Ladies and gentlemen, welcome to the Fourth Quarter 2022 Badger Meter Earnings Conference Call. 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.

Good morning, and thank you all for joining the Badger Meter fourth quarter and full year 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 fourth quarter earnings call. The Badger Meter team finished the year with another strong performance, delivering solid revenue growth while achieving yet another positive book-to-bill ratio. Despite persistent macro challenges with sustained inflation and sporadic component shortages throughout 2022, gross profit margins have consistently been within our tightened normalized range of 38% to 40%, and we improved SEA expense leverage during the year. We generated robust cash flow in 2022 and utilized that growth capital to acquire Syrinix in early January 2023, adding to our comprehensive hardware-enabled software offerings. I'll talk more about Syrinix, provide a recap for the full year, and discuss our outlook later in the call. But for now, I'll 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 in the fourth quarter were $147.3 million, sequentially similar to last quarter's record level, and 8.5% higher than the $135.7 million in the same period last year. On a constant currency basis, excluding the impact of the stronger U.S. dollar, sales increased 10%. Total utility water product line sales increased 9% year-over-year against a difficult prior year comparison. Broadly, we experienced continued strong order demand, ongoing price realization, and growing adoption of our cellular AMI solution with higher Orion cellular endpoint and Beacon Software as a Service sales. Additionally, we saw increased sales of meters, including E-Series ultrasonic meters. The strong demand environment resulted in another record utility water backlog exiting the year, even with the strong top line sales performance. Sales for the flow instrumentation product line increased 8% year-over-year, led by solid growth in water-related markets. The impact of the stronger U.S. dollar was most meaningful to this product line with constant currency growth of just over 10%. Order trends remained steady with water-related applications outperforming the more general industrial end markets. While we are very excited about our growth expectations for both the near and long term, we do anticipate that the rate of quarterly sales growth in 2023 will moderate from 2022. Turning to margins, gross profit as a percent of sales in the fourth quarter was 38.7%, consistent with the prior quarter and again, in the middle of our normalized range as anticipated. While favorable structural mix trends continued, the impact of inflation across various input costs remained a stubborn headwind. For instance, pick up any copper price graph, and you can see an example of the type of volatility and unpredictability inherent in the inflation challenges facing nearly all industries. After peaking around $4.90 a pound last spring, copper settled back into the $3.50 per pound range over the past six months or so. However, we now are back to over $4.25. While we can't fully control these types of input costs, we are managing what is within our control, which includes continuing our value-based pricing rigor. We remain committed to our normalized gross margin range and are confident in the overall margin resiliency of our business model. SEA expenses in the fourth quarter were $34.5 million, an increase of approximately $2.5 million year-over-year due primarily to higher personnel and incentive compensation costs, research and development spend, and travel. As a percent of sales, SCA was 23.4%, a 20 basis point improvement from 23.6% in the comparable prior year quarter. Sequentially, SCA leverage did worsen by 70 basis points as our robust cash flow in the fourth quarter resulted in higher incentive compensation accruals at year-end. We expect SCA spend in dollars for 2023 to increase as a result of inflation and ongoing growth investments, yet we continue to endeavor to improve SEA leverage as a percent of sales as just one of the levers for future margin enhancement. The income tax provision in the fourth quarter of 2022 was 23.4% compared to 24.5% in the comparable prior year quarter. In summary, consolidated EPS was $0.60 in the fourth quarter of 2022 compared to $0.59 in the prior year comparable quarter. Working capital as a percent of sales was 22.2% at year-end compared to 23.8% at the end of Q3 and down from 24.5% when we started the year. While inventory has increased in response to supply chain complexities, the corresponding payables increase, coupled with receivables collection quality, resulted in the net overall improvement. Fourth quarter free cash flow of $28.5 million was higher than the prior year's $26.2 million, the result of our effective working capital management activities. For the full year, free cash flow was $76.6 million, and free cash flow conversion of net earnings was 115%. This represents the fifth consecutive year of greater than 100% conversion of net earnings. With that, I'll turn the call back over to Ken.

