Ladies and gentlemen, welcome to the Q4 2024 Badger Meter Earnings Conference Call. After the prepared remarks, there'll be an opportunity to ask questions. If you'd like to participate in the Q&A, you can do so by pressing star followed by one on your telephone keypad. As a reminder, today's conference is being recorded. 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 fourth quarter and full year 2024 earnings conference call. On the call with me today are Ken Bockhorst, Chairman, President, and Chief Executive Officer, Bob Rockledge, Chief Financial Officer, and Barb Novarini, Senior Director of Investor Relations. Please note that 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 another record year with strong fourth quarter results across sales operating profit earnings per share and cash flow metrics we also announced today the acquisition of smart cover we're excited about incorporating their sewer and lift station monitoring offerings into our blue edge suite of tailorable solutions 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 four, as Ken mentioned, we delivered another quarter of solid results to close out 2024. From a sales standpoint, we delivered 13% quarterly sales growth, which as a reminder was on top of a difficult 24% increase in the prior year comparable quarter. Total utility water product line sales increased 14% year-over-year as we continued to deliver on solid demand across our Blue Edge suite of utility smart water solutions. Year-over-year growth was broad-based, led by cellular AMI adoption, including associated meters, Orion cellular endpoints, and Beacon Software as a Service. Sales for the flow instrumentation product line were up slightly at 1% in the quarter, as growth in our core water-related applications offset declines across the array of de-emphasize end markets and customer applications. Turning to margins, we're very pleased that operating margins expanded 150 basis points to 19.1 percent in the quarter. Gross profit margins came in at 40.3 percent, a 110 basis point improvement from 39.2 percent in the prior year comparable quarter. The benefit of overall higher volumes, structural sales mix, and solid price cost management contributed to the year-over-year gross margin improvement. SEA expenses in the fourth quarter were $43.5 million, an increase of approximately $4 million year-over-year. Consistent with prior quarters, the spending increase was due primarily to personnel-related costs including higher headcount and salaries to support our growth. Additionally, the increase included certain acquisition costs associated with the Smart cover transaction. SEA as a percent of sales declined 40 basis points to 21.2 percent from 21.6 percent in the comparable prior year quarter on the higher sales. The income tax provision in the fourth quarter of 2024 was 27.1 percent compared to 26.1 percent in the comparable prior year period. Similar to the full year 24 tax rate, we continue to expect an ongoing effective income tax rate in the plus or minus 25% range, assuming no change in overall corporate income tax rates. In summary, consolidated EPS was $1.04 in the fourth quarter of 2024, a 24% improvement from $0.84 in the prior year comparable quarter. Primary working capital as a percent of sales at December 31st, 2024 was 20.8%, which compared to 23.8% at last year end. Note that these percentages reflect a current year balance sheet reclassification of the current portion of deferred revenue from payables to other current liabilities, for which prior years were not restated. There's an appendix slide that details this reclass on a pro forma basis, and Karen will provide a bit more information in her call closeout comments. We were pleased with the primary working capital improvement, notably our reduction in absolute inventory levels. As a result, we generated strong free cash flow in the quarter, a record $47.4 million, up 32% year over year. With that, I'll turn the call back over to Ken.

