Ladies and gentlemen, welcome to the Third Quarter 2024 Badger Meter Earnings Conference Call. It's 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 for joining the Badger Meter third quarter 2024 earnings conference call. On the call with me today are Ken Bockhorst, Chairman, President and Chief Executive Officer; and Bob Wrocklage, Chief Financial Officer. Also joining our call today is Barb Noverini, our new Senior Director of Investor Relations. I have made the decision to retire after our Annual Shareholder Meeting in the spring of 2025. Barb and I will be working together over the next six months to seamlessly transition investor relations, sustainability, and strategy activities, and I know she will be a great resource to the company and to you all in the years ahead. But the countdown to my last earnings call begins with two to go after today. Moving on, 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. We will definitely miss your expert safe harbor reading skills. But all joking aside, we recognize the importance of a professional IR function. And consider ourselves very fortunate to have had Karen's expertise as Bob and I began our first public company CEO and CFO roles about six years ago now. It's also why we believe in well-planned transitions, and we're happy to have Barb on board to work alongside Karen. Turning to the third quarter. I'm very pleased with our financial results, which reflect continued strong performance across a broad array of metrics, including delivering 12% year-over-year top line sales growth against increasingly difficult comparisons. We reported record operating margins of 19.5% with both year-over-year gross margin expansion and SEA leverage contributing. We delivered strong EPS improvement even with a higher tax rate and last but not least, we generated robust year-over-year cash flow growth. In summary, our team continues to do a tremendous job in executing against our strategic priorities in support of our customers. I'll hand the call over to Bob to go through the details of the quarter, and I'll come back to talk about market conditions and the outlook.

Thanks, Ken, and good morning, everyone. Turning to Slide 4. As we expected, our top line sales growth rate moderated, reaching a strong 12% growth in the third quarter. This growth came on top of a 26% increase in the same quarter last year. Sales in the total utility water product line rose 14% year-over-year, driven by solid demand for our BlueEdge suite of utility smart water solutions. The growth was broad-based, including flow measurement, water quality, pressure, and related communication solutions. Notably, Software as a Service revenues grew by approximately 35% in the quarter, highlighting the increasing customer reliance on insights and analytics from our industry-leading BEACON digital solution. Sales for the flow instrumentation product line remained flat in the quarter, with strong global order trends in our water-related applications, which offset modest declines in less prioritized end markets. As mentioned in the release, we expect the usual pattern of fewer customer operating days as we approach the heavy U.S. holiday season. Additionally, hurricane recovery efforts may temporarily delay some utility projects in the Southeastern U.S., although it is too early to estimate any potential impact. Regarding margins, we were pleased to see an operating margin expansion of 260 basis points this quarter, reaching a record high of 19.5%. Gross profit dollars increased 15% year-over-year, and gross margins were 40.2%, a 110 basis point improvement from 39.1% in the same quarter last year. For those wondering if we are ready to declare a new normalized gross margin range, the answer is no. While we are happy with this quarter's results, one quarter does not establish a trend. We remain confident in the long-term gross margin improvement trend, driven largely by positive structural mix, evident this quarter, but it can be uneven on a quarterly basis. Higher volumes and effective price cost management also played a role in the year-over-year gross margin improvement. SEA expenses for the third quarter were $43.3 million, up about $2 million year-over-year, primarily due to personnel-related costs, including higher headcount and salaries. Despite this spending increase, SEA as a percentage of sales declined 140 basis points to 20.8% from 22.2% in the same quarter last year due to higher sales. The income tax provision for the third quarter of 2024 was 25.3%, compared to 20.3% in the same period last year, which had benefited from a discrete tax advantage related to equity compensation transactions. We continue to anticipate an effective income tax rate around 25%, assuming no changes to corporate tax rates. In summary, consolidated earnings per share was $1.08 in the third quarter of 2024, a 23% improvement from $0.88 in the same quarter last year. Primary working capital as a percentage of sales was 21.7%, consistent with the previous quarter and showing a 40 basis point improvement from 22.1% at year-end. We are managing working capital investments carefully to support growth. We achieved a record quarterly free cash flow of $42 million, which is 48% higher than the $28 million from the previous year, largely due to higher earnings and effective working capital management. With that, I'll turn the call back over to Ken.

