Ladies and gentlemen, welcome to the Fourth Quarter 2023 Badger Meter Earnings Conference Call. As a reminder, today's conference is recorded. It is now my pleasure to turn the conference over to Karen Bauer, Vice President of Investor Relations, Corporate Strategy and Treasurer.

Good morning, and thank you for joining the Badger Meter fourth quarter and full year 2023 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'll 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 all for joining our call. We capped off a record year with strong fourth quarter results across sales, operating profit, earnings per share, and cash flow metrics. Demand trends remained robust, and our continued manufacturing conversion allowed us to again make modest headway into the order backlog. Shortly after year-end, we added to our suite of smart water offerings by acquiring the Telog/Unity network monitoring assets, as previously announced. I want to thank all of our employees for their efforts in delivering another fantastic year for Badger Meter. I'll talk more about the acquisition, provide a recap of the year, and discuss our outlook later in the call. For now, I'll turn it 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 in line with our expectations at $182.4 million, up 24% compared to $147.3 million in the same period last year. This brought our full year 2023 sales to a new milestone exceeding $700 million, specifically $703.6 million, or 24% above 2022 sales of $565.6 million. Total utility water product line sales increased 28% year-over-year in the fourth quarter and the same percentage on a full year basis. As we have noted all year, demand for our suite of utility smart water solutions continued to benefit from underlying secular growth drivers, coupled with the differentiated performance of our innovative offerings. In the quarter, we delivered on continuing strong cellular AMI demand, which translated into higher sales of ORION Cellular endpoints, E-Series Ultrasonic meters, and BEACON Software-as-a-Service revenue. Additionally, water quality and pressure monitoring sales contributed to the top-line growth. There were a few highlights within the full year sales growth that I'd like to touch on. First, Software-as-a-Service revenues exceeded $42 million in 2023, up 27% year-over-year. Our international utility revenue grew more than 30% year-over-year, albeit from a small base. Syrinix, which we acquired at the beginning of 2023, delivered pro forma sales growth of approximately 60%, also from a small base, a sign of both broader market adoption and our early integration efforts. While we again saw a slight increase in the penetration of ultrasonic meters as a percent of our metering units, mechanical meters continue to command a leading position in the North American utility market for customers of all sizes for a variety of fundamental reasons. Turning to the flow instrumentation product line, sales grew modestly in the quarter and were up 7% on a full year basis with solid demand experienced in water-related markets, partially offset by lower sales associated with the deemphasized general industrial markets. Looking at margin performance, continued strong execution at both the gross margin and SEA lines contributed to the robust 230 basis point increase in operating margins in the fourth quarter, reaching a record 17.6% compared to 15.3% in the comparable quarter last year. Gross profit dollars increased $14.5 million year-over-year and as a percent of sales increased 50 basis points to 39.2%, compared to 38.7% last year. The combination of higher volumes and favorable product mix led to the solid year-over-year improvement. We remain pleased with overall gross margins, demonstrating the gradual yet durable structural mix benefit inherent within our smart water portfolio. SEA expenses in the fourth quarter were $39.4 million, an increase of $4.9 million year-over-year, which included higher personnel-related costs such as headcount, salaries, and annual bonus incentives. The addition of Syrinix, with its related intangible asset amortization, also contributed to the dollar increase. Yet as we have demonstrated all year, even with the higher spend levels to support growth, SEA as a percent of sales declined 180 basis points to 21.6% in the fourth quarter from 23.4% in the comparable prior year period. Our effective income tax rate for the fourth quarter was a bit higher than the full year average at 26.1%. Incorporating that effective tax rate as well as interest income on our cash balances, we delivered EPS of $0.84 compared to $0.60 in the prior quarter, representing a 40% improvement. Working capital as a percent of sales was 22.1% consistent with the prior year-end. While overall working capital increased in total dollars to support growth, we were pleased with the overall working capital efficiency, recognizing we have improvement opportunities in inventory as we move forward. Free cash flow for the fourth quarter was a record $35.9 million and improved from a year ago primarily on the higher earnings. For the full year, free cash flow reached a record at $98.1 million with free cash flow conversion of net earnings at 106%. 