Badger Meter, Inc. (BMI) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Quarter 1 2013 Badger Meter Earnings Conference Call. My name is Rachel, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Richard E. Johnson, Senior Vice President, Finance, CFO and Treasurer. Please proceed.

Thank you very much, Rachel. Good morning, everyone, and welcome to Badger Meter's first quarter conference call. I want to thank all of you for joining us. As usual, I will begin by stating that we will make a number of forward-looking statements on our call today. Certain statements contained in this presentation, as well as other information provided from time to time by the company or its employees, may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see yesterday's earnings release for a list of words or expressions that identify such statements and the associated risk factors. Let me reiterate some of our guidelines. For competitive reasons, we do not comment on specific individual product line profitability other than in general terms, nor do we disclose components of cost of sales, for example, copper. More importantly, we continue our practice of not providing specific guidance on future earnings. We believe specific guidance does not serve the long-term interest of our shareholders. Yesterday after the market closed, we released our first quarter earnings for 2013. As you saw, sales for the 3 months ended March 31, 2013, decreased $4.4 million or 5.8% to $71.8 million compared to $76.2 million in the same period last year. The decrease was due to lower sales of both municipal and industrial products, although the industrial product show an increase year-over-year because last year we had only 2 months of the Racine Federated product lines in our results. This year we had 3 months of sales. Municipal water sales represented 65.1% of sales for the first quarter of 2013. These sales decreased $5.5 million or 10.5% from $52.3 million in the first quarter of last year to $46.8 million in this year's first quarter. Our municipal water business has always been very seasonal, primarily due to the fact that many utilities slow down or even stop meter replacement activity during the winter months, causing our first and fourth quarters to usually be weaker than our second and third quarters. During the winter month, snow cover causes difficulty in locating pit meters. Excessive snow can also cause some utilities to divert funds and crews from meter replacement to snow removal activities. Recently, we were able to obtain snow cover statistics from the Rutgers University Global Snow Lab. We found a strong correlation between first quarter snow cover data and our first quarter municipal water meter sales, noting that increased first quarter snow cover resulted in lower first quarter sales and vice versa. The decrease in this year's first quarter municipal water meter sales followed that pattern. The snow cover in the contiguous 48 states was 22% below normal last year, but 15% above normal this year. We believe that this unusual 47% increase in snow cover was a primary contributor to our weaker first quarter. We saw a similar pattern in 2011, when first quarter snow cover was 25% above normal and our municipal water sales were also down in that quarter. Often these weather events cause delays in meter orders, with a weaker first quarter followed by a stronger second quarter as we saw in 2011. Similarly, we also expect to see a second -- a stronger second quarter this year. In addition, we look at states that were hard hit by Hurricane Sandy and found that sales were down nearly 30% in those states. We attribute this to the current focus on repairing and replacing infrastructure in the communities affected by the hurricane. The meters will come later. And so while sales of residential meters were down nearly 10% and commercial meter sales are down almost 17%, both compared to 2012's first quarter, we don't believe that this is anything more than our normal lumpiness. And it is likely that other lingering factors, such as continuing concerns over municipal budgets, now more due to sequestration concerns, and housing starts also played a role, but we truly believe weather was the main culprit for the sales decline quarter-over-quarter. Industrial flow products represented 36% of sales for the first 3 months of 2013. As I noted, these sales did increase by $0.5 million or 2.3% to $22 million from $21.5 million last year. The increase was solely due to including an extra month of the Racine product sales in the results. On a comparable basis, industrial product sales on average are down 13% to 14%, which we find to be similar to other industrial manufacturers who are seeing an overall weakness in industrial orders. Specialty products -- specialty applications represented 4.3% of sales for the first quarter of 2013. These sales increased $600,000 in the first quarter to $3 million from $2.4 million in the same period last year. Again, included in this group is the concrete products line from Racine, which has 3 months this year versus 2 months last year. The gross margin as a percent of sales was 34.9% in the first quarter compared to 37.9% last year. Clearly, the lower volume of products sold had a negative impact on our factory utilization, resulting in the lower margin percentage. Selling, engineering and administration expenses increased about 8.8% over the same period in 2012. This increase was due to having 3 months of expenses for Racine compared to 2 last year, amortization of the intangibles associated with that acquisition and amortization of software installed as we integrate our industrial product line systems. Those 3 items constitute the majority of the increase quarter-over-quarter. Interest expense is up slightly due to the higher average debt balances this quarter compared to the first quarter of last year. The provision for income taxes for the quarter had an effective tax rate of 35.1% compared to 37.4% last year. Our estimate for the year is the same at 37.4%, although we were able to recognize the R&D tax credit for 2012 in this quarter. The legislation for that credit was passed shortly after the first of the year, making it a first quarter event. That brought the percentage down this quarter to 35.1%. As a result of all this, net earnings from continuing operations were $2.9 million or $0.20 per diluted share as compared to $6.2 million or $0.42 per diluted share last year. Our financial condition remains strong. Despite lower than anticipated earnings, we still generated $4.7 million of cash from operations, a portion of which was used to reduce debt. At the end of the quarter, debt as a percentage of total capitalization was approximately 27%. With that, I'll turn the call over to Rich Meeusen, Badger Meter's Chairman, President and CEO, for his comments. Rich?