Thanks, Bob. Turning to Slide 5. I want to spend a few minutes on our recently announced acquisition of Syrinix and how we believe it expands the value of our smart water solutions portfolio. Syrinix brings additional capabilities to our industry-leading offerings in the form of pressure monitoring hardware and software. Their patent-protected and innovative time-synchronized high-frequency pressure monitoring and acoustic leak detection complements the existing pressure monitoring capabilities available in our E-Series ultrasonic meters. Syrinix has a history of success with network monitoring installations across a variety of utilities, most notably in the U.S. and U.K. Of keen interest to Badger Meter is their radar software, which adds to the scope of real-time and actionable data and analytics for utilities to improve their operations. For example, time-synchronized pressure data allows for proactive versus reactive strategies to address pipe bursts and other leaks, saving precious time, money, and water loss. Additionally, pressure and water quality sensors can work in tandem. For example, in situations where a cracked pipe is identified as a result of contaminant infiltration. In fact, Syrinix has worked closely with the ATI Water Quality team over the years. From a financial standpoint, this technology startup has seen steady growth, albeit from a very small base. Our acquired revenues are a few million dollars, and it will start up modestly dilutive to earnings, given the pre-profit position upon acquisition and future amortization of purchased intangibles. We believe over the long term, adding the Syrinix capabilities to our comprehensive and tailorable digital solutions will continue to competitively differentiate Badger Meter in the market. Taking a look back at fiscal 2022 and the past several years overall here on Slide 6, we have distinguished our performance by executing our strategies exceptionally well in the face of a multitude of macro challenges. As noted in the release and outlined here, in 2022, we delivered 12% overall sales growth and 14% utility water product line growth, grew orders in backlog to new record levels, generated nearly $34 million in software revenues, grew operating profit 11% in the face of unprecedented inflation, and delivered 115% free cash flow conversion of net earnings. Looking at just a few of the longer-term accomplishments relative to our strategic growth goals. We've grown our utility water business at an accelerating rate over the last three years. Increased software sales revenue at a 45% growth CAGR, reaching 6% of revenue in 2022, even with a sizable increase in product sales. We reduced our primary working capital as a percent of sales, freeing up capital by installing a focused continuous improvement mindset to working capital management, all of which enabled us to generate nearly $240 million in free cash flow over the past three years with an average free cash flow conversion of 137%. Of that cash, we deployed nearly $100 million inclusive of Syrinix, three strategic tuck-in acquisitions, adding water quality and pressure monitoring capabilities to our smart water solutions. We returned nearly 30% of that cash to shareholders in the form of dividends, achieving dividend aristocrat status with a track record of 30 years of consecutive annual dividend increases, and we continue to invest in R&D and innovation to build on our leading portfolio of smart water solutions. I couldn't be more proud of the team's achievements. Finally, turning to our outlook, I remain excited about the opportunities ahead. At a macro level, Badger Meter is uniquely positioned with a broad and expanding portfolio of smart water offerings, including our industry-leading cellular communications, real-time water quality and pressure monitoring, as well as tailorable software to enable customers to be more efficient, resilient, and sustainable with their water systems. Our replacement-driven demand, macro AMI adoption drivers, and growing proportion of stable SaaS revenue are supportive of durable multiyear growth against an uncertain economic backdrop. We continue to remain constructive on the bid funnel and order rates with record orders in the fourth quarter and a record backlog, which bodes well for future sales growth. I'm also encouraged by the current trajectory of supply chain easing. Coupled with some anticipated leveling off of input cost inflation and continued price realization, this should bode well for gradual gross margin improvement in 2023. Our cash flow generation and debt-free balance sheet provide us with ample capacity to execute our capital allocation priorities, including an attractive funnel of organic and inorganic strategic growth investments. I want to again thank the entire Badger Meter team for their tremendous efforts and accomplishments in 2022, and I look forward to executing on the many opportunities ahead. With that, operator, please open the line for questions.

Absolutely. Our first question comes from the line of Nathan Jones with Stifel. Your line is now open.

Good morning, everyone.

Nathan.

I do like that Slide 6. I think the chart there of working capital to sales coming down and especially the free cash flow conversion over the last couple of years with all these supply chain challenges is pretty impressive. Maybe you could talk a little bit more about the supply chain easing, what you're seeing there, and what you're expecting to see there. No doubt all of this supply chain disruption has had a negative impact on the productivity within your facilities. Maybe talk a little bit about what that impact is being, what kind of margin expansion you might be able to see as you improve productivity with more reliable supply chains?

Yeah. Thanks, Nathan. So supply chain, as we've talked about, I think, in the last couple of quarters, continues to improve again. I wouldn't say that we're completely out of the woods yet across the entire industrial space. We're still seeing some challenges with electronics here and there. But for the most part, we're definitely in a better position than we've been and expect that to continue to improve. You're right. The supply chain complexities certainly have added a lot of inefficiencies and other issues throughout our facilities, but we've handled it very well. And I expect to see some improvement there, but nothing that I think you can model as a huge improvement.

Yes. I think the takeaway, Nathan, should be exactly what is stated in the prepared remarks, which is with that supply chain easing continuing and the opportunity for greater efficiency, we're still staying resolute in our normalized margin range, but we would expect a modest improvement in 2023 versus 2022.

