Ladies and gentlemen, so again, welcome to the quarter three 2015 Badger Meter earnings conference call. My name is Tracy and I’m your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now, I’d like to turn the call over to Rick Johnson, Senior Vice President, Financial and Chief Financial Officer. Please proceed, sir.

Thank you very much, Tracy. Good morning, everyone. Welcome to Badger Meter's third quarter 2015 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 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. Now on to the third quarter results. Yesterday after the market close, we released our third quarter 2015 results. Much of what I'm going to share this morning is very similar to what we said on our second quarter conference call. We continued to experience what I termed last quarter as underwhelming growth. Once again, sales were an all-time record for any quarter, but they were not at the level we anticipated, because we built our cost structure anticipating higher sales, we also did not perform as well on the bottom line as we anticipated. We’ll get into those details in a moment. Our takeaway for you today is that we're still confident that our long-term prospects and our position within the industry is solid. So…

Thank you, Rick and thank all of you for joining us today. As Rick said, this was a disappointing quarter for us. The continued weak dollar, the depressed oil and gas market and the delayed sales caused by the unavailability of radios from our alliance partner, all contributed to weaker than expected revenues. However, there are two important points to consider. First, we believe that none of these factors have caused us to lose any market share. Secondly, the product availability issues now appear to be behind us. We do not believe that we've lost any potential sales associated with these opportunities. As we are able to acquire product from our alliance partner, we expect to catch up on those sales over the next several quarters. Another positive during the quarter was the market acceptance of our new utility products. Unit sales of our E-Series ultrasonic water meter increased 70% over the same quarter last year and 35% over the second quarter of this year. Unit sales of the ORION cellular radio, which was first introduced last year, increased more than four-fold over the third quarter of last year and 18% over the second quarter of this year. Both of these products are performing well and allowing us to capture new accounts in the utility markets. As we complete the first full year of ownership of National Meter, we're pleased with the results. National Meter generates significant value for our shareholders, while allowing us to efficiently reach more current and new customers in the western states. In the recent acquisition of United Utilities, although much smaller than National Meter, permits us to do the same thing in the Eastern United States. We intend to continue our strategy of making targeted acquisitions in our distribution channel in the coming years. We…

Thank you. [Operator Instructions] And your first question comes from the line of Richard Eastman from Robert W. Baird. Please go ahead.

Yeah. Good morning. Rich, could you just kind of fill us in a little bit on National Meter, what their third party sales were in the quarter and the profit impact too in the quarter?

Their third-party sales were bought $5 million for the third quarter and incremental. Incremental, that’s over and above the sale of the Badger Meter product.

So it was $5 million though, it's a good number. And then I noticed on the - I noticed the inventories are up about $4 million is that basically just staging product for Itron shipments?

Some of that is product that we made but couldn’t ship because we didn’t have the radios. So you’re right on that but some of it was also product that was produced because we’re expecting a stronger quarter than what we had.

Yeah, fair enough. So when you speak to, in the press release, you talked about the performance wasn’t as anticipated. It does strikes me that if you would have shipped the call it 4.5 million or 6 million now of backlog on Itron. The residential utility side of the business would have looked pretty good, right; I mean it would have up maybe 6% or more. So is your disappointment in the quarter related to the industrial flow business and also essentially the profit line?

No, my disappoint is primarily related to the fact that at the start of the third quarter when we did the second quarter conference call, I believed that the supply issues were eminently behind us and we would be able to ship that 6 million in the quarter or at least a piece of it. And I'm disappointed that I was wrong that didn't come about. We knew there was going to - we knew oil and gas was still weaker. Oil and gas is not going to turn on a dime and we’ve done some digging into the oil and gas impact because I’m probably going to get that question, so I head it off a little bit. I’ve said in the past that oil and gas was less than 5% of our sales. Really, oil and gas has been about $1 million - last year, it was about $1 million a month of sales and we're doing about $0.5 million. So it’s down about 50%. So we knew that was going to be bad for the quarter. We knew the euro wasn’t going to get much stronger during the quarter. So the flow instrumentation side pretty much did what I expected. I was disappointed that we weren’t able to catch up on the utility side Rick.