Thank you, Rick, and thank all of you for joining us today. I know that this could turn into a transcript, so just to clarify something, Rick did misstate. He said that industrial sales were 36% of total sales for the first quarter, he meant 30.6%. So there's no confusion later. As Rick discussed, this was a challenging quarter for us, but it also exemplifies the lumpiness in our municipal water business that we've discussed in the past. First quarter sales can be significantly impacted both favorably and unfavorably by weather patterns. However, all of our utility customers still need to replace aging meters and many are moving forward with technology improvements. As such, we believe that these unusual quarterly dips can be evened out over time. There are a couple of other significant announcements included in our earnings release on which I want to expand. The first is the recent acquisition of Aquacue, a small Silicon Valley software technology company. As we've discussed in the past, our fixed network meter reading systems are able to provide large volumes of data to our municipal water utility customers. We currently offer state-of-the-art advanced metering analytics software to help our customers analyze and act on the available data, but we are also working to expand and improve our software offerings with more features and greater capability. Aquacue has developed and patented unique technology that will significantly enhance our product offerings. With this acquisition, we've made a significant leap forward on our technology development roadmap. We will be able to integrate the Aquacue technology into our systems to provide the water utility market with the unique and full-featured meter reading and analysis system. We expect to introduce new products in the early part of next year that utilize the Aquacue technologies. The second announcement is also very significant. In January of this year, one of our competitors, Elster AMCO Water LLC, announced their decision to stop producing and selling mechanical water meters in North America, effective June 30 of this year. This decision not only created an opportunity for all of the remaining companies to win this available market share, but it also had the potential to impact Elster customers with long-term water meter supply contracts. When we were informed of Elster's decision, we immediately contacted them and offered to work together to assist their customers in a smooth transition to the Badger Meter mechanical water meters. After working out the details, we reached an exclusive agreement last month. Elster AMCO has recently notified its customers that they have selected Badger Meter as the recommended supplier for mechanical water meters after June 30. We are currently in the process of making joint sales calls at those customers with both Elster and Badger Meter salespeople to work out the details for each customer. We view this as a significant opportunity for Badger Meter, and we've been very impressed with the cooperation shown by Elster AMCO, as well as their concern for their customers. We believe that this agreement will have a positive impact on the second half of this year. With that, we will be happy to take any questions you may have.

[Operator Instructions] Your first question comes from the line of Ryan Connors of Janney Montgomery.

On this -- first off on this Elster agreement, pretty interesting. Is there anything you can tell us about the economics or the structure of that? I know you probably can't get into specifics, but just any additional color on exactly what the composition of that is.

