to the second quarter 2025 Badger Meter Earnings Conference call. After the prepared remarks, there'll be an opportunity to ask questions. If you'd like to ask a question, you can do so by pressing star followed by the number one on your telephone keypad. It's now my pleasure to turn the conference over to Barbara Novarini, Head of Investor Relations. Please go ahead.

Thank you. Good morning and thank you for joining the Badger Meter second quarter 2025 Earnings Conference call. I'd like to introduce myself as the new head of Investor Relations. With me on the call today are Ken Bockhorst, Chairman, President, and Chief Executive Officer, and Bob Rockledge, Chief Financial Officer. The earnings release and related slide presentation were made available this morning on our website. Quickly, I will cover the safe harbor, reminding you that any forward-looking statements made during this call are subjects 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, Barb. Welcome to our second quarter 2025 earnings call. I'm pleased to report another quarter of record sales, disciplined execution, and the durability of the driver system. Difficult comps in the price margins continue to trend above our normal life and we generate a robust breach. Halfway through the year, I remain encouraged by the resilience of our business. Our proven history of differentiated operational execution combined with ongoing customer demand and momentum and technology positions us to successfully navigate this near-term. Bob will review the details of the quarter and then I'll be back to provide some thoughts on blue.

Thanks, Ken, and good morning, everyone. Turning to slide three, total sales of $238 million in the second quarter of 2025 represented an increase of 10% year-over-year, or 5% sales growth when excluding just over $10 million in sales from smart cover in its first full quarter under our ownership. Total utility water product line sales increased 11% year-over-year, or 6% excluding smart cover. As expected, moderating core sales growth from recent double-digit levels was primarily a function of the difficult second quarter sales comparison, which was the high water mark for the prior year. In the quarter, we delivered higher sales of meters, beacon software as a service, water quality, and remote monitoring solutions. Sales for the flow instrumentation product line were essentially flat year over year, as lower demand and the de-emphasized array of market applications offset modest growth in water-related end markets. Turning to profitability, operating earnings increased 8% year-over-year to $44.9 million, with operating margins down 40 basis points to 18.8% from the prior year's 19.2%. The structural mixed benefit of technology adoption by our customers continues to benefit gross margins, which expanded 170 basis points to 41.1% in the second quarter from 39.4% in the prior year quarter. As expected, this did represent a sequential decline from 42.9% in the first quarter of the year, which you'll recall was the result of favorable customer and product mix that quarter that did not repeat this quarter. Gross margin in the second quarter of 2025 also continued to benefit from ongoing operational excellence initiatives, while recently implemented price increases partially mitigated certain tariff-related cost pressures in the quarter. Year-to-date, we've adeptly managed the controllable aspects of the known tariff landscape. However, the trade environment remains fluid. As an example, copper prices recently spiked on copper-specific tariff concerns. Although we primarily used recycled brass in our ingot recipe, secondary markets like these do experience ripple effects when the primary commodity is impacted. Last quarter, we walked you through the manufacturing and supply chain footprint supporting our U.S. sales, along with the tariff-related exposures and mitigation efforts. While announced and rumored tariff rates by country and commodity continue to evolve, our underlying tariff-related exposures and mitigation actions remain the same. Most importantly, we continue to see the competitive playing field as level in terms of both exposures and planned mitigation actions, including any potential targeted pricing actions. That said, the ongoing trade uncertainty and lag impact of mitigation actions once again prompts us to leave our normalized gross margin range of 38 to 40 percent unchanged for now, despite another quarter of gross margin performance above 40 percent. SEA expenses in the second quarter were $52.9 million, an increase of approximately $9.1 million year-over-year, due primarily to the addition of smart cover, including $1.6 million of intangible asset amortization. Excluding the acquisition, SEA expenses increased $3.3 million, the result of higher personnel costs to support growth and approximately $1 million of deferred compensation expense resulting from the year-over-year change in stock price that is unique to this quarter. The income tax provision in the second quarter of 2025 was 24.5%, modestly above the prior year's 23.8%. Consolidated EPS was $1.17 versus $1.12 in the prior year quarter. Primary working capital as a percent of sales at June 30, 2025 was 21.8%, consistent with the prior quarter end and about 200 basis points better than a year ago. Free cash flow increased 19% year-over-year to $40.6 million, largely due to higher earnings and working capital differential between years. With that, I'll turn the call back over to Ken.