Thanks, Bob. It's customary at the end of the year to take a step back and reflect on our collective performance against our strategic goals. And so I couldn't be more pleased with the tangible outcomes from the team's efforts in 2024 which represent a continuation of trends seen in recent years as noted here on slide five we delivered 18 sales growth in 2024 surpassing 800 million dollars in revenue with a five-year top line CAGR of 14 our software revenue now exceeds 56 million dollars representing 6.7 percent of sales and resulting in a 28 compound annual growth rate over the past five years operating profit margins expanded 450 points over the last five years with both gross margin improvement and leverage contributing to the margin expansion EBITDA margins hit a record 23 percent in 2024 and finally we reduced our working capital intensity and consistently generated free cash flow in excess of 100 percent of net earnings enabling our ability to continue you as the innovation leader in our market, return cash to shareholders in the form of dividends, doubling our dividend rate from just five years ago, and building on our track record with 32 years of consecutive annual dividend increases, and executing value-enhancing acquisitions to further advance our portfolio of smart water solutions, the latest example of which I'll discuss next. Turning to slides six and seven, I'll cover the smart cover acquisition announced earlier this morning smart cover is a leading provider of water collection system monitoring solutions serving utility customers across north america smart cover's hardware enabled software offerings add to the scope of actionable data used by municipalities to improve efficiency resiliency and sustainability specifically smart cover provides sensors software and related support services to monitor sewer levels on a real-time basis by identifying changes in patterns and alerting utility personnel to potential issues the solutions work to predict detect and prevent sewer overflow spills which are becoming more frequent with the rise of extreme weather events like heavy rainfall and flooding reducing the frequency and severity of sewer overflows saves money while protecting public health and the environment In addition, the technology reduces the need for high-frequency cleanings, locates areas of inflow and infiltration, detects intrusion, and assists with managing harmful sewer gases. SmartCover also provides lift station monitoring and control hardware and software solutions to improve pump station efficiency, supplementing our existing Telog offerings. And last, but certainly not least, it brings strong talent with the expertise to assist our customers in applying these capabilities. We utilized existing cash on hand for the $185 million purchase price. This equates to about five times SmartCover's 2024 sales of approximately $35 million. The macro drivers behind technology deployment in the water sector such as labor availability, aging infrastructure and regulation combined with the increasing occurrence of climate related severe weather events support strong adoption rates for these technologies and to put it in baseball terms we believe sewer line monitoring is barely in the first inning in addition smart cover's leading mark position market position the recurring revenue dynamics and ability to further leverage the data and analytics into our full network monitoring solutions makes this a strategic deal with long-term shareholder value creation. As noted, sales today are about $35 million with high single-digit EBITDA margins reflective of their scale and heavy growth investments. As part of Badger Meter and BlueEdge, we can amplify the top-line growth rate by leveraging our direct sales organization and by advancing overall features and functionality with our world-class communication and software technologies, which will continue to competitively differentiate BadgerMeter's suite of offerings in the market. We will also aim to enhance profitability by leveraging existing infrastructure and processes in operations and supply chain. Finally, turning to our outlook, I know I said this last year, but it remains true even after our stellar 2024 results. I am as excited about the next five years as I've ever been. At a macro level, our BlueEdge suite of comprehensive and tailorable solutions continues 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 and the expanding need for real-time data visualization and analytics spanning the water network our order book and opportunity pipeline along with constructive customer budgets continue to support the high single digit average top line growth we've been communicating for some time now we also expect that positive structural sales mix and sea leverage will continue to gradually improve margins over the strategic cycle specifically on gross margin we're pleased that in the back half of the year we delivered above the high end of the normalized range of 38 to 40 percent with the six quarters prior to that above 39 percent while some might view that as reason to increase the range, the reality is we're in a heightened state of macro uncertainty, especially as it relates to potential tariffs, the scale, scope, timing, and duration of which are unknown. As such, until there is further clarity, we believe it's prudent to keep the current range as our comfort zone while continuing to drive improvement actions in the areas within our control. While we continue to anticipate that our SEA as a percent of sales will improve over the long term the addition of smart cover will reset the bar higher than 2024 levels this is a result of the higher than line average sea as a percent of sales in their underlying operations as well as the added and tangible asset amortization which based on very preliminary estimates uh preliminary estimates could be in the six to seven million dollar range annually separately i'll remind everyone that in the first quarter of 2025 margins for smart cover will be muted by the amortization of inventory fair value step up additionally interest income will decline year over year with the use of cash finally even after acquiring smart cover we'll have cash on the balance sheet of over 100 million dollars along with the untapped revolver we have significant financial flexibility and organizational capacity to further execute on our growth strategies including both organic and inorganic investments. I want to again thank the entire Badger Meter team for their tremendous efforts and accomplishments in 2024 and to welcome our new SmartCover colleagues to Badger Meter. I look forward to executing on the many opportunities ahead together. With that, operator, please open the line for questions.