Thanks, Bob. Turning to Slide 5. You may recall that last quarter, we introduced you to BlueEdge. In short, BlueEdge is the overarching name we've given to our tailorable suite of solutions that solve critical water challenges across the entire water cycle. It's a way to simplify for our customers, including both utility and commercial and industrial users the breadth of offerings available to best meet their needs and preferences today and as they advance and change in the future. In June, we demonstrated the elements and connectivity of BlueEdge to our utility customers at ACE. Last week, we did the same for our wastewater and industrial customers at WEFTEC. We showcased the literal representation of BlueEdge, highlighting the various hardware and communication technologies that relay data to both our proprietary software solutions and to traditional SCADA or building management systems. By taking that actionable data and providing true insights, we aid customers in making more informed decisions for efficient water management. Customer interest in technical discussions at the show was robust with concrete examples of our solutions improving water efficiency, resiliency and sustainability. And speaking of resilience, I wanted to highlight recent customer feedback we've received as it relates to the hard-hit hurricane regions in the Southeastern United States. Most importantly, the tragic loss of life and devastation from these storms is truly heartbreaking. Yet during these events as well as Hurricane Beryl in Texas in July, our customers have confirmed that our solutions continued communicating information critical to maintaining clean water availability and to prioritize identified leaks and other fix and repair activities for countless end users, even when utilities were without power. This is only possible with a resilient cellular network. It demonstrates again that our differentiated solutions resulted in differentiated performance when it counted most. Finally, turning to the outlook. The structural macro drivers that underpin technology adoption in the water industry are becoming more pronounced as evidenced by these extreme weather events and exacerbated by aging infrastructure and labor availability challenges. We continue to operate with an encouraging opportunity funnel, bid pipeline and order book, which bodes well for continued sales and earnings growth with our focus on high single-digit sales growth rates over the strategic cycle, as we noted in the press release and Bob's earlier comments. As we close out the year, we expect that the fourth quarter will include fewer customer operating days given the various U.S. holidays. Additionally, we anticipate customers in the hurricane-impacted regions could potentially delay certain projects in the near term. It's still too early to quantify any potential impact, and this type of situation serves as a reminder of the unevenness inherent in the industry. We remain steadfast in our commitment to existing capital allocation priorities and we have the balance sheet and cash flow generation profile to further invest in both organic and highly strategic inorganic growth while we also provide an attractive dividend. In summary, we remain excited about the opportunities ahead, and our team remains engaged in driving continued exceptional results. With that, operator, please open the line for questions.

Our first question today comes from Scott Graham with Seaport Research Partners. Please go ahead. Your line is open.

Yes. Hi. Good morning. And Karen, I start coverage. I hope I didn't change. Anyway, you are one of the great ones out there, and I'm very happy for you, sad for me, but I know that you certainly will be helping the transition. But good luck to you, Karen.

Thanks, Scott.

I have a question and a short follow-up. I understand that you discuss high single-digit growth over the cycle, but I’m curious about 2025. Considering you’re coming off three strong years, including this one, does that suggest you might see low to mid-single-digit sales growth? Is the measurement period different from what I’m assuming? Could you provide your thoughts on what 2025 looks like in that context?

Hi Scott. So welcome to coverage, and it's interesting in that question that you asked about the high single digits through the cycle going forward because we were asked exactly that same question last year at about this time about this year. So as we look forward and we think about the five-year strategic cycle and the market dynamics that we have, the advantages that we have with our portfolio, the way that I think we've been able to deliver best-in-class execution. From year to year, as we always say and remind people, it can be uneven from quarter to quarter, but we feel strong coming into 2025. So it isn't like we're trying to signal that you should be expecting some sort of weakness coming into the next year.

Okay. I think based on my reading of your transcripts, I think that's all I'm going to get out of it. So that's fine.

Karen has trained us well, Scott.

Understood. I'm glad to say that you're not seeing weakness, which for you guys would be, I guess, just defined as lesser growth. And look, you guys are doing a phenomenal job on the top line. When it comes to margins, there was a real nice pop there as well. And I believe mix, you cited as the primary driver there. But your volumes were up as well, I assume, and that drove some leverage and price/cost was positive is what you're saying? Is that sort of the ranking of the margin drivers?

Yes. So we typically don't get into kind of the sequential sizing or ranking, but you're exactly right. The top line growth is not a function of just mix or pricing. It's absolutely unit volumes increasing. It's actually absolutely an element of ASP and customer mix and project mix and product mix. And then you did hear our specific call out to price cost benefiting margins. So those are the three elements contributing.

Thank you. Appreciate your answers.

Our next question comes from Andrew Krill with Deutsche Bank. Your line is open.

Hi. Thanks. Good morning, everyone, and so my congrats to Karen as well. Thank you for your help. So I wanted to ask one more on the 2025 sales outlook, just I think we're not going to get an explicit opinion, but wouldn't an outcome as low as like flat or even down sales be very surprising to you, just given how the industry is replacement driven and the positive mix of story over time?

