Hello, good morning, and ladies and gentlemen, welcome to the First Quarter 2022 Badger Meter Earnings Conference Call. My name is Jema, and I'll be today's operator. As a reminder, today's conference is being recorded. It is now my pleasure to turn the conference over to Karen Bauer, Vice President of Investor Relations, Corporate Strategy, and Treasurer. Please go ahead, Ms. Bauer.

Thank you. Good morning, and thanks for joining the Badger Meter’s first quarter 2022 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 will 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 will refer to certain non-GAAP financial metrics. Our earnings slides provide a reconciliation of the GAAP to non-GAAP financial metrics used. With that, I'll turn the call over to Ken.

Thanks, Karen, and thank you for joining our first quarter earnings call. This quarter’s themes replicate those we experienced for much of 2021, including robust demand, operational execution, pricing activities, and operating expense leverage mitigating widespread inflationary pressures and manufacturing volatility from supply chain constraints. We were extremely pleased with the record pace of orders and the mid-teens growth in utility water revenues in the quarter. Our team continues to do an outstanding job managing the dynamic environment, and I want to thank them for their tireless focus and agility in serving our customers. I'll talk about the current environment and our outlook later in the call. But for now, let me turn the call over to Bob to go through the details of the quarter.

Thanks, Ken, and good morning, everyone. Turning to Slide 4, our total sales for the first quarter were $132.4 million, an increase of 12.4% over the $117.8 million in the same period last year. Utility water product line sales increased 15.1% year-over-year as continued strong order demand and production output was partially offset by intermittent supply chain disruptions that continued to restrict backlog conversion. Sales growth in the quarter was most notable in ultrasonic meters, ORION Cellular radio endpoints, and BEACON Software as a Service, and we continue to realize the benefit from strategic and value-based pricing actions. Orders reached a record pace in the first quarter of 2022, and we exited the quarter with yet another record high backlog. Sales for the flow instrumentation product line were flat year-over-year as solid demand trends across the majority of global end markets and applications were offset by supply constraints, which limited production. During the margins, as we noted on our January earnings call, mounting inflationary pressures were expected to temper gross profit margins, especially against difficult comparisons in the first half of the year. While the gross margin percentage at 38.3% was within our narrower normalized range of 38% to 40%, price-cost dynamics have tightened, leading the gross margin pressure both year-over-year and sequentially. Dissecting this in more detail, we increased gross margin dollars by $1.4 million year-over-year. As a percent of sales, gross margins were 38.3%, down from an all-time record of 41.9% in the comparable prior year period. Gross margin was pressured by increased costs from an array of purchase components, including brass and electronics, as well as increased freight and logistics costs. The year-over-year impact was compounded by the fact that we had the benefit of value-based pricing in advance of cost increases in the comparable prior year quarter. Margins did benefit from higher volumes and positive product sales mix in the quarter. Recent geopolitical events have increased the level of supply chain uncertainty and accelerated inflationary pressures in an already difficult environment. Therefore, we remain active in executing price increases for our solutions aligned with the value we deliver. The cadence for realization of these price actions has and will continue to be uneven given the timing of backlog conversion, product mix, and other factors. Our markets remain rational, and structural product mix such as higher SaaS revenues continues its favorable trend. Therefore, despite the tightening price-cost landscape that will have leading and lagging effects, we are confident in the margin resiliency of our business over the mid and long-term. SEA expenses in the first quarter were $31.9 million, an increase of just $0.3 million year-over-year. As a percent of sales, SEA was 24.1%, a 270 basis point improvement from 26.8% in the comparable prior year quarter. We remain disciplined and thoughtful in our spending, balancing near-term gross margin pressures with our ongoing commitment to R&D and other investments in the business for long-term growth. As a result of the above, overall operating profit margin was 14.2%, a 90 basis point decline compared to 15.1% in the prior year quarter. The income tax provision in the first quarter of 2022 was 23.7%, a modest increase over the prior year’s 22.2%. In summary, EPS was $0.49 in the first quarter of 2022, up from $0.47 in the prior year comparable quarter. Working capital as a percent of sales was 24.8%, an increase of 30 basis points compared to the prior year-end. As expected, the PWC increase was primarily the result of transitory effects of the inflation and supply chain environment, most notably an increase in accounts receivable, where supply chain volatility resulted in shipments skewed later in the quarter and an increase in inventory resulting from higher costs and increased safety stock levels. Free cash flow of $8.1 million was lower than the prior year's quarterly record of $28.8 million, as modestly higher earnings were more than offset by higher primary working capital and timing between years. If you would, please turn to Slide 5, as I'd like to walk through our cash flow and working capital trends in more detail. Our free cash flow conversion of net earnings has been very robust over the past several years, due largely to the structural benefit from the low-hanging fruit of our working capital continuous improvement processes. As we enter 2022, there are a variety of factors that will mute this conversion trend, while still exceeding our annual target of 100% free cash flow conversion. I would categorize these into two areas, the first being certain temporary factors that will impact 2022 versus 2021. Most notably, the accounts receivable impact from intra-quarter shipping unevenness resulting from intermittent component delays, also inventory balances reflecting cost inflation and higher inventory levels. Finally, fulfillment of the CDMA cellular network sunset endpoint replacements that were accrued in 2020. The second category is short-term seasonality factors. In Q1, approximately $5 million of incremental year-over-year cash was used for higher incentive compensation payments made in Q1 2022 versus the prior year, and for retirement plan contributions, which were made in cash in 2022, but were previously made in shares of our stock. In summary, we remain committed to effectively managing cash flow, as evidenced by its inclusion in our short and long-term incentive programs. With that, I will turn the call back over to Ken.