Well, there are 2 aspects to it. One is that, that we have agreed to make these joint sales calls and offer those customers an opportunity to move smoothly from Elster mechanical meters to Badger. In most cases, that means that we will take those customers at Elster's pricing or as close thereto as possible. That's not as perhaps a strong a margin as we have seen in the past, but we think in a transition period, it'll be beneficial and it will certainly contribute to our throughput in our factory and contribute to our margins. The second aspect of it is that Elster, to their credit, is also very concerned about supporting warranty on their customers going forward. So we have worked with Elster on a warranty agreement where we will continue to work with Elster after June 30 to help customers resolve warranty issues with any Elster products that may come up. And Badger will obviously be reimbursed for that from Elster, but our #1 concern was to make sure that those customers are able -- are properly serviced and able to get the meters that they need going forward. So those are the 2 major aspects of the agreement.

Got it. Okay. And then just a question on the -- obviously you mentioned weather as a headwind, but is there any way you can disaggregate the underlying strength or lack thereof in the municipal market in general? Obviously it's a market where there's a lot of debate on the trajectory there.

You're right. And it is postulate [ph]. It's very hard, Ryan, as you know, to look at 1 quarter, and even eliminating the snow effects say, "This is what's happening in 1 quarter." This is a market that moves slowly over a long period of time, and I think it will be very hard to say. We know that, anecdotally talking to our customers, there's still concerns about budgets, municipal budgets, and whether or not the federal government is going to be able to continue to fund the safe drinking water revolving funds that go into all the states, which is a source for money for a lot of utilities. We know that, that's a concern. On the other hand, we have not heard utilities saying, "As a result, we're going to delay any major projects or we're going to stop replacing meters." Certainly the replacement cycle has to be done in many states by law, so that's going to continue. So I'm fairly confident that we're going to continue to see good growth going forward with the industry. We just run into these hiccups from time to time, whether it's weather or government or whatever, and it makes a lumpiness in our business.

Got it. And the last one for me. There seems to be a greater interest among utilities in fixed networks lately. And so I wanted to get your view on whether you agree with that and whether you're seeing that in the marketplace. And then related to that, talk about how the traction of the AMA product has progressed.

Yes, and you are right, Ryan. We are seeing more and more interest in shifting from mechanical read meters directly to fixed networks rather than going mechanical to drive-by the fixed networks. I think the customers that are taking on drive-by still want it, they still like it and they're still moving forward with that. But there are -- customers used to have one option, go from a local read meter, manual read meter to drive-by. Now they have 2 options, drive-by or fixed network, and there is a lot of interest in the fixed networks. One of the things we've seen is there's concern about the amount of infrastructure. And for some of our competitors, they have less infrastructure, although a more expensive alternative. Our particular offering has more infrastructure, us and others, us, Itron, Neptune, we all have a little more infrastructure, although a lower cost offering in total. So it's a question of what the customers prefer. Some customers like the less infrastructure, some customers like the lower cost, and it's what they want to go to.

It also fits, Ryan.

Okay. That's very helpful.

Ryan, Rick has additional comment.

We're also starting to see utilities whose customers are asking for their...

Your next question comes from the line of Rich Eastman of Robert W. Baird. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Rick, I know you were answering that question, but you weren't by the mic or something.

All right. Can you hear me now? Can you hear me now? Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: So if you want to answer it as part of this, go -- feel free.

Hold on a second, Rick. We may have a technical problem here.

Can you hear me now? Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Yes.

Okay good.

Okay, we -- I...

Let me try and answer what Ryan... Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Go ahead and finish that answer of you now.

Thank you.

I just want to finish because I think the other thing is the utilities are starting to get demands from their customers to have information available online. And really, that dovetails in with our Aquacue acquisition, where this idea that I want to be able to sign in -- if I'm a water customer, I want to sign in to my local utility, eventually they may want to pay the bill on that. And all that because this whole generation, this next generation of people coming up has done nothing but doing things on the web. And I think water utilities, this dovetails into why there's more interest in networks are going to have to go that route in order to be able to respond to that. That was the answer for that question. It took me forever to get on, but we finally got it. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Can you just tell us -- I know we want to get away from talking to RFI's sales on a quarterly basis now that it's annualized, but can you just give us the first quarter of '13 sales for RFI just so we can -- was there any growth there year-over-year and what that incremental number was?