Yes, a down year would be surprising to us. If you look at our history, even in the COVID year when everyone else was down considerably, our utility business even grew 4% in the COVID year. It even grew 9% in the supply chain year. So regardless of any of these other factors or events, the macro drivers in the industry are still very strong. It just can have varying effects that one year might be 12%, another year might be 5%, but we certainly don't expect down years.

Okay. Great. That makes sense. Regarding the impact of the hurricane on the Southeast, I understand you can't quantify it at this moment. However, could you provide some direction on the percentage of the business that the Southeast represents for Badger Meter? This would help us understand the potential scale of the impact.

Yes, let me mention a couple of points as we look ahead to Q4 and next year. This is the sixth year Bob and I have conducted this call, and we’ve consistently highlighted that there are holidays in Q4, which should be well-known to those who follow our story. Additionally, regarding the hurricane impact, it’s crucial to note that 75% of our utility revenue comes directly from end users. We maintain strong and open communication with our customers. The distributors managing the other 25% do an excellent job, but our sales model has been effective for about six years, benefiting from advancements in technology that provide us insights into customer operations. Installing meters and other sensors requires fieldwork, and when power lines are down or other issues arise, it can affect this process. Our approach has always been to support our customers whenever and wherever they need us. There's no specific sizing or issue to mention here. Looking back at 2020 when COVID hit, we had a good understanding of the situation due to our direct communication with most customers. We didn’t lay off employees and successfully bounced back in Q3. In the first quarter of 2021, we were the first to indicate potential supply chain challenges, yet we still achieved 9% growth that year. We aim to highlight factors that may cause fluctuations in performance. I can assure you that we excel at managing what we can and still delivering strong results. I know my response was lengthy and didn’t provide a precise answer, but I hope it conveys our perspective clearly.

Got it. And if I just have one quick last one in. Just if there were some delays in, is it fair to think those should hit in the first quarter of 2025, and there's no chance they just get canceled out, right, correct?

I would say for sure that there would be delays, not cancellations, but I can't promise they would be the first quarter.

The next question comes from Rob Mason with Baird. Your line is open.

Good morning. Thanks for taking my question. You talked about normalizing backlog. I think you've been commenting around that as we've gone through this year. Again, maybe emphasis on the word normalizing, not normalized. So can you give us any sense as to where maybe your backlog level is relative to what you would consider more of a steady state, assuming it's higher than that? If that's correct?

Yes. So Rob, prior to an extremely building backlog prior to last quarter, where we called out that we aid into it a bit more, we've never sized the backlog, but we didn't call it out this quarter because there was no meaningful change within it. So it still remains very positive. All the areas of the market that we look at from customers in the engineering phase to what's in the bid phase to what's in our backlog to what we're shipping remains as solid as it's ever been.

Sure, sure. I also wanted to ask about, you noted the growth rate in your SaaS revenues, which was, again, really strong. Can you maybe tear that down a little bit? Just should we think that, that is solely a kind of a unit-driven growth rate? Or as you've offered new services, the leak detection, just a number of things, obviously, under BlueEdge now. What is the contribution besides unit growth to that from other services that are rolling into that SaaS component?

Yes. So I think you've picked up on the first clue. Again, we always talk about our AMI, our Software as a Service being a function of 100% attachment rate to hardware sales. So the leading indicator is when we talk about more ORION Cellular radios sold; the lagging indicator is, of course, then SaaS uptake because of a 100% attachment rate on a per meter-per-month basis. That is the lion's share of the recurring revenue stream SaaS. That doesn't mean on the fringes, there aren't additional impacts from those factors that you mentioned, additional water quality devices, leak detection devices, etc. But where we stand today, 99% of the revenue stream is related to meter to cash, surrounding BEACON and AMI. And so the driver today is absolutely additional hardware units in the field, bringing with it the additional insights and intelligence that we talked about in the script and that the benefits that, that offers to customers.

I see. That's helpful. If I could squeeze one last one in. Just maybe again going back to the hurricane impacts. The implications maybe that could be an interruption headwind in the business. But the leak detection business is a newer business for Badger. So is that a business that can see actually some incremental demand as those units are deployed out into the field to try to inspect for potential disruptions when you have instances like that? I just don't know the history nature of that business as well?

Yes, Rob. So as we built out our portfolio of adding new sensors and software, that's one of the reasons that we're so excited about some of the pressure monitoring, leak detection capabilities that we've added. Events like this just make people realize how much more necessary those products and services are. And so we were excited about it before. We're just as excited about now, and hurricane doesn't make us feel better about it, but it surely shows the benefits that utilities have. And then on top of that, just as I called out in the script, the fact that our customers in the hardest-hit parts of the storm, not just the storm, but the others continue to communicate throughout. So when they can have our battery-powered cellular communications telling them where their issues are throughout their system, it's a lot more efficient than guys driving around looking for problems. And it's a lot safer than sending people out looking through areas where perhaps there's down power line. So the combination of the whole portfolio coming together is really truly seen at unfortunate times like this.