Thanks, Bob. Turning to Slide 6, despite the challenging environment, our team was able to produce a solid quarter in which we worked to meet customer requirements by delivering on the choice matters portfolio of innovative smart water solutions synonymous with Badger Meter. We implemented additional pricing actions throughout our business to offset inflationary pressures and effectively managed expenses while thoughtfully investing in our growth initiatives, using our financial flexibility and strong balance sheet to invest for the longer term. With a record order pace in the first quarter and robust backlog, we remain confident that our exceptional customer support and winning portfolio of digital solutions will provide sustainable growth. Badger Meter is uniquely positioned with a full line of smart water offerings, including market-leading cellular communications, water quality monitoring, and tailorable software to allow customers to monitor, manage, and support operational efficiencies and sustainability throughout the water distribution system. In the near-term, we will work to mitigate the impact of ongoing material cost increases, supply chain disruptions, and logistics availability in support of our customers. Our priorities over the long-term continue to be focused on executing our organic and acquisition-driven growth strategies and delivering value for shareholders. To close out our prepared remarks, I want to again thank our team for their hard work and dedication serving customers, further enabling the protection of the world's most precious resource. With that, operator, please open the line for questions.

Thank you. Our first question today comes in from Andrew Buscaglia of Berenberg Capital Markets.

Hey, good morning, guys. So obviously, the quarter, you're seeing some margin pressures as expected. But I was wondering if you could talk about from here on out, does it seem like margins can resume expanding sequentially? And I know you don't give guidance, but how heavy, I mean, I guess I'm looking for maybe like how heavy are these inflationary pressures and other dynamics you are seeing? Is this kind of like you think getting peak-ish with regards to how hard things are?

So yes, let's just frame it. We anticipated coming into Q1 the margin pressure, and I think we signaled that pretty effectively in our January call. At the time in January, copper was at a lower level than where it is today. There wasn't a war in Ukraine. So I think the world has changed slightly, and the impacts there are having a cascading effect. But at the same time, I don't know that we've changed our outlook on our overall margin profile. And so as you know, we talk about 38% to 40% is this narrow band of gross margin. It just happens that Q1 was at the lower end of that range, still proud of that in a highly inflationary environment. But I don't know that the dynamic has changed all that much. And so while I'll stop short of talking about continued accretion moving forward and where we fit, I think, safely, you can assume it's in that 30% to 40% - 38% to 40% tighter band. And that's going to play out depending upon how mix occurs, how we claw back the backlog, and all these pricing actions that we've taken late in Q4 of 2021. And now another step here on a limited number of products here in April 1, how those play through into the P&L, which as you know, there's always a lag in that, but I think we're confident very much in that normalized range that we routinely talk about.

Yes, and I just like to reinforce that. I mean, with the way that the structural change in the business has occurred, where we're selling more value, customers have proven that they see that value and they're willing to allow us to price that accordingly, and the structural mix is there. We have growth again in cellular radios, ultrasonics, and Software as a Service. So really, it’s a difficult operating environment as we go through some of the challenges that everybody is facing, but the confidence and the resilience of the margins is there.

And I know last quarter, when you report you didn't have this geopolitical issue, obviously, what exactly specifically is that? I guess, is the impact there just like, further disruptions? You're not making, you're not able to get parts? It just makes it that much harder?

Well, I think it's more related to the inflationary side. So first of all, we don't have much revenue at all in Russia or Ukraine, so it's not a revenue issue. It's just caused some rapid inflationary issues when you look at the price of oil and gas and just some of the other things that have come through. We're not tied to supply chain issues to that region. So it's more on the inflationary side that came on pretty suddenly and quickly.

Okay. And maybe just the last one, presumably the cash flow in the quarter, we got a lot of moving parts there with working capital. What changed for you? Or how did things come in line with what you were expecting for the quarter? And I guess how difficult is it to manage versus the previous years when you had such great cash flow conversion? How do you see that playing out this year?