No, I think we commented on it. On a comparable basis, industrial orders pretty much across the board were down in that I think I said 13%, 14% when you put 3 months against 3 months.

But that includes our industrial and RFI. We're really looking at it...

[indiscernible] our legacy business.

As a full set. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: I can't really do that math. But was RFI's sales for the quarter $11 million or something like that?

Probably... Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: What I'm curious of, was there growth at RFI year-over-year?

No. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: And secondarily, was the gross margin relatively consistent at RFI?

Yes. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay, so yes and yes?

Margin was consistent, but there was no growth. We talked about industrial being down 13%, 14%, most of that is RFI. I mean they brought more to the table than our old legacy businesses. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. All right, got you. And then, Rick, is there -- in the SG&A line, you mentioned kind of these 3 items, amortization, the extra month and then the IT system spend to integrate. Was there any expenses from the Aquacue acquisition? Or does that SG&A kind of run out at a $20 million a quarter run rate for the balance of the year?

Yes. There were obviously some expenses, but that acquisition was really not that, from a cost standpoint, was not that significant to us where it rises to the point where it influences that number.

But Rick, if you pull out the 1 month of RFI, that difference between the 2, instead of an 8% increase, you're looking at about a 2% increase.

Yes.

So our core expenses went up about 2% year-over-year. So it wasn't -- it really wasn't that significant. The biggest impact of the increase was the fact that there was 1 more month of all the RFI expenses in there. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then obviously the sales number here was a little bit light, so it kind of exposed just the base inflation in the business. Because that number looks bigger than it should have been?

Correct. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Yes. And then just 2 things I wanted to circle up from a revenue perspective. There -- we bumped into something, this National Resource Defense Fund, the few utilities were talking about increasing the standards for residential meters to tighten accuracy. And I don't know if that gets any momentum, but the combination of that with concerns about state revolving fund's funding by the feds, those 2 things, are they going to impact the business longer term or is that just a quarter or 2?

This is Rich. I have not heard anything about the National Resources Defense Fund calling for tighter meter standards. I mean, meters right now, the standard is a plus or minus 1.5% accuracy, and I'm not quite sure how tightening up that standard is going to dramatically impact the environmental situation in the United States around water. I do think there is concern over government funding as I've spoken in the past. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And Rich, this agreement with Elster, why was that necessary? I mean, again, Elster has got 8% to 10% share. You guys are #1 or #2 in mechanical meter sales. You know where they reside. Why -- do we have to pay them a royalty or anything on the co-marketing and co-sales? Or why is that necessary to gain share in that space?

Eastman, I have to give you credit, that's a decent question. Even a blank chicken finds a piece of corn once in a while. The fact is that when Elster made this announcement, it started a scramble by us and all of our competitors to call on those customers. We all went in, and we started saying to those customers, "We're the company you should switch over to." We felt that there was an opportunity to get a competitive advantage in the scramble. And the competitive advantage would be to instead of walking in cold and saying, "I know the other competitors have just been in here, but I am different and you should consider using my meters," to walk in with the Elster salesperson that this customer has been working with for maybe the last 10, 20 years and who the customer, frankly, trusts. This is a relationship business. And so this is a huge opportunity for Badger Meter where, unlike our competitors, we're walking in with the salesperson who knows that customer, who has worked with that customer, who has served that customer for very well, and that salesperson is saying, "We are recommending that you switch over to Badger Meter's and not one of the other competitors." That is the reason it was a very, to us, a very valuable opportunity. Secondly, no, there is no royalty. Elster was not looking for anything like that, what Elster's #1 concern was, to their credit, was they wanted to serve the customers well. They wanted to make sure that their customers were not negatively impacted by this decision for mechanical meters, and that's what the focus is on. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: And there's still in the -- anticipate playing in that E meter market, though?

