Good day, ladies and gentlemen, and welcome to the Q1 2015 Badger Meter earnings conference call. My name is Laura, and I will be your operator for today. [Operator Instructions] I would now like to turn the call over to Mr. Rick Johnson, Senior Vice President of Finance and Chief Financial Officer. Please proceed sir.

Thank you very much, Laura. 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'll 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 risk 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 identified 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. Now on to the first quarter results. Yesterday after the market close, we released our first quarter 2015 results. The first quarter proved a little tougher than we expected. Sales were approximately $100,000 higher than the first quarter of last year. This is the net result of higher sales of municipal water and specialty products and lower sales of flow instrumentation products. Let me review each of these sales categories. Municipal water represented 70% of sales in the first quarter of 2015 compared to 68.4% in the first quarter of 2014. These sales increased $1.4 million or 2.5% to $58.5 million in the first quarter of 2015 from $57.1 million in the first quarter of 2014. Looking at the detail for municipal water, higher sales of…

Thank you, Rick, and thank all of you for joining us today. As Rick said, this was a tough quarter that followed a record breaking year. The combination of the harsh weather in the upper Midwest and northeast, the weaker euro, weakness in the oil and gas sector and generally slower construction activity, all combined to negatively impact our sales. On the other hand, margins improved, as we benefited from the National Meter acquisition and lower copper prices. Unfortunately, these benefits were not sufficient to offset the headwinds. When I look at the coming quarters, I am optimistic. Although, the weakness in the oil and gas sector is expected to continue to impact us, we also expect that most of these other factors will not. The weather effect should abate, construction activity is expected to pick up, lower copper prices should continue to benefit us, and although the euro may remain weaker it has little net effect on our business as lower euro-based sales when translated are offset by lower euro-based purchases. Also our new products are gaining market share and we expect to see continued benefit from them as we move forward. Sales of our E-Series meters increased 47% in the first quarter of this year when compared to the first quarter of last year, and sales of our ORION SE meter reading system increased 26%. Sales of our newest meter reading technology product, the BEACON Advanced Metering Analytics system, tripled sequentially from the fourth quarter of 2014 to the first quarter of this year. We introduced BEACON a little over a year ago, and as many of you know, this product is unique, because it's a managed system that includes cellular endpoints, making it both easy to install and very cost-effective. During the first quarter I spent time…

[Operator Instructions] And your first question I have from Kevin Bennett from Sterne, Agee.

First real quick on the oil and gas exposure in flow instrumentation, can you guys just remind us about your exposure there?

The oil and gas sales represent, well I think about less than 5% of our total sales, correct. So isn't a very large exposure, but when you're comparing especially our first quarter, which is typically our lowest quarter in total sales, when you're comparing it quarter-over-quarter, a significant swing can have an impact on us.

And then Rick for you, the $2.3 million of higher SG&A from National Meter, is that more of a one-time recurrence or will we see that -- is $23 million kind of the new run rate for SG&A going forward?

Well, the $2.5 million is the run rate for National Meter, okay. And again, you've got to back off some of the $1.7 million we had in there last year. But the reality is I think we had $2.5 million in the fourth quarter, $2.3 million in this quarter. So virtually all of their expenses are considered SG&A, because they don't manufacture anything.

So there weren't any one-timers in that quarter?

No.

And then, Rich last question from me. On BEACON, and more specifically the California, I mean, can you elaborate on your comment about some utilities fully installing the platform. I know we've talked about last few quarters about kind of the trial packages, any more commentary around that would be great?

We've got a list now of about 40, over 40 utilities that have made the commitment to BEACON. And they average, I mean, they run everything from a small utility to a larger one, but they average I would say about 7,000 or 8,000 services per utility. So you're probably talking about somewhere between --

Well, now you want me to do the math for you.

You're probably talking about between 0.25 million and 300,000 services that we have where utilities have said, yes, we're interested. Now, that doesn't mean they'll do them all this, but they're going to do them over a period of time.

Your next question comes from Richard Eastman from Robert W. Baird.

Rick, was the National Meter revenue, just under $4 million for the quarter? Was that on the light side or is that just reflective of seasonality? Just curious how that, again, kind of flowed into the numbers here for the quarter?

I want to clarify, that was incremental revenue. That was not their total revenue. Their total revenue was in line with what we've seen in the past. That's the additional margin on the product that we normally would have sold to them in the past, plus some of the additional products they sell, as well as, like their installation services.

So Rick, let me try to shed some light on this. Obviously, National Meter on a standalone basis has a much larger revenue that gets eliminated, when we add the two companies together, because they are reselling our products, right. And the incremental revenue, Rick, is talking about is a combination of the markup they make on the products we sell them and on other products that they might sell.

So the $3.9 million is essentially the gross margin contribution, correct?

No, it's the sales contribution.

It is the sales contribution. So it's incremental sales contribution, okay?