Yes. So I’d say nothing has changed from our overall target of having free cash flow conversion in excess of 100% of earnings. So that will remain tried and true and we remain steadfast in that commitment. I think what's changing is the ability to convert in the 150% or 160% range, because those years from 2019 through 2021 benefited from kind of working capital improvement to drive primary working capital as a percent of sales from what used to be in the high 20% range to now mid to low 20% range. And so you just don't see that ability. The quarter played out quite frankly as predicted. We had already anticipated coming into the year free cash flow being weaker in the first half than in the second half. And so I would say not much has changed other than we're up against a really tough comp from a year ago, and we had a record $28.8 million of free cash flow in a comparable period where working capital was declining. Now we're in a first quarter where working capital is increasing, and if you look at the balance sheet, you'll notice the biggest driver of that working capital change is accounts receivable, which largely relates to the pacing of shipments in the first quarter of 2022 versus how that played out a year ago. And that's a direct cause of the intermittent supply chain challenges that we've talked about. So I would say, again, Andrew, not much has changed overall. It's just the step change of being able to maintain that high rate of conversion, and we're simply signaling it won't be at those higher levels. In this case, it's probably more of a second half story than a first half story.

Our next question today comes in from Rob Mason of Baird.

Yes, good morning. Thanks for taking the question. Just it sounded like as the quarter played out, you were able to ship more product later in the quarter. I know supply chain issues still abound. But at the margin, can you inform us how your supply situation is trending in April? Did it get better during the quarter? That would maybe be the inference there, but can you just clarify that?

Yes. So the inference you picked up is correct. We've definitely had momentum exiting the quarter with supply chain. The supply chain problems aren't over. But we are absolutely in a better place today than we were a year ago. We're absolutely in a better place than we were six months ago. But we continue. Yes, we continue to manage and things pop up here and there in the old whack-a-mole analogy. But we're definitely in a better place heading into Q2 than we have been for quite some time.

I mean, is it fair to carry that forward, Ken, that you typically see some seasonal, stronger shipments in the second and third quarter? Of course, your backlog right now is elevated, too. But all else being equal, that we could see some seasonality, normal seasonality in the second or third quarter?

No, I wouldn't count on that. And that actually hasn't really been a thing for us for a few years now. The seasonality is really kind of melted away as customers are more and more implementing AMI projects that are longer-term and scale. And as we build up our Software as a Service, that's a completely resilient, recurring revenue stream. So the profile has changed quite a bit. And you're right, even with the backlog, it's just a matter of us continuing to convert backlog. And frankly, we've had a great problem. We keep shipping more, but the backlog keeps growing.

Sure. I just wanted to flip real quick to the flow business. You mentioned strong order trends there. But again, I guess supply held you back, certainly relative to the utility business that's viewed as more economically sensitive. I'm just curious now that you've also retooled the end markets that you're serving there, how you view the economic, macroeconomic sensitivity of that business or what would be more cyclical or less cyclical within that bucket of product?

Yes, the thing to always remember about flow instrumentation is that it's a really small portion of our portfolio in the 15-ish percent range. And then that 15% is broken down into a series of very small markets. We are doing extremely well in the focus areas of wastewater and HVAC building sustainability. And then those other markets kind of go up and they go down, but they're pretty small in the grand scheme of the overall portfolio. And in terms of the economics of those markets we've attacked those with the same value-based pricing models to make sure that we're extracting the value that we create for customers.

The next question on the line comes from Nathan Jones of Stifel.

Good morning, everyone. I just wanted to follow up on the revenue question and ask about supply chain delimit. I mean, is revenue kind of ramped up each quarter as we went through 2021. The first quarter of 2022 here was pretty flat sequentially with the fourth quarter. We talked about supply chain being a little bit better exiting April. Should we kind of count on this $130 million to $135 million of revenue unless we say more significant and sustained easing in the supply chain challenges? Are you kind of implying here that you think you can get a little better than that with some of the momentum on supply chain that you've exited the first quarter with?

Yes, so as we've said a few times since the start of COVID, or throughout the supply chain challenges, obviously, we don't provide guidance, and starting to do that now would be a most difficult time to try to guide. But I think when we just look at the significant growth that we've had in our order book, the momentum that built through the quarter, and the confidence that we have heading forward here, I'm not going to guide. I just to the point I made before, supply chain feels better today than it did three and six months ago.

Okay, and just, obviously, there's been low price increases here, there's a lot of inflation. Are you seeing the velocity of projects through your funnel change, maybe slow down because customers are poking at pricing? Any of the sales cycle extending, just any kind of areas of potential weakness that you might be seeing? Obviously, the business has done extremely well throughout this whole time.