Thank you. Please press star followed by the number one if you'd like to ask a question and ensure your device is unmuted locally when it's your turn to speak. Our first question today comes from Andrew Krill with Deutsche Bank. Please go ahead, your line is open.

Hey, thanks. Good morning, everyone. I just want to ask on tariffs first, just I think, could you help, you know, side a little more explicitly, you know, your Mexico manufacturing exposure? I believe it's around like 30% of the square footage, but just any more, you know, like clarification on that would be helpful. And then, you know, if we do have wide thread, you know, tariffs put in place tomorrow, you know, if you give us some color on the contingency plans you have in place and maybe, you know, how long it might take to adjust price. Thank you.

Yeah, so that's a bit of a, of course, loaded question these days, which so much uncertainty about what the impact of tariffs will be, where they'll come from, how it all works. So I'll tell you what we do know and what we can control. And, you know, first of all, clearly everyone would have some impact from tariffs regardless of however this comes through. But the things to remember are from from a China point of view, we source very little. We've done a considerable amount of reshoring, if you will, back to North America over the last several years. We certainly have capacity in some of our U.S. facilities that we can continue to use. And yes, we're very proud of our outstanding operation that we have in Nogales. So I have no idea yet what the administration will do or how that will go. But the thing I would remind you through the last several years is I think we've done a great job of being able to control what we can. We've seen over the last several years the threat of tariffs in the first Trump administration. We've been through COVID. We've been through supply chain challenges. And I think our hallmark has been understanding what we can control, acting with urgency around mitigating those actions and having a best-in-class operating model. So I don't know how to tell you how this is all going to work out. And it's hard to model something when you have no idea what the impact is actually going to be.

Okay, 100% fair.

And then just on the broader and market demand, and again, conscious, you do not give explicit guidance, but I thought the choice of using resilient as the operative word in the press release was interesting. So maybe just, we know there's multiple years of very impressive growth.

Just do you think, is your confidence higher now than it was when you reported third quarter earnings you know that maybe 2025 could be a high single-digit growth here um so it's not higher but it's as good as it was in q3 so we continued you know it's an it's another it's another quarter where you know i'm really proud of the results that we had and what we were able to to get in revenue um certainly uh pleased with the order rate that we saw in the quarter certainly pleased with still seeing several rfis out on the street for ami and water quality and other pieces of the BlueEdge portfolio, and engineers are still working on projects in the future. So I would just say nothing has changed. Our ongoing positive tone remains the same.

Okay, great. Thank you, guys.

Sure. Thank you.

Our next question comes from Rob Mason with BERT. Please go ahead. Your line's open.

Yes. Good morning. Can you talk a little bit about smart cover?

What are the demand drivers they're kind of the catalyst i'm just curious um you know how much is maybe compliance driven uh whether that's um cso overflow you know mandates um just you know what's the catalyst for adoption primarily been to date for for that solution yeah so it is it is a mix of things so one of the areas is of course regulation and critical system overflows where you know you've got mandates to to to be monitoring this in real time of course labor availability is a driver many of the same macro drivers that we see um on the on the rest of the business where labor availability uh critical you know um you know rising extreme weather events uh adopting technology uh it's one of the reasons we're excited about it is it's the same macro drivers similar outstanding outlook for growth, and then the ability to sell that through our existing channel is what has us pretty excited about it. But I would say the drivers are very similar to what has driven our growth over the last several years.

And I would say adding to that whole equation that Ken just mentioned is obviously the market opportunity, meaning the rate of adoption of this technology at this stage, as we alluded to in the earnings script, was a first inning analogy. And so there's plenty of runway here in terms of the number of monitored manhole covers in North America. And we believe the market leading position of smart cover positions us now to take advantage of that collectively across our leveraged sales channel and customer base.