Thanks, Bob. Next, I'd like to talk about the progress we've made since the launch of Blue Edge last year. As a reminder, Blue Edge is the brand that unifies the comprehensive suite of products and solutions that enable our customers in june our booth at the ace trade show in denver which is our industry's biggest event of the year highlighted the various use cases and included smart we also featured our new field app which brings the power of our beacon software to utility field personnel and we introduced cobalt which leverages machine learning for example our booth was the physical representation of today our blue edge portfolio of water management solutions provides tremendous value to customers, and it was exciting to see the energy in our booth, as well as the enthusiasm that both longstanding and... While it's only been a year since we've launched this concept, we've already seen meaningful momentum in our efforts. Furthermore, we've elevated our already strong reputation. A long-term relationship with us means that we'll be there to enable our customers as they evolve and plan for the future. We're seeing increasing numbers of RFPs that ask for solutions beyond the meter and our offering elevates our standing in the bid process while providing tangible reasons for us to continue our partnership in summary we're turning to the outlook we routinely highlight that our business can be simply the nature of project deployment schedules project phase in phase outs etc the difficult second quarter comparison from a year ago that bob's example is that we did have a number of ami projects wrap up in the second quarter while we already have new ami projects in hand to replace them the timing of the start of those projects is such that we expect despite the moderation in sales we still expect macroeconomic trade full long-term secular trends fueling growth where we are positioned critical to the operations of a water utility commercial and industrial customers as a reminder the meter is the cash our ongoing conviction and high single-digit revenue growth over the long term is underpinned by these enduring favorable industries, along with customer order and demand trends, project awards, pending and future RFC activities, and the competitive positioning of significant financial flexibility to withstand macroeconomic pressure while pursuing both organic and strategically relevant inorganic investments, all while paying a dividend that has grown in line with After nearly six months of integration, we remain on track to deliver the anticipated details and cost synergies associated with the smart cover acquisition we've made tangible progress in leveraging badger meter resources continue to identify go-to-market opportunities for smart cover as part of our blue edge suite i'd like to call out our recently published 2024 sustainability report i'm proud that the collective efforts of our team allowed us to exceed and raise our targets for greenhouse green also delivering records 2020 our continuous improvement philosophy towards sustainability efforts continues to produce as it has across in summer and summary we're carefully managing through uncertainty in the broader now what we can control in the near term while diligently executing against the long-term strategic that operator please thank you please press star follow by the number one if you'd like to ask the question and ensure your devices are muted locally when it's your turn to speak if you change your mind or your questions already been answered you can

withdraw your question by pressing star followed by the number two our first question today comes from nathan jones with stifle please go ahead your line is open good morning everyone i guess uh i guess my question is going to be on the sgna expense line um just looking at it sequentially it's kind of gone up about seven million bucks which was i think more than people were looking for. You've got an extra quarter of smart cover in there and that one-time deferred comp number in that. Can you talk about the other investments that have been made there to support future growth, I guess, and x the million-dollar write-up of deferred comp? Is this kind of $52 million, a new level of SG&A that we should be expecting going forward?

Yeah, I think you've picked up on, I think, the two main pieces that are relevant to the quarter, Nathan. Certainly, yes, a full three months of SmartCover's SEA run rate, which, of course, we mentioned that acquisition is above line average organically. And then when you add the intangible amortization to that, which, again, we've sized for the year and the quarter, that's certainly an element of that uptick sequentially. You've also picked up on the very unique item to the quarter, that being the deferred comp expense to the tune of about a million bucks. So absent those items, essentially SEA growth year over year is up $2 million to $3 million. And it's ongoing investment to support the wonderful things that we're doing in the marketplace in terms of continuing to evolve our software offering to keep it leading best in class, continue to bring innovative product development to market that differentiates not only our meter-to-cash products but are around the meter technologies and continue to drive adoption of those technologies, which remain very early stage in terms of U.S. and North American water utility adoption. And so, yeah, I mean, those are pieces of it. Obviously, we don't guide, but you've picked up on the outliers that would help to inform your outlook moving forward?

I guess the $1.6 million of intangible amortization, is any of that like inventory step-up or something that goes away, or is that what you expect the continuing level of amortization to be?

Yeah, that is entirely the intangible asset amortization. The inventory step-up that was a small amount in association with the acquisition passed out in the first quarter, so essentially that's the continuing run rate for the life of those varying lived intangibles that we disclose in the financials okay so there's no reason to expect it to be less than 52 million in the sgna line going forward yeah we'll leave that to you to figure out but ultimately you've picked up on the two unique pieces yep fair enough i i guess then maybe you could provide a little bit more color i mean you ran through a few other things there bob but just on what uh what kind of uh capabilities let's not call them expenses

we call them capabilities have been added to the business to support future growth yeah so so nathan as you know you reflect on the past part but we're up 100 continuing to increase the product line we go through our five-year strategic plans every year and we look forward on you know what what the new skills and new offerings are we're going to have some investing in different kinds continuing

to invest in our software business that we're totally excited about so all the things that we told you over the years that we're investing in to grow and and frankly we still feel like that's the key there is that there's nothing unique about the rate there's nothing unique about the rate of investment in this quarter there's anything different than what we've been doing for the last four or five years in terms of our primary uh cash capital allocation priority of organic investment in the business it's just the way i think it's sequencing on a year-over-year basis and in concert with those two unique items that you mentioned to start your question.

