Badger Meter, Inc. (BMI)

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Badger Meter Inc. (BMI)

Q3 2008 Earnings Call

October 16, 2008 11:00 am ET

Executives

Richard A. Meeusen – Chairman, Chief Exec. Officer and President

Richard E. Johnson – Chief Financial Officer

Ronald H. Dix – Senior VP of Administration

Analysts

[Scott Newmanfol] – [Emerald Advisors]

[Richard Birdy] – [Servant & Company]

Richard Eastman – Robert Baird

Steve Sanders – Stephens, Inc

[Bryan Ram] – [Morgan Demps and Capital]

Ryan Connor – Boenning

John Quealy – Canaccord Adams

Presentation

Operator

Welcome to the Third quarter 2008 Badger Meter earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Rick Johnson, Senior Vice President of Finance and Chief Financial Officer.

Richard E. Johnson

As usual, I will begin my stating that we will make a number of forward-looking statements on our call today.

Certain statements contained in this presentation, as well as other information provided from time to time, by the company or its employees, may contain forward-looking statements that involve risks and uncertainties that can cause actual results to differ materially from those in these forward-looking statements.

Please see our 2007 Form 10-K for a list of words or expressions that identify such statements and the associated risk factors. Also, I will give you my quarterly reminder about our guidelines. For competitive reasons, we do not comment on specific, individual product line profitability other than in general terms, nor do we disclose components of cost of sales, for example, copper.

More importantly, we will continue our practice of not providing specific guidance on future earnings. We believe guidance does not serve the long-term interest of our shareholders. And, if you'll [permit] me to editorialize a bit, I would suggest that our guidelines do serve us well.

We want to remind you that we manage this business for the long term. Because of the upheaval in the financial markets over the past several weeks, I've received calls from some analysts, shareholders and others, who suggested that the company abandon its guidelines and tell them something that would give them an indication of our results.

When reminded about the Fair Disclosure rules, I was even told by one person that all of the rules were out the window. I politely disagree and suggest that continuing to manage for the long term, despite these bumpy economic times, will best serve the interest of our shareholders, in the long term.

With that said, let's now turn to the third quarter results. Yesterday after the market closed, we released our third quarter of 2008 Results. Net sales for the third quarter were a third quarter record $68.8 million, a 9.6% increase over last year's third quarter sales of $62.8 million. The increase was driven by higher sales of the company's utility products, including ORION sales to Chicago, and higher prices offset somewhat by lower sales of its industrial products.

Looking at the breakdown of sales, residential and commercial water meter sales represented 82.7% of total sales for the third quarter, compared to 80.4% in the third quarter of 2007. These sales were $56.9 million, and increase of $6.4 million over last years amount of $50.5 million.

Sales to Chicago in the third quarter of this year were nearly $4.4 million, versus only $200,000 last year. Commercial meters, excuse me, commercial meters also saw a nearly $2 million increase. While sales of the ORION products, which include Chicago, were relatively flat, there was an increase in Itron-related sales of 39%.

Even though this is the third quarter in a row where we have seen increase in our Itron sales, we do need to point out that ORION sales, even in this quarter, outsell Itron products by a nearly 2 to1 margin.

We continue to believe that ORION is the primary driver of our AMR business, and that recent increases in Itron sales are just a function of current customer mix. For commercial meters, about 0.67 of the increase is coming from volume increases, while the balance is coming from price increases.

Industrial sales represented 17.3% of total sales for the third quarter of 2008, compared to about 19% for the same period last year. Sales were about $400,000 or 2.9% less than last year's level. Most of our industrial product lines have been affected by the economy, and they've seen declines in sales through the lower volume. But, one exception to this is our increased sales of valves, which saw a 22% increase in sales, in Q3 over Q3 of last year.

Well, gross margin dollars between this year's third quarter and last year's, increased due to our higher sales. The gross margin percentage declined to 34%, from 36.1% last year. The decline was due primarily to the product mix in the quarter. Like last quarter, we saw more Itron sales, which have a lower margin than our own proprietary products.

Also contributing to the decline is the lower mix of industrial products, which have higher margins. Increased sales volumes, higher prices, and favorable warranty experience did negate some of the product mix impact.

Selling, engineering and administrative costs for the third quarter are $1.3 million higher than last year, which [inaudible] have consulting costs associated with sales process enhancements and planned increase research and development costs.

In addition, we have intangible amortization expense for the recently acquired GALAXY technology. The effective tax rate for this quarter is 33.8% compared to 36.1% for the same period last year.

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