Badger Meter, Inc. (BMI)

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Badger Meter Inc. (BMI)

Q4 2009 Earnings Call

February 5, 2010 11:00 am ET

Executives

Rich Meeusen - Chief Executive Officer

Rick Johnson - Chief Financial Officer

Analysts

Richard Eastman - Robert W. Baird

Trey Grooms - Stephens Inc.

Michael Cox - Piper Jaffray

Chip Moore - Canaccord Adams

Eric Stine - Northland Securities

Michael Coleman - Sterne, Agee

Bheeshma Chaudhary - Deutsche Bank

Gary Lenhoff - Ironworks Capital

Ryan Connors - Boenning & Scattergood

Brian Rafn - Morgan Dempsey Capital

Glenn Wortmann - Sidoti & Co.

Presentation

Operator

Good day ladies and gentlemen, and welcome to the Q4 2009 Badger Meter earnings conference call. My name is Deanna and I’ll be your operator for today. At this time all participants are in a listen-only mode. (Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Rick Johnson, Chief Financial Officer; please proceed.

Rick Johnson

Thank you very much Deanna. Good morning everyone, and welcome to Badger Meter’s fourth 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 interest of our shareholders.

Before I talk about our fourth quarter results, let me also comment on some changes we are making to our terminology. Everything that Badger Meter does, revolves around flow measurement, using a wide variety of technologies such as Positive Displacement, Impeller, Oval Gear and so forth.

All of these technologies are used in a broad range of applications. The application in which most of our sales are made deals with water, primarily metering water usage for utilities, but water applications extend beyond that and also include wastewater, irrigation, water reclamation and industrial process applications. Some of the same products sold for water purposes, as well as our other products are also used for specialty applications. A good example of this is the Orion Radio developed for water, but now sold to natural gas utilities for attachment to their gas meters.

In order to more effectively communicate to you about our business, we will begin to discuss our sales in terms of water applications and specialty applications, rather than utility and industrial. It’s a subtle difference since water application continues to have utility water meter and related technology sales as its biggest piece, but we will now also include sales used in other water applications, such as sales of impeller meters for your irrigation.

Specialty applications will include such projects as valves, automotive fluid meters and radios sold to the natural gas industry. One of the reasons for this change is that our sales force is now cross selling our products, so with the changes in the way we sell, we are also changing the way we report sales.

Now onto the results; yesterday afternoon after the market closed, we released our fourth quarter 2009 results. Sales for the fourth quarter totaled $56.4 million, an $11.2 million or 16.6% decrease from the fourth quarter of 2008. With small exceptions, all of our product lines showed decreases in the most recent quarter compared to the same quarter in 2008.

We continue to see the effects of the economic downturn in our business, as well as the slowdown in customer purchases, caused by delays associated with the stimulus program. It is our understanding that stimulus funds must be allocated by the middle of this month and that there’s an intent in the program, to have a substantial portion of the money spent by September of this year.

Products sold for water applications represented 88.5% of sales for the fourth quarter of 2009, compared to 88.8% in the same period in 2008. These sales decreased $9.9 million or 16.4%, to $49.9 million from sales of $60.1 million in 2008. The decrease is due primarily to lower volumes of units sold. It should be noted that the fourth quarter of 2008 was an unusually strong quarter with significant increases in sales commercial meters and sales of residential water meters from projects that were occurring in Mexico; neither of these recurred this year.

Sales of Orion related products decreased approximately 21%, while sales of Itron related products decreased 15% over the fourth quarter of 2008. In the most recent quarter, Orion continued to outsell Itron by nearly 2.5% to 1%. Commercial meter sales were down nearly 18.8%. As I indicated last year was unusually strong in the commercial meter area.

Chicago sales for the most recent quarter were $2.4 million compared to $4.2 million in the fourth quarter of last year. We are on target to complete this contract in 2010. It now appears likely that the three year value of this contract will be less than originally anticipated, simply because the original number of meters for this phase was estimated, and the estimates are coming in less than expected.

Specialty products represented 11.5% of fourth quarter sales in 2009, compared with 11.2% in the fourth quarter of 2008. These sales declined nearly $1.1 million or 14.5%, to $6.5 million from $7.6 million in 2008, due to volume declines caused by current economic conditions.

Gross margins for the quarter were 36.4%, compared to 35.7% in the fourth quarter of 2008. Recall last year that the cost of sales number included a $994,000 one-time pretax gain from the sale of our facility in Rio Rico, Arizona, which favorably impacted margins. This year the margins were higher due to the tail end of favorable commodity costs and maintaining price discipline and cost control.

As you know, for most of this past year we have benefited from lower commodity costs, particularly copper as compared to prior periods in 2008. That benefit has recently ended with copper now over $3 per pound. By maintaining pricing discipline through the past year, we were able to see the benefit of the lower cost flow through to the bottom line.

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