Yeah. And it's not just the regulation side, but when you can get into the reduction of the frequency of cleanings, there's financial payback.

So there's many benefits to this that are as bob said just really scratching the surface how much of the uh 35 million in trailing revenue that you know would be recurring in nature yeah so from a pure kind of what i would classify as recurring revenue so the software and um and maintenance service business is roughly a third i would say there's also another 20 or so that's more aftermarket uh product replacement service which again is not recurring but as a certain amount of durability to it very good uh maybe just last question um just shifting over to your your business itself you called out bob

the you know excellent working capital performance in the quarter i'm just you know inventory did come down a fair amount from where it's been tracking through the year just just curious what the enabler of that was and I mean is that a level that you know um you know we should trend out as we go forward or does that come back up yeah so I'll go first and I'm sure Bob will have something to add but but Rob what I've what I've been proud about is for several years now we've really talked about our continuous improvement mindset across the business and you know we mentioned to you at the beginning the year that we thought opera you know inventory was still an opportunity for us to continue to improve our processes.

And frankly, that's what we've seen. We've had a great team working really hard at improving to get to a better sustainable rate that just happens to be lower.

Yeah, I would say that what you saw in the fourth quarter is the byproduct of multiple quarters of focus. And thankfully, for free cash flow purposes, that all came together and lined up in the fourth quarter. I would say there's nothing anomalistic about that. We still know we need inventory to support the business and to support our high single digit growth outlook. So that's not to say that the dollars are fixed by any means, but certainly we're at an optimum level as we exit the year.

Very good. I'll get back in the queue. Thank you.

Our next question comes from Nathan Jones with Stiefel. Please go ahead.

Good morning, everyone. Morning, Nathan. I wanted to start off with a question, a question about the cadence of revenue through 2024. You did see revenue peak in the second quarter. Sequentially, it was down in the third quarter and fourth quarter. I'm just hoping to get some color around what the dynamics were there. If customers were buying some inventory or something in the second quarter, or there were projects and shipments in the second quarter, or whether it was bad in the fourth quarter, or just anything that would help us set the bar for what 20 that cadence through 2025 might look like.

Hey Nathan yeah so thanks for pointing out how we've always pointed out that the business can be uneven from quarter to quarter from year to year um you know in that particular quarter uh you may recall we talked about uh having um you know a bit of a deeper uh dive into our backlog than we traditionally have seen in most quarters which is why we we did caution to not just take that run rate for the rest of the year so So, excuse me, I'm not strategically losing my voice now, but I'm going to turn to Bob.

Yeah, I would say the only early quarter that had, if you're talking absolute dollars, Nathan, the only quarter that had some quote unquote noise in it would have been the second quarter, as Ken mentioned too. Let's say everything else is more the general trend and unevenness that Ken alluded to. If you're talking about rates of growth change, I would say the biggest impact on the second in half is just having lapped an anniversary to more robust increase last year. So by just basic math, the rate of growth slows. I would just tell you that on a go forward basis over our strategic planning horizon, we're still laser focused in that high single digit growth with the reality that there'll be noise quarter to quarter and year to year.

Yeah, no, I was talking about the absolute dollars of revenue. So the TQ number is a little bit elevated because you're taking down some some backlog that's probably just around supply chain improvements um i guess i had one on smart cover um just when i look at this from a high level you guys don't sell sewer pumps why couldn't the sewer pump manufacturer just put you know something on the sewer pump that would do this kind of monitoring um i guess the question there is is why does smart cover have the right to you know to have 50 market share in that kind of business why couldn't a competitor you know somebody like a sewer pump manufacturer lift station manufacturer um put something similar

