pick up in steam.

[Rob Mason:]

I see. Okay. just also a question in referencing the fourth quarter performance revenue performance, I know that you have been downplaying the significance of seasonality in your business has become more muted over time. But I'm just curious if you think, as you think about the supply chain as it is in your backlog, is the fourth quarter is that a representative jumping off point as we go into 2022 in terms of what can be delivered? I'm not sure if there was anything unusual in there. You mentioned growth in cellular radios and beacon. I didn't hear anything about mechanical meter growth but just some thoughts there in terms of how we flow into 2022 off the fourth quarter.

[Ken Bockhorst:]

Yeah, I would say, I know there's been some historic perspective on seasonality. As you may mentioned, we we've downplayed that over the last several of years. So I don't see market change quarter to quarter or Q3 to Q4, Q4 to Q1. So while I'll stop short of saying, take Q4 and make that your number for Q1, I just, I don't think there's a high degree of seasonality to contemplate there's no real outliers.

[Rob Mason:]

Is there Bob, you talked about logistical challenges last quarter. Have those abated any?

[Bob Wrocklage:]

Yeah, so a lot of times when we get into these questions on relative feel of whether it be supply chain or logistical concerns, it's a bit like the frog in the boiling water. So any answer we give you is going to be relative to recency bias. So certainly that Ken alluded to, some of the pressures we've felt, feel like they were easing in Q4, but that's relative to the peak and not necessarily relative to normal. So while easing sequentially, we're not back to normal, nor do we expect either supply chain, whether that's component availability or logistics to be all of a sudden magically back to normal anytime soon in 2022, while we do think there's some easing of those pressures as the calendar progresses they're not going away anytime soon.

[Rob Mason:]

Sure. Okay. Understood. I'll pass it along. Thank you.

[Operator:]

Our next question comes from Tate Sullivan of Maxim Group. Tate your line is open. Please go ahead with your question,

[Tate Sullivan:]

Thank you all. As you're focusing on the water quality monitoring details that you gave earlier in Slide five, you mentioned some time and investment for the opportunity. Can you, expand on that a little bit? Is it expanding the capacity, product introductions? You mentioned possibly from more acquisitions, but can you elaborate a bit further if you can?

[Ken Bockhorst:]

Yeah. So the investments are primarily twofold. So one is in aligning and training and getting synergy throughout the sales force, which were well down the path on that and then the second piece is bringing all of the excellent data that we get from the instrument sales and water quality up to 60 different water quality parameters. Getting that, investing in the ability to bring that through our cellular communications and back through software to further enhance the value for end users is where the primary investment is. We're working on that already, sometimes in the water industry as we've talked about many times it moves somewhat slowly, but in our model, we're going to continue to build out software and we'll see that play out over the next couple of years.

[Tate Sullivan:]

Related to that and the water meter business is fair to say, there will be more of a technology component to the water quality monitoring business than water meters.

[Ken Bockhorst:]

Yeah, absolutely. The trend that we saw and why we were so excited about s

[Tate Sullivan:]

And maybe it's unfair comparing to your water meter business, but is water -- the water quality opportunity, more global at this point than the water meter business based on the different dynamics in the countries, different countries for the water meters.

[Ken Bockhorst:]

Well, the thing about water quality and what's so great about it is everybody in the world is affected by it. So it certainly has tremendous global growth opportunities that if you recall, when we bought ATi and s

[Operator:]

We currently have no further questions registered at this time. So I'll hand back over to the management team. Thank you.

[Karen Bauer:]

Thank you all for joining our call today. For your planning purposes, our first quarter 2022 call is tentatively scheduled for April 19. I'll be around all day to take any follow up questions you might have. Have a great day and a great weekend.

[Operator:]

Thank you very much for joining us today. Ladies and gentlemen, you may now disconnect your lines. This concludes today's call.