Yes, we continue to see a very strong pipeline of bid activity. We've experienced robust order conversion and revenue growth, so our confidence in the entire pipeline remains high. Looking back, despite discussions around infrastructure, customers continued to place orders, and now, even with significant inflation, we see ongoing orders. This indicates that our outlook on AMI adoption has been accurate. The COVID period accelerated this trend, and the benefits of AMI for utilities have become evident. Our leading position in cellular technology and our customer collaboration are being recognized and rewarded.

Yes, well, I'll tell you, from my view here, the adoption of AMI seems like it's going to be ubiquitous. Thanks for taking my questions.

Tate Sullivan from Maxim Group, you'd have the next question.

First, say thank you. Can you just comment on the water quality monitoring opportunity? Were some water quality monitoring orders framed within your comments about a record pace of orders from the press release? Just a general update.

Yes, sure. Hey, Tate. Yes. So as you're probably aware now, we've lapped the year. So that's just included in our utility sales. But our excitement around water quality is every bit as big today as it was the days that we acquired s::can and ATi. We're seeing significant growth opportunities, strong synergy opportunities, and cross-selling to our customers or into some of the long-standing s::can and ATi relationships. So we're seeing strength in that part of our market and feel great about those acquisitions and having strong growth rates going forward with it.

Thank you. And then also on the record pace of orders, it's a bit of a change in language before when you commented on record backlog. Was that indicating maybe stronger orders at the end of the most recent quarter? Or just, I mean, is it safe to say that you've had record backlog again, or just go into the reason to phrase it that way?

It's just the fifth consecutive quarter where we've had pretty strong shipments, but the backlog continued to grow. So I mean, it's been pretty consistently strong.

Okay. And then I thought I heard Bob, you comment on some new product introductions in April, or did I hear that correctly? Can you just give an update?

Let me clarify my earlier comment from April regarding the price increase; it was not related to a new product. I’ll let Ken discuss the new product specifically.

Yes. We continually work on our new product development funnel, and typically those get launched and they come in, but no, we didn't have any significant launches in the last three or so months.

The next question comes from Thomas Johnson of Morgan Stanley.

Hi, thanks for taking my question. Just kind of reverting back to the backlog here. Certainly, if you could kind of help frame the backlog for us, maybe just in terms of how long it could possibly take to kind of work that down to normalized levels. And then beyond that, any commentary you can provide on pricing within the backlog and the ability to reprice some of that legacy backlog that’s remained in there.

Yes, so, first off, yes, with five consecutive quarters of backlog growth, I would say it continues to be something that we'll work through throughout the remainder of this year. I mean we've got a really strong order book to build off of, and I don't see us getting back to normalized backlog levels within 2022, which in my view is a good thing. On the pricing side, we have different pricing arrangements for new products that we price. We have list price increases that take some time to roll themselves through. We have some backlog questions, but generally, it's not one size fits all on how the dynamic pricing works. So it's not as simple as just saying, yes, we're going to go out and reprice a backlog. But we do have a very robust process for pricing analysis that we put in with our value-based pricing initiatives in 2020 that we feel really good about.

Yes, so it varies customer to customer, contract to contract. Typically, on some of the longer-term items, we might have a kick at the can once a year. And we have customers where pricing has held for two years. Obviously, those are some legacy practices that as we've gone through an inflationary environment, we're trying to change or take different stances with customers on. But at the same time, there is some of that legacy that carries forward, even despite being five quarters into inflation. There are some that haven't had a reset button yet that are forthcoming here in the near term. So it really varies contract to contract; it depends on the channel, whether we're direct or through distribution. But trust in the fact that every opportunity we have, where there's an opportunity, again, appropriately with a customer to recoup costs, we're going to try to do that. We're going to do that in a very genuine and sincere way with our customers.

We have a follow-up question on the line from Tate Sullivan of Maxim Group.

Hi, thank you for taking my follow-up question on the water quality monitoring again. Ken, can you talk a little about the sales cycle? I think historically, on the water meter side, you've introduced some new technology to industrial customers and flow instrumentation. In water quality monitoring, will you sell it first to some industrial customers into wastewater capabilities into drinking water? Can you talk about some of the potential process in terms of introducing more water quality monitoring product?

Sure, yes. So as we thought about integrating the companies and how the sales cycle would work in the early phases, there's more opportunities on the industrial side because as we're all well aware, the water utility space is a little bit slower moving. But by now as we're into this a little bit over a year, we're capitalizing in both spaces.

Great. Well, thanks everyone for joining our call today. For your planning purposes, our second quarter 2022 call is tentatively scheduled for July 20. I'll be around all day to take any follow-up questions you may have. Have a great day.

Thank you all for joining us today. This concludes today's call. You may now disconnect your lines. Have a great afternoon.