on that would have them closer to the customer and maybe give them an advantage over a business like smart cover yeah so i'll start with i think the underlying assumption of that question is that somehow we don't play in the collection network today or the sewer system network today and that's just not true. Certainly across Cyranex, Telog, ATI, SCAN, more recent acquisitions, there is a certainly a presence in collection systems already. So this is not a fairway reach where we're reaching over to play in a space that we don't already plan. So there's a presence there already today. I would say specific to smart cover and the sewer line aspect of that, essentially what we're doing here is monitoring at the manhole. So call it depth and level sensing and flow sensing from the manhole to essentially produce analytics to drive those four outcomes that we mentioned in the earnings release, that being prevention of spills, optimize cleaning, predict infiltration and inflow, as well as then monitor toxic gases. So I would say I'm not sure that other people can't do it. I could just tell you that after 20 years in the marketplace, Smart Cover's done it best, and that's why this is the most attractive asset in terms of expanding our presence in the collection network and we're super excited about the ability to leverage that technology to in large part a similar decision maker at the north american utilities that we've already participated for a very long time with this is the definition of a near adjacency that brings greater scope and scale to not only our hardware solutions but our software solutions to integrate as a critical data analytics and solution provider to utilities in north america and the rest of the world And if I could add to that, Nathan, compared to the people that you're referencing, which of course we spent a lot of time understanding who's in this space and who could be, no one will have the opportunity with our core competency around communications and software to be able to build on this the way that we already have with our Beacon portfolio and AMI and what we've done with Radar and the other software and communications products and services we already have. And while we're certainly talking a lot about sewer monitoring, sorry, I was just going to say, I just want to make sure we didn't leave out of that answer was very focused on sewer line monitoring. There's a big part of this business that's at the lift station. And again, similar to my earlier answer, we already play at the lift station in many respects in those same technologies. And so it's absolutely a perfect marriage between the sewer line and lift station monitoring to collectively address not just the sewer, but the full collection system.

Thanks for that. I guess one final one. High single digit EBITDA margins. Obviously, they're a pretty small business at the moment. And you talked about investing for growth and things like that. this would seem like a business that at scale should have significantly higher margins than where it is today. Maybe if you look out, I don't know how long you want to look out, five or 10 years, where you think the margins for this business could get to.

So you hit the nail on the head at acquisition here. It is an EBITDA margin profile less than our core. I would say in large part, the strategy under XPV's ownership to date was to position for growth. And so there's been a heavier investment in SEA, and that's why we talk about in the script on a go-forward basis, whereas we've been leveraging SEA or levering SEA over time. There's probably a temporary step back here in 2025 as we bring in this $35 million of revenue with higher than line average SEA. But we think that through kind of the growth synergies and bringing our channel to bear, we can take what's already a great organically growing business in the double digit range and augment that and make it grow faster. And similarly, as Ken alluded to, we can bring to bear larger corporate functions, whether it's around supply chain, engineering, cost down and other things to essentially increase the profitability. So as we look out, we certainly think this is a business that has well above line average EBITDA margins compared to where we operate on the core business today.

Awesome. Thanks for taking my questions.

Thank you. As a reminder, if you'd like to register a question or rejoin the queue for follow-ups, please press star followed by one on your telephone keypad. We'll move to our next question from Scott Graham with Seaport Research Partners. Please go ahead, Scott. Your line's open.

Scott Graham Graham Yeah. Hi. Good morning. I wanted to understand a little bit more about how you're deploying backlog. I know you said you had a little bit extra juice in the second quarter of last year because of some backlog deployment. I'm just wondering, as you look at, you know, sort of your orders and excluding the second quarter, your backlog and how that ran through, what that dynamic was, are you seeing any, you know, sort of unevenness? Are there an unusually higher number of either faster than expected, slower than expected deployments? Or has that been kind of fairly normal for you, again, away from that 2Q?