Yes, I believe so. I believe Elster is still going to do -- be selling electronic meters and other devices in North America.

Your next question comes from the line of Chip Moore of Canaccord.

I was wondering if you could talk a little bit about the competitive environment. In general, any changes you're seeing out there? We talked a little bit about Mueller last quarter. Any updates there?

Well, I think obviously, the thing that has changed the competitive environment for us in the last few months is that Elster decision. And we are -- Elster is no longer actively pursuing new accounts. That certainly is having an impact on the dynamics of the marketplace. I think any time you take some capacity out of the marketplace, it opens an opportunity for perhaps some improved pricing and some opportunity to gain market share, and that's what's happening right now.

And sort of on the opposite end of that spectrum, is there any sort of near-term opportunity for competitors to price more aggressively? Are you seeing anything like that?

I think we're all starting to see that.

Okay. And then on the acquisition, does that address something specific that your customers were looking for? Or is this more of a longer-term opportunity?

Well, I wouldn't say it's longer term because we intend to be able to start introducing products as early as the first quarter of next year as a result of this acquisition. So if you consider that long term -- I mean in the software business, that's long term. In the hardware business or in the water meter business, that's maybe not long term. And I think it does address some specifics, but I'm being purposely vague. I don't want to go into a lot of detail, because I don't necessarily want to telegraph to our competitors exactly what we're going to be coming out with.

Sure. That's fair. And then just lastly, back to the weather, just some historical context you touched on in terms of last winter it seemed like we had no snow, and then I think it was a couple of years ago, we kept getting hit with storms. Just how this compared versus that period and you saw a pretty big snap back sequentially, I think, in that Q2 '11 and how you see that playing out?

Well, and if you look at the last 10 years, the data from Rutgers, you'll find that the 2 first quarters that had the highest amount of snow cover in the contiguous 48 states was the first quarter of '11 and the first quarter of '13 out of the last 10 years. And interestingly, the first quarter of '11, for us, was a very weak quarter, I think we did about $0.22 that quarter, and the first quarter of this year was very weak. But then again, if you look, you'll see that the second quarter of '11 came back stronger. Likewise, the first quarter of '12 was unusually -- was an unusual quarter in that it lacked snow and we had a very strong first quarter. So we've always known that these patterns exist, we haven't exactly had numbers to correlate them, but this now gives us some numbers, and I think it is a pretty strong correlation, all other things being equal.

Your next question comes from the line of Hasan Doza of Water Asset Management.

Just a follow-up -- a couple of follow-up questions. You had mentioned that competitors are scrambling after the Elster market. So my question would be, are your competitors being rational when they are competing for Elster's market share? What are kind of competitive pricing environment are you seeing specifically as they scramble for these Elster meters?

I would say thus far we're seeing that they are being rational. We know that Elster had some fairly aggressive pricing on some of those accounts, and Elster recognized it and I think frankly, the customers recognized it too, that it wasn't the kind of pricing that could be sustained long term. So as we're getting into talk to those accounts, they realize that prices have to come up on those types of accounts in order for any of us to remain -- for any of us to be able to provide and service those customers on a reasonable basis. So I haven't seen anybody going in there and doing the opposite, trying to cut prices further or being overly aggressive. I think there's a lot of rationality we're seeing in the marketplace.

In terms -- go ahead.

I also think we've seen some customers that -- they're under a 2, 3-year contract that it's simply gone to the next bidder. If the contract was ordered a year ago, they just went to the next bidder and just continued on. So we won't see the full impact of this until some of those bid periods are over also.

Okay. So essentially, if you are a city and you signed a 2-year contract with Elster, can you or can you not buy meters from someone else? Or what's going to be the arrangement between now and when the contract expires in terms of getting supply of Elster meters?

Yes. That's too hard a question because it varies literally by city, by city. There are some cities that have just gone to the next bidder and have continued. There are some cities that are continuing to work with Elster, they're bringing us to the table. It's going to vary city by city and to answer specifically, for an overall answer like that is just not possible.

