Badger Meter, Inc. (BMI)

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Badger Meter Inc. (BMI)

Q4 2008 Earnings Call

February 05, 2009, 11:00 am ET


Rich Meeusen - Chairman and CEO

Rick Johnson - SV, Finance and CFO


[Graham - Stephens Inc.]

[Carter Shut - Deutsche Bank]

Ryan Connors - Boenning & Scattergood

Rob Mason - Robert W. Baird

John Quealy - Canaccord Adams

Richard Eastman - Robert Baird

Richard Birdy - Servant & Company

Kelly Bradley - Gold Coast Securities

Eric Stine - Northland Securities



Good day ladies and gentlemen, and welcome to the 2008 Fourth Quarter and Year-End Badger Meter Earnings Conference Call. My name is Michelle and I will be your coordinator for today. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Rick Johnson, Senior Vice President of Finance and Chief Financial Officer. Please proceed, sir.

Rick Johnson

Thank you very much, and good morning, everyone. Welcome to this conference call, where we will discuss the fourth quarter results for Badger Meter. As usual, I will begin by making 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 could cause actual results to differ materially from those in these forward-looking statements.

Please see yesterday’s earnings release for list of words or expressions that identify such statements and the associated risk factors. Let me reiterate some of 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 have not served the long-term interest of our shareholders.

Now unto the fourth quarter results, yesterday afternoon after the market closed we released our fourth quarter 2008 results. Now those of you who listen regularly, recall that we always mentioned that quarterly results can vary, in fact the word we used to describe this is lumpy. The fourth quarter demonstrates that lumpiness in a positive way. We are very pleased to report that our sales earnings and earnings per share from continuing operations were all fourth quarter records.

Sales increased to $67.6 million an 18.3% increase over sales of $57.2 million in 2007, this increase was the net impact of a nearly 28% increase in utility sales offset by a decline of 16% in industrial sales due to the effect of the current economy.

When the break fails down, we find that utility sales were 84.8% of the quarter sales compared to 78.6% in the fourth quarter of 2007. These sales were nearly $57.4 million or a 27.6% increase over the $45 million in last years fourth quarter. This increase was driven by a number of factors. First and foremost we continue to see increases in our residential AMI products.

Both the Orion and Itron products showed increases. Itron related sales increased 29% over the fourth quarter of 2007, while Orion related sales increased 30.4%. Orion continued to outsell Itron by ratio more than 2.5 to 1. Commercial sales increased over 30% driven by higher volumes. Normally, our sales are not of these levels in the fourth quarter.

In addition, to what I have just noted were fortunate enough to benefit from increased sales in Mexico as governmental agencies there face the December 31 deadline for certain allocation of fund. Sales to Mexico alone were up over $1 million from the same period last year.

Industrial products represented 15.2% of sales for the quarter down from 21.4% last year. These sales were nearly $10.3 million down 16% from last year's level of $12.2 million. In this quarter, we saw declines in all of the products due to lower volumes as a result of the economy.

Gross margins for the quarter were 35.7%, up slightly from the 34.9% last year. The cost of sales number includes a 994,000 one-time pre-tax gain from the sale of our facility in Rio Rico, Arizona. You will recall that we had pulled that facility in 2006 and opened a new facility in Nogales, Mexico. That asset has been held for resale and the sale was completed in the fourth quarter. This had a favorable impact on margins.

Strong sales obviously helped our margin, but the mix of products had a dampening effect on the margin percentage, because industrial sales generally of higher margins there were lower sales effected margins. We also had several more turnkey or installation projects that were included in the mix this quarter that did not exist in the fourth quarter of 2007.

The most significant example of this is the City of Chicago. And before you ask the question, I will disclose to you that sales for Chicago in the fourth quarter of 2008 were nearly $4.2 million compared to $1.2 million in the fourth quarter of 2007, when we had just completed the pilot and begun installation on this project.

Sales for Chicago for all of calendar 2008 were nearly $14.5 million. The project is on-track and continuing.

Our selling, engineering and administrative costs for the fourth quarter as a percentage of sales were 20.8% compared to 22.3% of last year. The percentage decrease is more a reflection of the increased sales as these expenses actually increased 10% due to higher bad debt expense, higher incentives and increased money spent on research and development.

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