Yeah, hey, Scott. So with 50,000 utilities of various scales and sizes it's it's always difficult from one quarter to the next or one year to the next uh to really predict what that replacement cycle can be which is why we're always feeling like um you know reminding people of the unevenness is the prudent thing to do so so what we're seeing in terms of a backlog and how order rates are flowing through i would say is very normal and um you know again it's it's it's not like uh we're you know digesting big chunks and trying to get in another big chunk you know with 45 000 small utilities 4 500 mediums 500 larges um it just kind of flows in and in what i would call a normalized um uneven uneven but exciting pattern understood thank you now i'm sure your customers they've obviously had ample time to digest the results of the election.

And are you hearing them just talk about any pauses in deployments or even ordering patterns? I know you said that you were pleased with your fourth quarter orders with regard to, you know, sort of from 2.0 and the potential for some regulatory rollbacks.

Yeah. So we're not hearing any change in tone at all. So keeping in mind that you know 75 percent of our revenue sells directly we talk directly to customers and and we get a feel for that uh for that dynamic probably sooner than most people um i've recently been with our distributors who are all feeling as excited about next year as they've been about previous years and in the the out phases so um i'm very confident that if there were discussions or talks about utilities pulling back, we would be the first to know.

I think if your question's got a specific to a pause or a temporary slowdown in government funding or infrastructure spend, if you listen to anything we've talked about over the last three years about a reliance on infrastructure money, it's just not there in the metering space, quite frankly. And so if that's the question angle here, I would say certainly historically we've seen very little benefit from that money flowing to the market. and a pause wouldn't necessarily have any immediate impact on us.

Yeah, no, I mean, I'm talking about regulations perhaps more broadly, not necessarily the infrastructure related, but thank you for that. I just have one more question in strategic relative to smart cover. Is there an opportunity to take your sort of digital product line and the competencies there and the advantages there to smart cover or vice versa and by extension is there can you start to sell maybe more like a larger solution this year under contract that you do with your ami like you do with your ami yeah so this is uh this is one of the reasons last

year we started talking about the blue edge portfolio because um yes whether that's all in one package or whether that's a utility that plans out the next three to five years on how they want to implement their technologies and manage their budgets we clearly um see the opportunity to bundle sell even if that bundle isn't immediate again we think about our utility customers in 5, 10, 20-year cycles. So this fits squarely in the ability to sell more to customers we already sell to. And your question on the software and the things that we can do, one of the things we like about SmartCover is they're already a really strong company that just needs to grow, as we talked about. So it's in no way a fixer-upper. So it's got a strong management team it's been it's been run well and and it's just you know as we talked about a bit subscale so i think we can help that with our cross sales leverage i think we can enable that with some operational improvements and um i i think we're really excited about it as i'm sure you can tell from the commentary and everything that goes with it but being able to pick up both as bob pointed out sewer line monitoring and lift station uh enhancements in in one transaction was really attractive to us thank you for all that i appreciate if i can just sneak this last one in do you have a view on whether this will be modestly accretive dilutive to earnings this year

so in the short term when you factor in the opportunity cost on the interest we're saying for 2025 it is is EPS dilutive and that it turns to accretion in in year two and that's that's really where we're at very good thanks a lot thank you we have no further questions so I'll pass you back to Karen Bauer for any closing comments great thanks operator Bob referenced this earlier but I did want to call your attention to the slide in the appendix where you'll find the historic primary working capital recast for the pro forma balance sheet reclassification we did on the current portion of deferred revenue. So we've reclassified this data element from accounts payable to other current liabilities beginning in Q4 2024 and going forward. So as you can see on the slide, while the general trajectory of PwC improvement remains, there is a slight difference in absolute PwC as a percent of sales, as noted on those charts in the appendix. So this reclassification does not change in any way, cash from operations or free cash flow and then in closing thanks for joining our call today for your planning purposes our first quarter 2025 call and my last at the helm of ir here at badger meter with my retirement in early may is tentatively scheduled for april 17th please don't hesitate to reach out with any questions you might have have a great day thank you this concludes today's Cool, thank you very much for joining.

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