The one fact we do know is that after June 30, they will not be able to get Elster mechanical meters. That's a definite fact. And we also -- they all know that basically the other companies are willing to step up and provide the meters perhaps at a different price, but we're all there willing to provide them. Where Badger has a bit of an advantage is we are being brought to the table by Elster, which means that Elster's relationship can -- with that customer can, to some extent, benefit Badger.

Okay. In relation to your -- the acquisition, I understand it's a small acquisition, $14 million, Aquacue. As you mentioned the company is not generating significant revenues today, but how do you kind of think about in your acquisition portfolio in terms of your accretion, years to accretion and also the rate of return that you would want to earn in any acquisition? So can you kind of help me understand as to how can we get to accretion and what type of returns do you think you can earn on this $14 million that you invested in this company?

Well, you mentioned any kind of acquisition, so let's back up. There are 2 types of acquisitions, there's 1 where we are acquiring an existing company with an existing customer base and existing sales and EBITDA, such as Racine Federated. Racine Federated was immediately accretive on our acquisition. It's done very well for us, we've been very pleased with it. We were able to take some cost out of it through the integration and we were able to cross sell to a lot of our customers and take a much stronger market share. So that's been very good for us. In the case of Aquacue, this is a technology acquisition. This is not an acquisition of an ongoing business that has strong sales and EBITDA and margin and all of that. This is purely acquiring a company in order to get the intellectual property out of it and to get the employees who are all engineers and who will continue to work for Badger Meter and continue to develop the products that they've developed so far and integrate them into Badger's products. So there is not an immediate accretion on it. If anything, it adds a little bit to our engineering expense for the rest of the year in terms of these additional employees and the amortization of the patents and that sort of thing. But where we look at it is in 2014, as we introduce the new products that integrate the Aquacue technology, we should be able to gain market share then and grow our business, and that's where we start seeing the accretion from the acquisition.

Okay. And in terms of housing starts, if you look at the last 3 months in the first quarter, would you be able to quantify like how many new meters you saw coming into your portfolio because of the increase in housing starts during the first quarter? I know...

Yes, that's something we've never been able to quantify. The problem is when we send meters to a city, they don't tell us, "These meters are going in new houses versus these meters being used for replacement." The city or the distributor buys the meters, they put them on the shelf and we are unable to get that data back. The best we can do is take a look at the overall housing starts in America and make some inference about whether or not we're generating meter sales as a result of those housing starts. Clearly, compared to where housing was at the trough of about 500,000 new residential houses in America, we're up from that, and it is helping us. But where we were a few -- before the recession, when we were doing 1.5 million, 1.6 million houses a year, we still have a long ways to go.

But would you be at least able to quantify? Because housing starts from the bottom, as you mentioned 500,000 or at 1 million. So if housing starts went up by 500,000 say in the 1-year period, from the data that you have, how many new incremental meters did Badger Meter take in from the bottom of the housing starts? Do you have that data?

Well, first I'm not sure housing starts went from 0.5 million to 1 million in 1 year.

They're projected to.

But an annualized rate, okay, is what you're saying?

Yes, yes exactly. So, I mean, then if you kind of follow that correlation, then wouldn't you be able to kind of get a sense as to how many new meters that you have gotten since the time of the housing starts?

Right. You could take the number of new houses, you could assume that maybe 80% of them have meters because 20% are on private wells. You can take that 80% and assume that we got 30% market share and come up with a number, yes.

Okay. And last question guys, on Hurricane Sandy, you guys kind of mentioned Hurricane Sandy -- the lingering effects of Hurricane Sandy impacting the sales this quarter. I'm a little bit surprised because Hurricane Sandy was a fourth quarter event last year, and I didn't really hear a lot of impact in your fourth quarter results. So why is it showing up now? And secondly, it is a long-term reconstruction project. So when do you expect the sales that were destroyed from Hurricane Sandy to return to Badger Meter?