Yes. Thank you. Appreciate it.

We'll move next to Nathan Jones with Stifel. Please proceed.

Good morning. This is Adam Farley on for Nathan. My first question I wanted to ask around BlueEdge the way that you frame it, are you seeing any acceleration in selling more bundled offerings to customers? I know it's still kind of early, but I imagine your expectation eventually is to gain wallet share with customers?

Yes. What's really exciting about how we've built this is it allows us to approach any customer anywhere at wherever they are in their technological journey. So they could be a water quality customer that then we expand their reach through Badger Meter through the BlueEdge into metering or lift station monitoring or if someone's on the metering side, we can bring them in with water quality stations and the like. So it's back and forth both ways. Some customers also look at it as the full portfolio upfront. Some look at it as it's great to know that you have all this. I'm going to do my AMI first, and I'm going to roll the water quality after them in whatever order that they see. So when we use the word tailorable, what we mean by that is a customer can tap into the BlueEdge portfolio and pick whatever standard solutions they need based on whatever their current concerns are, not to be confused with customizable, which would imply highly engineered different products and services.

And that strategy is not new. I mean BlueEdge absolutely and how we talk about it and position it with customers is new. But the idea of cross-selling and bundling and being able to take metering customers and sell them water quality and vice versa. That's been the thesis and the behavior since acquisition starting back in 2020. So I just want to make sure that it's not like this is some brand-new strategy. It's absolutely a better way and a more understandable way and a more tangible way to bring that tailorable solution set to market, but the strategy itself underpinning is not new.

Yes, understood. That's very helpful color. I guess shifting gears to capital allocation. You recently raised your dividend by 26% annually. Balance sheet is still very healthy net cash position. What are the main priorities? Maybe talk about a little bit about the M&A funnel. Anything there would be helpful? Thank you.

Yes. So capital allocation priorities remain constant with how we viewed this for several years now. So first and foremost, we've been the R&D leader when it came to cellular AMI and software and ultrasonics in the market, now expanding that also into leadership in remote water quality monitoring pressure and so forth. Second, yes, 32 consecutive years of increasing dividends is something that is certainly important to the capital allocation priorities. And then third, yes, M&A. So we're really proud of the four deals we've done in the last 3.5 years, and we keep a pretty strong funnel around the sensor area that can continue to plug into BlueEdge, whether that's more water quality, more pressure, more software, interesting global footprint, all those things come into play. So it hasn't changed. We continue to remain disciplined and look for value where we know it translates into customer satisfaction.

Thank you for taking my questions.

And our next question comes from Tate Sullivan with Maxim Group. Please go ahead.

Thank you. Thank you for your help over the years, Karen. And Ken, can you talk about the international markets a bit? Have you allocated more sales there? Is there still a water quality monitoring opportunity internationally? Can you address that market, please?

Yes. Over the past couple of years, we've seen significant growth from our acquisitions that have established a strong presence with long-term customer relationships. For example, s::can has an installed base in over 50 countries, ATI has robust relationships in the U.K. and U.S., and Syrinix has solid ties in the U.K. We have been able to use these connections to engage in discussions about BlueEdge, as Bob mentioned. Even prior to the public announcement of BlueEdge, we were having these conversations and implementing improvements. Our global growth is strong, although it has been somewhat overshadowed by our exceptional growth in North America. Nevertheless, we are pleased with our growth and are excited about the expanded relationships for BlueEdge on a global scale.

Any particular areas? Or I mean, I know the growth has been a bit higher in Europe historically, but still broad-based international approach?

Well, I'll just give you one example. We could certainly talk more. But you hear a lot about AMP cycle 8 in the U.K., and we talked a lot about the relationships that ATI has. We talk a lot about the relationship Syrinix has still just part of us. And we've been able to have high-level discussions with several of those utilities about how to help them meet their needs for AMP8, whether that be potential in smart metering and software, whether that be around river monitoring, whether that be around leak detection, customer satisfaction, a lot of the pieces that we've been able to provide here in the U.S. are the same that they're looking for there. And then there's other regions of the world, too, but just one specific example that we've been cracking into.

Okay. Thank you very much.

Thank you.

Great. Thank you all for joining our call today. For your planning purposes, our fourth quarter call is tentatively scheduled for January 29. Please don't hesitate to reach out with any follow-up questions you might have. Have a great day.

This concludes today's call. Thank you for joining. You may now disconnect your lines.