The incremental revenue. Their total sales for the quarter were actually about $9 million, right. But then you have to eliminate what we sold them, which was about $5 million, and it left about $4 million as incremental. Is that making sense to you?

Yes. And is there any reason to assume that that math changes a great deal here quarterly? I mean, is there any seasonality in their business?

There is seasonality in that they are in the same business we are in. So they tend to have a weaker first quarter and weaker a fourth quarter and their second and third are the stronger quarters.

And then can I ask, on the gross margin side of the business given where copper prices are, has there been any competitive pricing within the meter market relative to the competitors, some that maybe have a different cost component on copper?

No, we haven't seen it. And bear in mind that it's a little tricky, because first off one competitor, Mueller, primarily sells plastic meters, so they really aren't even competing in the brass market. Obviously, Neptune only sales brass meters, they own their own foundry, so they really don't want the market move to polymer meters. And Sensus has moved more towards pushing their iPERL, which is a plastic meter. So really the only major competitor we have in the brass area is Neptune, and we have not seen pricing pressure yet.

And then just one question on the industrial flow side of the business. Again, we did kind of, maybe we sized our oil and gas exposure at, say, $10 million to $12 million a year. If we do it that way, when you say it was down significantly, I mean was it down a 100%?

No.

So it was maybe $1 million or $2 million drag on the quarter year-over-year in terms of revenue?

Rick, it was a little over $1 million.

And again, that probably is going to be kind of a normal trend through the three quarters here.

I mean, we're obviously taking some actions to try and get whatever we can back. But the fact of the matter is when our customers, when the whole market is down on activity, it's hard to jump around to it. It isn't like its one customer, and you can jump to another.

And then just on the municipal side, the water side, the commercial business, obviously the comp was out there for all to see. I mean, you had a massive 60%-plus comp year-over-year. But again, given that the commercial stuff here is weather-related, it defers on the construction side due to weather. One would assume that business comes back, as the weather clears here in second and third quarter. I mean, that's not a lost share, that's not lost business, that kind of sits in backlog until you get the thumbs up to ship.

Yes. It's not a lost market share or anything like that. It's just that, we always refer to business being lumpy. It's the general lumpiness of it. Over the long term commercial generally follows residential. When a city switches out, they not only switch out residential, they switch out their commercial meters also, so it's a bit more a function of timing more than anything else at this point.

And that business, just in general, should look something like, for the full year it should look something like non-res construction type of forecast, correct? I mean, something like that?

Right, exactly. Yes, it should.

That's the trend.

Your next question comes from Brian Rafn from Morgan Dempsey Capital Management.

Going back, looking just at [indiscernible], obviously Boston got 70 inches of snow. The Eastern seaboard got killed with snow. Back in Midwest, back to '14, we had Ice Station Zebra with all those polar vortexes. From a weather basis, can you look at maybe broad, Rich, was weather about a push in both fairly difficult first quarters in 14' and 15'?

No. I would say not, because the cold doesn't impact us as much as snow does, ground cover on snow, because when there is snow, it's difficult to find the pits where the meters are. And so the utilities simply slow down sending their teams out, because it's just not an easy thing to do. Also, for the meters that are in basements, tracking snow in the basements, they don't want to do it. So snow has a bigger impact than cold. The first quarter '15 is more like the first quarter of '13, which was a very heavy snow quarter.

In fact, if you remember, I am remember distinctly sitting here a year ago talking about the fact that our customer mix weighted more West of the Mississippi last year this time than normal.

Given the drought conditions in California, some of which could be self-inflicted, are there any large national city, national sales, potential contracts, I'm thinking, and I don't know, Los Angeles, Sand Diego, Sacramento, San Francisco, or any of the second tier cities in California amongst the 235 that you talked about unmetered?

Well, the short answer is in California specifically, no. In New Mexico, we did get a contract with Santa Fe right now.

Right, we have a large contract in Santa Fe.

And they have the same issues by the way.

For BEACON. And it's because they have concerns about wanting to manage their water usage. I will say though in California, because the BEACON software was developed in California. And at the time we bought that startup, who was working on that software, they were basically using many of the California utilities, large California utilities as their beta sites for that software. So we do have very strong relationships with those utilities and we have a lot of interest from those utilities as to what this software could do for them, the entire system could do for them. And so we are moving forward in those discussions.

And then just one final one guys. With the integration of National's sales, as a distributor, you guys talked about having a lot of relationship with over the years, very much a legacy relationship. Are there any other maybe top-tier distributors that might be watching that integration and might now at a point where they might be looking to kind of follow in, or is that these things just one-off?

No. Brian, I think your first analysis was right. Once we did that and we did it very well and we treated the sellers very fairly, other distributors expressed an interest and we are in conversations with other distributors. So it's not really a one-off, it really is a strategy that we developed where we wanted to start with National Meter, because it was our largest distributor and had very good systems in place. And then look at whether or not we could rollup other distributors who might be interested in getting involved with us to where we could put them under the National Meter umbrella. So we are in conversations and that is moving forward.

