Badger Meter, Inc. (BMI)

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Badger Meter Inc. (BMI)

Q2 2009 Earnings Call

July 17, 2009; 11:00 am ET


Rich Meeusen - Chief Executive Officer

Rick Johnson - Chief Financial Officer


Steve Sanders - Stephens Inc

Ryan Connors - Boenning & Scattergood

John Quealy - Canaccord Adams

Rob Mason - Robert W. Baird

Glenn Wortmann - Sidoti & Company

David Woodburn - ThinkEquity

Brian Rafn - Morgan Dempsey Capital

Bheeshm Chaudhary - Deutsche Bank

Eric Stine - Northland Securities

Michael Cox - Piper Jaffray

Michael Coleman - Sterne Agee



Good day ladies and gentlemen, and welcome to the second quarter 2009 Badger Meter earnings conference call. At this time all participants are in a listen-only mode. We will conduct a question and answer session towards the end of today’s conference. (Operator Instructions)

I will now turn the presentation over to your host for today’s call, Mr. Rick Johnson, Senior Vice President, Finance and Chief Financial Officer.

Rick Johnson

Thank you very much Nikita. Good morning everyone and welcome to Badger Meter’s second quarter conference call. I want to thank all of you for joining us. As usual I will begin by 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 risk and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see yesterday’s earnings release for a 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 continue our practice of not providing specific guidance on future earnings. We believe guidance does not serve the long-term interests of our shareholders.

Now onto our results. Yesterday afternoon after the market closed, we released our second quarter 2009 results. We are pleased to report that despite a 9.2% decrease in sales, we had record quarterly earnings and earnings per share; and those records are not just for the second quarter, they are for all quarters.

The revenue decline was caused by lower sales volumes of our products. Total sales were $67.8 million for the quarter, compared to $74.7 million last year. I will point out that last year’s sales of $74.7 million still stands today as the all-time sales record. So you can see we had a very tough comparable for the top line this time.

Utility sales declined $3.9 million or 6.3% from $62.2 million last year to $58.3 million this year. Staying in the utility area, residential sales declined 3.1%, while commercial sales declined 18.5%. We had very strong commercial sales in the second quarter of last year. Orion and Itron related sales declined 9.3% and 7.4% respectively. The Orion products continue to outsell the Itron products by a ratio of nearly 2.3 to 1.0. Sales of the company’s fixed network product, Galaxy, continued to increase and accounted for a 1% of total sales for the quarter.

The first quarter sales also included nearly $4.2 million of sales to the city of Chicago, as compared to $3.6 million in the second quarter of last year. This project continues to be on track and is a little more than halfway through its completion. We have received a number of questions about what is going to happen in the next phase of the Chicago project. Our discussions with Chicago water department personnel have indicated that a timetable for the rest of this project has not yet been finalized. So it’s premature for us to say much more than that at this time.

We saw a nearly 24% decrease in our industrial sales due to continuing volume declines, both domestic and international, in all six of the small niche product lines comprising this group. Until general economic conditions improve, these product lines will continue to struggle.

Gross margins increased in the second quarter, both on an actual dollar basis, as well as a percentage basis. Margins for the second quarter of 2009 were 39.3% compared to 35.3% in last year’s second quarter.

We continue to see favorable impact from the reduction in commodity costs, particularly copper, and the cost of our radios which are sourced in Europe and have benefited from the strengthening of the dollar. We will continue to benefit from the lower commodity costs, particularly if copper remains under last year’s levels. Obviously the lower industrial sales, which generally have higher margins, did negatively impact margins somewhat.

Selling, engineering and administrative costs for the second quarter of 2009 declined nearly $700,000 or 4.6% compared to the second quarter of 2008. The reduced sales do have some impact on expenses; for instance commissions, which were down corresponding to the lower amount of sales. In addition, the company has experienced more favorable healthcare costs, as well as some benefit from foreign exchange, and in these economic times, there has been continuing emphasis on cost control.

Our effective tax rate for the quarter was 37.2%, a little lower than the 38.3% used for the second quarter of 2008. Our current estimate for all of calendar 2009 is 37.1%. The result of all this is that earnings from continuing operations were nearly $7.8 million for the three months ended June 30, 2009 as compared to $7.0 million for the three months ended June 30, 2008. On a diluted basis, earnings per share from continuing operations was $0.52 for the second quarter of this year compared to $0.48 for the same period last year.

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