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 tuck-in acquisition. The Telog brand of remote telemetry units, or RTUs, along with the Unity monitoring software, bring additional capabilities to our smart water offerings in the form of remote monitoring access across utility wastewater, stormwater, and source water applications. It also brings talent with the expertise to assist our customers in applying these capabilities. For example, the acquired hardware portfolio adds certain complementary products such as hydrant-mounted pressure devices and flexible RTUs for external sensor integrations. These products are cellular enabled and add flexibility and edge computing for real-time monitoring. The devices connect seamlessly to a secure cloud software platform with a GIS-centric interface, robust device management, flexible dashboards, and a suite of analytical tools that enable data-driven decision-making. Application examples range from monitoring water depth at an aquifer or well in a water-stressed region utilizing a single sensor to a full suite of instruments at a pumping station monitoring flow, level, pump health, water quality, pressure, and more. While overall modest in size, with sales and purchase price in the mid-single-digit millions, we believe these added solutions bolster our growing capabilities in full network monitoring and continue to competitively differentiate Badger Meter's suite of offerings in the market. Moving on to Slide 6, finishing out 2023 represents a bit of a milestone for me, 5 years as the CEO of Badger Meter. During that time, the Badger Meter team has done a tremendous job evolving and advancing what was already a good business into a great one, through developing and executing our growth strategy. First and foremost, I'd call out our evolution to a smart water management company, effectively leveraging our innovation leadership and targeted acquisitions to build on the suite of tailorable solutions ready to address the persistent macro challenges facing the water industry. We've executed a multi-year transition to more direct sales efforts, building out our team of experts across smart metering, advanced communication technologies, water quality, full water network monitoring, and software. We've built on the trust earned over our nearly 119 years, becoming an even more valued partner to our customer base. We've advanced the culture of continuous improvement across not just operations, but working capital management, pricing excellence, talent management and development, and sustainability, really across all of our enterprise business processes, which have enabled our record results. The tangible outcome of these efforts are displayed here on Slide 7. We've distinguished our performance by executing our strategies exceptionally well in the face of a multitude of macro challenges. For example, in the past 5 years, we've delivered over 13% compounded annual growth rate in total sales now exceeding the $700 million milestone revenue run rate. We've grown our software revenues at a 28% CAGR to over $42 million. We've improved our margins, reaching 16% operating profit as a percent of sales in 2023, with 220 basis points of improvement over pre-COVID levels despite inflation and supply chain challenges. We've reduced our working capital intensity and consistently generated free cash flow in excess of 100% of net earnings, enabling our ability to continue as the innovation leader in our market, return cash to shareholders in the form of dividends, achieving dividend aristocrat status with a track record of 31 years of consecutive annual dividend increases, and to execute value-accretive acquisitions to further enhance our portfolio of smart water solutions. I couldn't be more proud of the global team's achievements over the past 5 years. Finally, turning to our outlook, I'm even more excited about the next 5 years than I have been about the past 5. At a macro level, our solutions continue to see growing adoption as we address the variety of persistent macro water challenges customers face, enabling them to be more efficient, resilient, and sustainable with their water systems. Our durable business model is underpinned by replacement-driven demand, secular AMI adoption drivers, an expanding need for real-time water quality information, and a growing proportion of recurring SaaS revenues. Our strong backlog, along with constructive customer budgets and inventory levels, are supportive of future sales growth. Although, as we've consistently communicated, the rate of top-line growth is expected to moderate from recent levels and will not be linear in delivery. This rate of growth moderation is simply the law of larger numbers. Finally, while not anticipated to be meaningful, incremental opportunities associated with infrastructure funding could provide modest potential upside, and we are well-positioned to capitalize on them. The continuation of positive structural sales mix and SEA leverage drivers demonstrated in our business are expected to provide gradual margin improvement year-over-year. Finally, 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 2023, and I look forward to executing on the many opportunities ahead. With that, operator, please open the line for questions.