And you talked about expectation some flattening inflation and some additional price reading through in 2023. Can you give us whatever color you're prepared to on price cost in '22? And then what your expectations are in '23? Should price/cost be better in '23 than it was '22, or the same?

Yeah. So a lot of moving pieces there. As you know, when we talk about price cost, oftentimes, in addition to what people most traditionally think of, there's always a mix or an average sell price dynamic that plays into that. That said, I think the way we would look at 2023 simply versus '22 is modestly better price/cost dynamics, 2023 versus 2022. We know we've had leading and lagging effects of price actions relative to cost. But that's why we're still staying resolute with that targeted comfort zone or margin profile of 38% to 40%.

Great. Thanks for taking my questions. I’ll pass it on.

Thank you, Mr. Jones. Our next question comes from the line of Thomas Johnson with Morgan Stanley. Your line is now open.

Hi. Thanks, and congratulations on another strong quarter here. To start, it would be helpful if we could maybe get some incremental color on the demand outlook. Obviously, language on year-over-year comps. This is reasonably conservative, but constructive, although you did mention record fourth quarter exit ordering. And it's pretty clear that recent results have been delivered in the face of some pretty strong operational headwinds, which we kind of would assume are easing in 2023. So what are some of the underlying assumptions that are kind of causing that conservatism on the 2023 outlook just on a year-over-year basis?

I'll go first, and I can see Bob eager to jump in. Let's refer to Slide 6. In the upper right corner, we have a chart illustrating utility growth, which accounts for 85% of our revenue. Even during the challenging year of 2020, we grew by 4%. In 2021, we increased by 9%, and this year, we've seen a growth of 14%. We are incredibly excited about the market, which remains strong. Each quarter, we continue to set records for shipments, and our backlog has been consistently growing. Our bid funnel is healthy, and we are capturing more than our fair share of Advanced Metering Infrastructure in this sector. We feel very optimistic about the utility market since it is the largest segment of our business. Additionally, we are confident in our ability to achieve 10% growth in flow instrumentation, which makes up the remaining 15%. While we may not see a growth rate of 14% again, we remain untroubled by market conditions.

So that's the clear takeaway should absolutely be here. Optimism about the outlook moving forward. But just incrementalizing on a year where you just delivered 12% growth to think that that rate of change on a law of big numbers is going to be in excess of what we just delivered. The conservative comes from just anniversarying the increases of 2022. Still a very robust growth, but just not at the level of in excess of what we just delivered.

Yeah. And to be very clear, I mean, we are very confident in 2023 and the longer term with what we see in the markets.

Understand that. Thanks for the color. Just shifting to capital allocation here. Really helpful information on Slide 7. And clearly, you've put some capital to work in the first quarter of the year, but still sitting on pretty high levels of cash here. So just from an M&A perspective and maybe the pipeline of deals there. Post this recent acquisition, what other areas are you focusing on for inorganic growth here in the near term?

Yes. We've built and have maintained a really interesting funnel of companies that are in the water quality space, software space, much like Syrinix, the recent acquisition. And anything that brings some sort of a global customer base and footprint with it is in that target zone. So we remain disciplined. We look for value. I think we certainly have found that with the three acquisitions we've done in the last 26 months. So we're not in the mode of just trying to get bigger because we can, but there's certainly a number of interesting opportunities out there for us that we continue to work.

So the laneways Ken mentioned are the same as they've been really for the last couple of years. And you can tell that those laneways are very core to where we play today. So this idea that perhaps with the available cash, we all of a sudden stray far from the fairway in which we operate right now. That's most not likely. We're staying very core to where we play in those laneways are unwavering really over the last few years.

Understood. Thanks for the helpful responses, and I’ll pass back.

All right. Thanks.

Thank you, Mr. Johnson. Our next question comes from the line of Rob Mason with Baird. Your line is now open.

Good morning, everyone. You mentioned that the book-to-bill ratio is above one. Ken, could you clarify the status of the backlog at the end of the year compared to a year ago, at the end of 2021? I'm interested in the magnitude of the increase.

We do not specifically disclose our backlog, and given the supply-demand imbalance over the past 24 months, sizing it might not be very relevant and could lead to confusion. However, looking at the book-to-bill ratio of over one in recent quarters, it’s reasonable to conclude that our backlog at the end of 2022 is higher than it was at the end of 2021. Nonetheless, we will not provide a specific size for it as we typically do not disclose backlog figures, considering that our business model is not traditional in that regard. We do have a greater focus on water-related industries now, which differentiates us from our previous approach.

And can you tell me if the backlog, the bookings book-to-bill over one in the flow measurement business also or how does that comparatively, how does it look?