Well, let's answer your first question. It's more of a first quarter because there's always inventory on the shelf at the local utility, all right? And so what we basically -- we were shipping in the fourth quarter to replenish the normal replacement, come out -- when did Hurricane Sandy hit, October -- it was October right?

It was, yes, October, yes.

Somewhere there end of October. And so basically, from that point forward, they didn't put orders in because they weren't taking many more meters off the shelves at their local locations. Now as far as when it returns to normal, that's just -- it's a long-term recovery thing. It's kind of like Hurricane Katrina was years ago. In certain cases, you have to rebuild the homes first before you can worry about putting a meter in. I think that there weren't as many homes destroyed as there were things disrupted. So I think over time, that'll come back. And I know it's coming back just based upon the news articles, but it's over time. But clearly, that had an impact. I mean when we look at the 8 states directly affected and see a 30% sales decline and plus talking to our sales people who've been out there, they're not worried about putting in meters right now in those locations. They're worried more about testing the infrastructure, making sure that any floodwaters didn't do damage, replacing pumps and the like. I expect that part to resume shortly.

[Operator Instructions] Our next question comes from the line of Bob Chernow.

This is Bob Chernow from RBC. My question is do you -- are you getting any synergy from the companies you've purchased for your robotic manufacturing system that you have for industrial pumps -- I mean, industrial meters?

Bob, I'm not sure what you mean by a robotic manufacturing system for industrial meters, I'm kind of lost on that one.

This is the system that you have in your Milwaukee factory to -- that doesn't really require much setup time, but you do the large meters, with the large meters for a beer and soda, those type of things? Are you getting other business from the companies -- that's been one of the smaller portions of your business.

Right.

I'm just curious if these acquisitions are helping that area out or not.

Right. Well, yes, we are making some -- we make some industrial products here in Milwaukee, but with the acquisitions and probably the 2 that were most significant of that were Racine and Cox, which we made a couple of years ago. Cox makes the meters for John Deere and Caterpillar and companies like that. Racine makes meters for a much broader version. We have not brought any of that production into the Milwaukee facility. We've left that production in the Racine and Phoenix facilities where they are. We have been able to have our industrial engineers get involved and find ways to increase productivity. We're making a major investment in Racine to improve their flow testing using our knowledge of flow testing. So we've been able to get some synergies out of that. We will continue to see them going forward.

Your next question comes from the line of Richard Eastman of Robert W. Baird. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Just one follow-up. Rick, when you mentioned and talked to the utility piece of the business, you suggested residential was down 10% and commercial down 17-ish. Within just from a mix perspective, within residential, the down-10 number, was your local reader, just mechanical meter business, down more or less than that? In other words, was the automation piece down more and hence, a negative kind of gross margin mix impact?

Yes. I mean, the actual -- the plain vanilla water meter, the manual read meters, that was up slightly. Now again, that's not a big piece of the business, but we did see a slight increase there.

So there was some mix impact in there, Rick, to answer your question. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. It must have been fairly substantial, though. I mean, if your shop overhead on the manual meet -- reader side, if you're volumes were up a little bit, then your automation again was down pretty meaningfully then? The automation piece?

Well, that's a fair comment.

That's a fair comment, yes. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay, okay. Because copper, again, thinking about the 1 quarter lag, copper was actually a bit of a negative for you in this quarter, but it will turn positive, I think, right?

Well if it stays down or under $3.20 it's at this morning, it certainly will.

It was, but it was a small negative this quarter.

There are no further questions. So I'd now like to turn the call over to Richard Meeusen for closing remarks.

Thank you. And in closing, let me reiterate that while this was another challenging and lumpy quarter, we are optimistic about the rest of 2013 and beyond. We're excited about the opportunities of both the Aquacue acquisition and the Elster AMCO represent for our company, and we will be working hard to integrate those and to pursue those opportunities. So thank you for the time today.

Thank you. Ladies and gentlemen, that concludes your participation in today's conference call. Thank you for joining. You may now disconnect. Good day.