Okay, thanks very much for taking my questions.

Our next question comes from Scott Braham with Seaport Research Partners. Please go ahead.

Yes, hi, good morning. I have a similar question to Nathan, just want to maybe come at it a little bit differently. You were, I thought pretty clear in your bullet points here on the SEA that the 1.6 million stays, but the $1 million, a variable deferred comp, is unique to the quarter. So am I to infer that that means that that goes away next quarter?

Not in its entirety, but when you experience a quarter where the stock price goes up over $50 from beginning to end and you have liabilities associated that track that, there's going to be an oversized impact that is absolutely unique to the second quarter.

Understood. That's clear. Thank you. But one other question, though, around this, Bob, you also, I think, indicated that if you strip those out, there was a $3 million core increase. Now, if my calculations are right here, that that $3 million core increase on a year-over-year basis is about the same as your sales number, sales increase in total, which would suggest that maybe there was a little bit more, because you typically get leverage off of that line, would suggest maybe a little bit more investment in this quarter, although you just said that was not the case. So maybe you can connect those dots for me.

So I think the simplest way to say this is that we're comparing to a quarter of SEA as a percent of sales at 20.2%, which is abnormally low, stripping out all the noise in the quarter. So in essence, stripping out smart cover for all intents and purposes, we'd have been at 20.7%. So yes, there is a 50 basis point increase, but that is in any way different than where we've been historically or in recent quarters and is still indicative of our ability to leverage SEA over time just not quarter to quarter yeah i mean i mean we thank you for that clarity yeah okay so then let me just um ask this one last question if i may the third bullet point says that strategic price increases mitigated certain paraff impacts which suggests to me that you are maybe price

cost negative in the quarter? And then if that's the correct assumption, should you essentially be price cost neutral for the rest of the year?

So I think you're picking up on the right dynamic. Certainly our book of business here varies in terms of go-to-market. Sometimes we're direct, other times we're through distribution. Sometimes we have PO to PO pricing, other times we have long-term contracts, right? The pricing actions implemented in the quarter were implemented in call it mid-April and by default they won't be effective on everything that we shipped in the quarter. To the extent tariff cost pressures remained static which I don't think anyone is saying those two be the case. You're exactly right in your diagnosis of how we've characterized the second quarter results. I think what remains to be seen and the main priority reason why we're not redrawing a gross margin line or normalized gross margin range in this quarter despite again once again having 41.1% gross margins is the uncertainty associated with tariff costs. So the last part of your question is difficult to answer, not knowing exactly what the forthcoming reciprocal tariff impacts are, as well as then the tariff around copper, which at this time is just a rumored statement, nothing that's been firmly implemented. And so that's the overall hesitancy to tell you that we're going to be cost neutral moving forward because the cost side can change while equally the price side can change as well.

Thanks very much.

Our next question comes from Andrew Crow with Deutsche Bank. Please go ahead.

Hi, thanks. Good morning, everyone. I wanted to follow up on the comments about the AMI project in the funnel and it being a little unclear when they might start. So is this like a change where they've been deferred or pushed out a little bit or is this more normal course of business? And can you maybe also just generally comment on like muni activity in general? I think there's been some fears maybe of like a little bit of softness there.

Yeah, so Andrew. Yeah. So as we talk about all the time in this business, it can be uneven from quarter to quarter. So we're just basically letting you know it's not a stack, but it can be the same. So just trying to be transparent here that some projects have rolled off, but we certainly in terms of like we always have we continue to spend very helpful and then a quick clarification

on the comments about sales being down quarter over quarter into 3Q just was that a total sales comment or more core sales though in other words like kind of strip out smart cover and your core dollars are down as well thanks yeah andrew that's that's a core comment yeah so the script specifically uh clarified excluding smart cover so essentially core core growth within obviously the non-comparability of smart cover in q3 25 not being in q24 okay great thanks guys thank you

our next question comes from rob mason with bed please go ahead uh yes good morning ken pop maybe i'll just pick up real quick uh around smart cover uh so the sales in the quarter look like They were, and this is, I guess, the first full quarter we're seeing of smart cover, above the run rate of sales that they reported last calendar year. So I'm just curious, is that reflective of seasonality in the business? Is that kind of underlying organic growth? just how we should be thinking about you know 10 million contribution this quarter anyway of smart cover sales and you know how the um uh you know maybe uh quarter to quarter pattern should look there yeah so so i'll make a general comment so let me just talk in yeah i mean you you hit the