Yeah, it was slightly better than one.

Just I guess remind me, of course, all that that's 15% of the business and not necessarily dark as markets are very fragmented in those many markets. So if you're trying to draw conclusions of that data point to other industries, challenging to do.

Yeah. And to Bob's point, it is small. And remember this now, we have more of a primary focus in that group on water-related industry. So it's quite different than it used to be, I think, when people thought about recessionary times or other challenges.

No. Understood. Understood. Ken, good color on Syrinix, but I'm curious if you could go a layer deeper. It looks like a very interesting business. And just help me understand how that product gets to market, maybe what the sales cycles would look like, what a typical deployment would look like just within that product category or how you envision it?

Yeah. So the way that we view a lot of these small technology acquisitions is that with our strong brand name and sales coverage in North America, we can usually sell anything to our existing customer base, to new customers, and even utilities that might use a different metering manufacturer. So Syrinix can fit right into our direct sales channel, and our utility distributors can sell it. They know the product. They have the right context. So in terms of being able to get some sales synergy in the U.S., we certainly feel that. And then we're excited about the fact that it also comes with the software component. So now when you think about our Beacon software that we've built out here, it was primarily AMI data. Now we added scan ATI, and now people can go to Beacon and get their water quality data. And now with the RADAR software that we'll incorporate into Beacon, a utility can now get their quantity, quality, pressure, acoustic leak detection all in one place. So we think we've got really good leverage and we can integrate it relatively easily into our sales force. And then on top of that, we're really excited about the - again, small companies, similar to ATI, scan, except even smaller, but long-standing great relationships with people like Thames Water, even American Water. If you go to their website, you'll see some really good customer test cases. So I've said this before, technology deals for us would always be flashy, but no deal is too small with what we can do with our customer base.

Sorry, Rob. The one piece that maybe we didn't touch on there was you talked about how deployed can cover channels. But from a deployment standpoint, this largely becomes starts. I'm going to call it a pilot for a lack of a better term—maybe a focused effort on leak detection in a particular part of a defined distribution network. And once that's successful, then that model gets replicated in other areas. So basically, customers start with a small footprint of technology, but that customer grows that installed base of both hardware and software over time.

I see. To the extent that you noted it might be modestly dilutive this year. I'm just curious what would be the impact on the gross margin?

At the gross margin line, this is above-line average. But again, to size what we said in the commentary, we're talking about a couple of million dollars of sales at acquisition.

Okay. Very good. Thank you.

Sure.

Thank you, Mr. Mason. Our next question comes from the line of Tate Sullivan with Maxim Group. Your line is now open.

Thank you. Good morning. On Syrinix, following up, is it additive to the existing real-time water quality measurement businesses you have? Or is it the other way around? Can you clarify?

Yeah, Tate. It's really exciting in that we have known Syrinix for several years, but they've had a long-standing relationship with ATI. So this equipment works hand-in-hand a lot of times with the water quality equipment because, as I mentioned in the prepared comments, sometimes you can understand a leak because you can see the contaminants in the water first and vice versa. So they really help each other out, plus you can get it into the drinking distribution system. So it goes all the way across the portfolio.

And on the real-time water quality opportunity, can you give an update there? Are most of the customers currently if you can't comment on industrial customers for that technology? And also, can you update on the process of integrating those software capabilities into the real-time water quality market, please?

Sure. The water quality applications do have wide-ranging effects of drinking water distribution, wastewater industrial processes. So yes, it fits all aspects of what we cover. And in terms of software, yes, it is available. It is online, and customers are now ordering water quality sensing plus software.

Both on industrial and utility, Ken?

Yes. That is correct.

And then on the international opportunity too, I mean U.S. was such good growth in 2022 and understanding the moderating percentage growth in '23. I mean, internationally, should we expect it to grow as a portion of revenue going forward, given many of these acquisitions?

Yeah. I'm getting a little bullish on percent of the portfolio because North America is growing so great that sometimes it gets hard to size something and say it's going to be X percent of revenue because we're doing so well right in the core. But yes, we do expect every year international growth. It can tend to be a little more uneven than the U.S. piece, but we remain just as interested and excited about global opportunities as we had previously.

Thank you very much.

You’re welcome.

Thank you, Mr. Sullivan. There are no additional questions waiting at this time. I will pass the conference back over to Ms. Bauer for closing remarks.

Great. Thank you all for joining our call today. For your planning purposes, our first quarter 2023 call is tentatively scheduled for April 20. I'll be around all day to answer any follow-up questions you may have. Have a great day.

That concludes the fourth quarter 2022 Badger Meter earnings conference call. Thank you for your participation. Have a wonderful day.