Our first question today comes from Nathan Jones from Stifel. Your line is now open. Please go ahead.

Good morning, everyone.

Good morning, Nathan.

I guess I will just start off with a couple of questions on the outlook. I mean you guys have said long-term the business should kind of be in that mid-single to high-single-digit organic growth rate. You've clearly been running significantly ahead of that over the last few years. Is that kind of the range that we should expect for 2024? Or are there anything that you see in 2024 that would meaningfully deviate you from the long-term kind of average outlook?

Thank you, Nathan. As you mentioned, we previously indicated that we would be in the mid-single digits throughout the strategic cycle. However, we don't provide specific guidance for quarters or years, only for strategic cycles. Over the past year, we've expressed confidence in achieving high single digits during this strategic period, and we are reinforcing that sentiment today. Our outlook is something we are genuinely enthusiastic about as we enter the year with considerable positivity and favorable conditions. While we don't provide guidance on backlog, it's worth noting that our backlog going into 2024 is higher than it was at the beginning of 2023, which reinforces our strong optimism for the future.

I have a follow-up question regarding the strategic cycle. Can we start from 2023 and expect high single digits growth over the next five years? If I looked at it from 2021, the outlook would be different since you've significantly outperformed expectations in the past few years.

Yes. Yes, Nathan, that is safe to say we are talking about going forward, not including the double-digit performances of the past couple of years.

Great. I think that's helpful. Maybe on incremental margins, maybe just one for Bob, kind of expectations as we go into 2024 or over the next strategic cycle, are there any increased incremental investments you need to make to support growth or anything like that, that might impact the long-term outlook for incremental margins and where does that sit today?

Yes. So I would say really no change from our historic position. We think about ourselves at both the OP and EBITDA line as being 25% incrementals. It just so happened that this Q4 that we are talking about was modestly ahead of that. But if you look at the full year, pretty much right in that zone. So no real change moving forward.

Awesome. Thanks very much for taking the questions. I will pass it on.

Our next question today comes from Andrew Krill from Deutsche Bank. Your line is now open. Please go ahead.

Hey, thanks. Good morning, everyone. I kind of wanted to follow up on the incremental question and related to that the SEA costs, I think, as a percent of sales dropped a lot year-over-year, which was impressive. I just wanted to ask, any other color you can provide on kind of what helped you drive this? Was it simply holding costs steady while you grew your sales impressively, and do you think you can sustain kind of that below 22% of sales going forward?

Yes. So, I mean, as in any case, a single quarter doesn't make a year, and a year does not make a strategic plan. I think the way I would think about it is, yes, clearly, Q4 had a lower rate of SEA as a percent of sales. If you look at 2023 as a whole, our SEA as a percent of sales was 22.5%. That's about a 100 basis point improvement over 2022. I would say, we often talk about SEA percent as an opportunity for leverage and as an opportunity to drive EBITDA and operating profit expansion year-over-year. We are a continuous improvement-based business. And so I would continue to expect us to be able to accrete that. But sizing that is not something we will do. But again, 21.6% is an outlier that helped us to get to 22.5% for the year. And I think as we would say, with many aspects of our business, we strive to make those improvements year-over-year.

Okay, great. And then next, just I noticed in the press release, there was some new text about water quality and pressure monitoring contributing to your growth. So just can you size or kind of dimensionalize how big those businesses are now? Maybe add it to your kind of growth rates going forward?

So we won't size them. I mean, traditionally, we talk about those businesses for the first year after acquisition and then they sort of fold into the base, if you will. I think the purpose in that specific comment is to say, yes, they're growing. If you think about our high-single-digit growth that Ken spoke to, and again, all those businesses are reported as part of the utility water line of business. If we were to take that high-single-digit growth over the strategic cycle, we do think about those pieces maybe growing faster than high-single digits. But again, they're starting from a much smaller base, a base that we won't size.

The growth is in the high single digits.

Yes.

Okay, great. Thanks so much.

Our next question today comes from Rob Mason from Baird. Your line is now open. Please go ahead.

Yes, good morning. Ken, as you outline the outlook for high single digits and moving forward, you mentioned that it won't always be linear, which I understand. We noticed this in the fourth quarter with the fewer shipping days you pointed out. I'm curious if there are any similar anomalies to consider in the first quarter or how we should approach linearity at the start of the year.

Yes. So I would think over the long term, I think everybody appreciates the nonlinearity piece. The only piece I'd highlight about the first quarter is, obviously, during 2022, as we delivered the roughly $704 million of sales, there was a ramp Q1 to Q2 to Q3. And so the only thing I'd call about Q1 2024 is it's against an easier comp, but that's one quarter within four.

Yes, that's fair. For the year, your capital spending increased year-over-year as expected, but it was significantly higher than recent levels. I'm interested in understanding how you plan to approach your investment as we move into 2024. Will it decrease or remain at that level?