main point which is of course i know everybody's immediate concern is quarter to quarter but But our long-term growth outlook for smart cover is multi-year, if not multi-decade. Again, referencing back to, you know, the sewer line monitoring portion of this business is virtually greenfield with very low digital adoption in the less than one half of 1%. So essentially, we believe not only in the revenue growth in the short term, but the long term. I would say this has little to do with seasonality and entirely to do with advancing our positioning as a leader in the market. and helping utilities solve primarily four main use cases in what generally tends to be out of sight, out of mind, in fact, underground infrastructure that is blind spots for those utilities. And so, yes, we're pleased with the revenue growth thus far, but certainly of high aspirations as we move forward as well. And, you know, Bob, you know, my quick math around the contribution from smart cover at the EPS level, you know, I know this is a gap number, of course um you know would have been in the neighborhood of kind of six seven cents diluted in the court year over year yeah you're not not too far off as you as i'll remind everyone you know we said at acquisition uh eps decretive in year one uh and certainly a path to uh eps contributions uh shortly thereafter primarily in year two so as you can imagine a lot of that is about market adoption and the great sales opportunities and sales growth that we mentioned while also leveraging what at the current time is an above line average sca business

but that we think over time provides well above line average incrementals both through the combination of software attachment rate and then leveraging the cost base yep um if i could sneak in one more real quick just again we'll have to see how the uh you know tariff uh tariffs around copper you know ultimately play out but you know if you think that there could be um you know some added cost to copper or and that ultimately flows through to scrap brass do you think that could have any influence on the adoption rate between um mechanical and uh solid state meters i mean does the pricing differential uh that exists today does that narrow um does it make the value

proposition for solid state stronger relatively well uh Yeah, so the first thing I'd remind everyone where to happen would not be a negative event. I know there's this mismatch too, and there are...

Good. Thanks, Kim.

Thank you. Our next question comes from Jeffrey Reeves with RBC. Please go ahead.

Thanks. Good morning. You mentioned you're progressing as expected on smart cover integration. Could you remind us the cost synergy opportunity, where you are today in capturing it, and maybe how quickly you can expect to realize the remaining upside? And is this mostly an SEA cost-out opportunity?

Yeah, so I think, let me just clarify. So certainly when we talk about the most dramatic and impactful synergies of the Smart Cover acquisition, it is all about commercial synergies, accelerating what was already great standalone organic revenue growth by advancing the connectivity of the technology to our existing install base, whether that's direct at customers or through distribution. So a number one priority from a synergies perspective is commercial synergies. As it relates to cost, the comment I made earlier was about leveraging an existing SEA cost base. So prior to Badger's ownership, Smart Cover was private equity owned, and they were in basically revenue growth boats. They invested heavily in advancing the technology and software, having the right feet on the street for sales. And so they carried a higher level of SEA coming into our acquisition. We're not saying we're reducing that. We're saying we're able to lever that as the incremental sales growth that we bring to the table through our great access to market and long tenured customer relationships occur. There are certain aspects of cost synergies when you start to look at the product side, meaning the product that SmartCover sells for sewer line monitoring has PCBAs and has batteries in it and are components that we're familiar with buying. And whereas we buy hundreds of thousands, if not millions of those parts and components, SmartCover in history has only sold smaller amounts. And we believe that we can leverage certain of those components through our supply chain and otherwise, but that is absolutely secondary to the primary synergy, which is commercial synergies. And so a big part of taking this from EPS decretive in year one to EPS accretive in years two, three, and beyond is all about the top line revenue growth, and then not having to invest in SEA at a rate commensurate with that great high organic above line average sales growth.

Got it. Thank you. And maybe just switching gears, there have been some discussions about potential cuts to the EPA budget. Do you have a sense of how that could impact demand for metering? Maybe at a high level, how would you break down customer project funding between uni budgets and federal support like state revolving funds?

Yeah, so Jeffrey, there's a lot of ways that utilities have...

All right, thank you.

Just as a final reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad. We'll just pause here. We have no further questions in the queue, so I'll hand back over to Barbara for any closing comments.

Thank you, Operator, and thank you all for joining our call today. For your planning purposes, our third quarter 2025 call is tentatively scheduled for October 21st, and I'll be around all day to take any follow-up questions you may have. Thanks, and have a great day.

This concludes our call. Thank you very much for joining. You may now disconnect your line.