And your next question comes from the line of Richard Verdi from Ladenburg.

I did have to jump off the call here for a second, so forgive me if you have already addressed this, but I have a question surrounding copper. And I know in the past, you don't speak in-depth or give in-depth details surrounding that issue. But I do remember that a couple of years ago, Rick, you had mentioned that when there's a change in the price of copper, it takes about three to five months for that impact to be realized on the P&L. And I'm wondering if that is a still accurate time frame? And if so, at this point in time, are we closer to three months or five months?

No, I would say, our inventory as a whole turns about four times a year. So three months is still is a reasonable assumption. If anything, it might actually turn a little bit less than that. The housings are the things -- we're hearing a noise that's why we're pausing here. But if anything it might change a little bit less. Housings turn a little bit more than some of the other inventory.

And the other issue is with new construction build, I know there has been a lot of success with that in the past, but we're also entering a time where it's been 10, 15 years and meters need to be replaced. And I'm just wondering if you could give a little bit of color on how much of business Badger Meter is seeing that's new construction, and how much is replacement. And on top of that, if there is significant replacement how much of that is the meter and how much is the radio?

That's a very, very difficult one, and we rustled with that for years. The entire industry has. When we ship our meters to a utility, we never know whether they are going into new housing or whether being used as replacement. The utility has no methodology for reporting back, and neither do our distributors. So we've never been able to say, this percent of our sales goes into new and this percent of our sales --

And the same is true for commercial meters.

Right. And it's the same thing with commercial. So it's really a hard thing. The only way you can kind of do it is to take a look at the -- for example, the industry sells about 6 million meters a year. So you could say, well, there are a million new houses built, and therefore, say, 80% of those have meters and the other ones have private wells. And you could somehow make a conclusion that some percentage, you know 20% or so or 15% of the meters are going into new houses. But it's really, it's that high level.

And your next question comes from Chip Moore from Canaccord.

Just maybe follow-up a little bit more and your commentary, about being a little more optimistic. Looking forward, maybe you can talk about cadence of orders, particularly March, April, and particularly where we've seen the snow pack melt?

If you look at what happened to us in the first quarter 2013, which was a very heavy snow quarter and had a big impact on our sales, we had a very weak first quarter. We followed that up with two record quarters. At this point, when we look at our order entry, our backlog, we see no reason to believe that we won't have some strong quarters coming forward. And so that's one of the things that makes us more confident about looking at the balance of 2015. Obviously, weather shouldn't be an impact. Weather really own hits us in the first quarter, but we're going to continue to benefit from copper. The euro will probably remain weak, but it's pretty much a wash on us, because of purchases and the sales. And we know we weren't probably going to lose $1 million a quarter on the oil and gas. But when we wash all those things together and we, say, hey construction should be improving, housing starts are continue to improve, all of that, it says that we're pretty optimistic about the rest of the year.

And one more, on California, obviously great opportunity. As these utilities look to evaluate these new systems, is there potential for any sort of near-term delay on traditional replacement business or how should we think about that?

We haven't historically seen that, because if a utility is on a manual read system, they'll go ahead and replace their meters. And then when they go to on automation, they'll just pop the automation on top. So generally, a utility won't say, let's extend the lives of our meters, because we haven't made a decision on automation, we don't see that happening.

And your next question comes from John Rosenberg from Loughlin Water Partners.

This is bit of a kind of a general question, but you mentioned California, which obviously represents an opportunity for Badger Meter. Are there any thoughts about perhaps trying to sell into Brazil? I know that COPASA does some business with Elster, so any of your new products perhaps -- would that be an attractive market for you? And if so, why or why not?

Let me address that. It's generally not an attractive market. And the first reason is that most of the Brazilian utilities use a velocity, a single jet or multi-jet meter. That's not a type of meter that we make. It's not the type of meter that's used in North America. It's the type that's used in Europe. And a lot of those come out of China at a very low price. So that's the first problem. The second problem with Brazil is that they have some pretty heavy tariffs for importing finished products. So to be effective there, you have to have a partner, so you're shipping in parts and they are doing a significant amount of the final work on the meter. We found that a key success factor on our meters is the control we exert over the final assembly and test for the meters. And outsourcing that to a third-party is pretty risky. So for all those reasons, we have not focused on Brazil as a target for our water meters. On the other hand, we sell a lot of our industrial meters down there and we will continue to do so.

I would now like to turn the call over to Rich Meeusen for closing remarks. End of Q&A

Well, I want to thank you all for joining us. This was a difficult quarter for us, but as Rick constantly likes to remind you, we are in a lumpy business. We have these quarters from time-to-time. History will show you that when we have a bad quarter, driven by weather or other factors like that, we tend to bounce back. And we're fairly confident that we can expect to see some good quarters coming forward. So with that, I'll thank you again for your support and look forward to talk to you in the future. Thank you.