Yes. So Rob, while the number is up on a year-over-year basis, it's still pretty small. I think if you compare it to anyone else in the industry or just in general industry. So I think we are at a period where we've had significant growth, and we've had to make some investments in capacity in certain product lines that I would suspect we'll continue at about the rate that we are at, but we are not certainly not looking at any significant increases from where we are today.

Okay. Just last question. Ken, you touched on the new assets that you're bringing in from Trimble, could you speak about the go-to-market capabilities there that come with that? What you're maybe able to overlay with that? And just trying to think about opportunities for sales leverage or sales synergies with this business with you.

Yes, absolutely. While it's a relatively small addition, it holds significant potential. This enhances our approach to water quality, and as Bob previously mentioned, we will integrate it into our utility business and sales channels. Following Syrinix, which provided us with pressure monitoring and logging capabilities, Telog represents another step forward as remote telemetry units have been a part of our strategic plan for a couple of years. We are eager to incorporate these units to increase data collection points across distribution systems and wastewater facilities. Integrating this process is manageable, and we have already begun making progress. Our distribution partners and sales team are well-equipped to incorporate this into our operations. The successful integration of water quality and Syrinix gives us a solid framework to move forward, and we expect to rapidly advance with Telog.

Very good. Thank you.

Sure.

Our next question today comes from Ryan Connors from Northcoast Research. Your line is now open. Please go ahead.

Thank you for taking my question. First, I want to congratulate you on your clear numbers again. It's appreciated that you avoid relying heavily on non-GAAP metrics. Your numbers are particularly impressive considering many of your peers try to adjust their figures to achieve success. It's refreshing to see your straightforward reporting. I have a couple of questions, starting with your channel to market. Has your approach changed at all, Ken? A few years back, Badger was very aggressive in buying forward and vertically integrating into the channel. Recently, there has been some discussion about the company possibly returning to third-party distribution in certain targeted areas. Are those isolated instances, or has your viewpoint shifted towards expanding your third-party presence?

Yes. Ryan, one of the things I think you've come to know about us is we talk a lot about continuous improvement and regular cycles where we review the business, and we tweak as required. Our strategy hasn't changed at all. There are certain areas of the country where perhaps picking up a distributor for a particular region might make sense. There's other cases where we take things direct because it makes more sense. So our overall mix of how much is sold direct versus how much is sold through distribution hasn't changed at all. These are just minor tweaks.

Got it. Okay. My other question is about the competitive environment. It has been quite turbulent for the industry recently. I believe Badger Meter has managed its supply chain exceptionally well compared to some of its competitors. However, now that the situation has stabilized, some of those competitors may pose greater challenges moving forward than they did when they were struggling with supply chain issues. Could you comment on the competitive landscape? Additionally, I've noticed that a new player has been gaining a lot of attention and visibility at trade shows. I'm interested in your thoughts on how the competitive landscape is evolving.

So two things. As again, I'm sure you know and expect, we spend a lot of time understanding every single competitor, how they're doing, what they offer, how that compares to us. And the one thing we've always been confident in is that we offer the most unique, broadest, and best portfolio for our customers, whether that be mechanical meters plus ultrasonic, whether that's drive-by radios plus the lead in cellular for a decade, whether that's the best-in-class software to tie the whole thing together front to back. We absolutely have a portfolio advantage that we can and will continue to defend. And even as others continue to maybe get better with their supply chains, ours never slowed down, and it's in a continued position to keep going. Then when you add to that our growing portfolio of being able to bundle solutions with water quality, pressure monitoring, RTUs, other people have tried to come in, they just can't match our portfolio and our 119 years of selling in the region. So we respect every competitor. We respect every entrant, and we feel uniquely positioned to continue to outperform.

Yes. Well, it's evident in the results, so congrats on a great '23. Best of luck.

Thank you.

That concludes the Q&A portion of today's call. I'll now hand back over to Karen Bauer for any final remarks.

Great. Thank you. Thanks to everyone for joining our call. For your planning purposes, our first quarter 2024 call is tentatively scheduled for April 18. I'll be around all day to take any follow-up questions you might have. Have a great weekend.

Thank you for joining today's Badger Meter Q4 2023 earnings call. You may now disconnect your lines.