Okay and we have the 6 million in just, I mean just for modeling purpose and thinking about it, half of that in each of the next two quarters just to capture that catch up.

I think we used the word several for a relay. Well, my people didn’t want me to give the impression that we were going to be able to catch up 6 million in the fourth quarter because that’s a lot and obviously we’ve said in the past that this is not like putting products on the shelve at Wal-Mart, plumbers have to go out and twist pipes to install our products. So that can only be done so fast. So I’m hoping it gets caught up over the next couple of quarters Rick. It could go another quarter beyond that but I’m really hoping in the next couple.

Aside from the catch up on that, that situation which is really more of an event here. Does the business feel like? It’s pretty lackluster but does the business feel like a typical fourth quarter kind of seasonality that aside from the catch up that we’ll have that typical seasonality to the overall business as we go from Q3 to Q4.

I would expect so with a little bit of a positive impact from the catch up.

Yeah, I got you, okay. All right thank you.

Thank you for your question. Your next question comes the line of Chip Moore from Canaccord. Please proceed.

Morning, thanks folks. Maybe dig down into industrial a bit more with oil and gas down 50%, but it sounded like using some slowdown maybe extend a bit beyond that to process markets. I guess what have you seen sort of September, October and where do you see that bottoming out?

We had a meeting audit yesterday and our flow instrumentation people really feel that we kind of hit a bottom in the June, July period, and that we’re starting to see things come back now. Not much in oil and gas but I’m talking about more in the process side of the business.

Yeah, okay, that’s helpful. And then on United Utilities just impact purchase accounting et cetera, how should we think about that in the next few quarters at least?

Yeah, this is Rick. Total purchase price is about $3.3 million. It’s really 300,000, 400,000 I suppose he was pointing at the, I could read the actual words but it was about 800,000 of receivables, 400,000 of inventory, that would be only a 100 grand of fixed assets and the rest of it is intangibles and goodwill which is yet to be allocated, so.

Okay, perfect. And then just along those lines, you talked about in the next few years going after some more distributors; you have a pipeline of targets or anything near-term there.

Yes, we have a pipeline of targets and we’re in conservations but nothing will happen yet this year.

Okay. And then just lastly on Middle East, I think you talked about some pilots. Can you maybe expand on the opportunity there?

In most of those Middle East, they have the old Kent meters that you find pretty much around the world in any country that used to be part of the British Empire, Kent being the British meter. In the Middle East what we’re seeing is pretty much all of the countries wanting to modernize and pull out of the Kent meters and replace them with something more modern. So what’s happening is, we are in there competing against several of the European water meter companies that are also selling into that area and we’ve seen some really good response to, in particular our metal E-Series meters. One of our competitors has a solid-state meter but it’s only offered in plastic and in the Middle East with the temperatures that things reach they aren’t too thrilled with that. So they are very interested in our stainless steel E-Series meters for those applications. And Like I say we’ve got the project in Kuwait to use as a reference project that’s gone very well. So we can take people over there and show them that. And I think 2016 and beyond we’re going to see some good projects coming out of there.

Okay, fair enough thanks for that folks.

Thank you for your question. The next question comes from the line of Ryan Connors from Boenning & Scattergood. Please proceed.

Great, thanks so much. I wonderful if you could discuss the municipal market for us a little more. Rich, when you talked about municipal volumes being up, you sited Mexico and the Middle East which would imply that even excluding the alliance partner issue, things don’t look so great in the U.S. So can you just kind of reset on the tone and order patterns in the municipal customer base in the U.S.

Ryan, we’re hoeing from the field sales people that they’re very positive and that they feel the tone is very good. The other thing that’s happening is, without naming cities, there are a lot of large cities that are now moving to RFP. That can be a year or two before it turns into actual shipments but some of the - you people have always asked about the elephants that are out there, and for the last few years, there really haven’t been any elephants but now some of the largest cities in America are starting to look at doing something pretty significant. So that’s a real positive for our industry as a whole. I think the other thing that’s happened a little bit is our introduction of cellular has slowed down the industry a bit because a lot of our customers and a lot of our non-customers have delayed making decisions wanting to run pilots on cellular. The good thing about that is our cellular product is performing extremely well. So we think there is going to be a pent up demand on that.

Okay, interesting. My other question Rich had to with copper and raw material costs. I mean, you’ve always downplayed that as a major driver of margins but it does seem like there used to be a little bit more of a discernible influence as copper went down, margins would benefit or vice versa. But now it seems like that’s really gone out of the window entirely as having really any correlation with what the margins are doing. Can you talk about why, what the drivers behind that change are and\or if there is or if that’s not the right way to look at it?

Well, there is a few factors in here and one is that it has copper declined, so did our sales volumes and so we had capacity costs that spilled in there. So benefit from copper was offset by unabsorbed overhead if you will because of the capacity issues - excess capacity issues, so that’s one factor. There are some other large factors in here; one of them is that there is in the United States more of a movement to plastic, the polymer solutions that people are getting more comfortable with them. So we’re just not buying as much or selling as much copper or brass product. And then of course the other factor is that although copper has come down nickel and zinc have gone by and so to some extend that balances thing that causes things to move over. Also, bear in mind that our E-Series, none of that is brass, it’s all stainless steel, and stainless steel prices haven’t come down like copper. So as our customer - we move our customer base more over to stainless steel or not seen the copper impact. So you’re right, something that really impacted us almost dollar for dollar, if copper moved so much our margins moved so much in the past, we’re not seeing as big an impact.

Okay. Well, that certainly would explain it. Thanks so much.

Thank you. And your next question comes from the line of Richard Verdi from Ladenburg. Please go ahead.

Good morning Rich and Rick and thank you for taking my call. A lot of my questions have been answered here but there is also been a lot of discussion on the metering side. So, I was wondering could you just talk a little bit about the - accompanying software to the meters and the benefits it’s had for those implementing that technology.

Software is a good question and interesting topic here because for many years, one of the discerning differences between a water utility and an electric or gas utility, primarily between electric and water, was that electric demanded a much higher level of software for doing time of day billing and load management all of that, whereas water didn’t have the software demand. Many of our water customers primarily wanted to send the billing, that was it. Badger Meter, ourselves, we ourselves changed the game a little bit when we introduced BEACON, which was a much stronger software suite and also provided all kinds of information to the homeowners. So we’ve changed the game and the other companies are following us into a situation where software sales are becoming a little more significant and software investment is becoming more significant in all our companies to be able to support that. So you are right, there is no question that software is becoming a bigger piece of what we do.

Okay, thank you for that. And how about the competitive landscape and alliances? I ask this because I was at the NAWC Water Summit the week before last and not only was the implementation of smart meters more heavily discussed the previous sessions, but also the technology especially associated well on metering software just was a heavily focused theme. And so I would like to just hear a little bit about what that competitive landscape looks like, the alliances and maybe with the likes of Smart Utility Systems or other companies like that company.

Well, fortunately for us, our competitors still have issues and a little bit of a disarray on certain things. And there are basically two companies out there that are really selling a solid state meter in North America, Badger and Sensus. Sensus only has the plastic. We offer both the plastic and the stainless steel. Another, the other major competitor, the other major player in North America, Neptune for metering has just now introduced a solid state meter, well, five years after Badger and Sensus introduced ours [ph] and they have only introduced at one size, so they have to complete their line. So we’ve got - to that extent, we’ve got a little bit of a jump on things. On the radio side, I believe we’ve got a very significant jump with the cellular. I don’t think anybody has a cellular product that’s even close to what we have and I think we are going to have that advantage for a while and we are really going to press it. And then on the software side, all the companies have software. They’ve all got software that can do different things, but the key to the software is the meter and the radio that’s providing the data, that’s what’s so very important. And because we are cellular-based, we are able to get information much more easily to the homeowner and that gives us an advantage on the software side with EyeOnWater. So there are all those factors out there, but it’s still a very competitive market for us. There is still obviously price pressure on everything else, but we have a good relationship with Itron, so basically when a customer wants Itron radios, very often they want to put those on Badger Meters, that’s great for us. And we also have - we’ve also developed a good relationship with Elster, which was a competitor. They no longer sell water meters in North America, but they have electric and gas, and so we have an opportunity to work with them on projects. So we have a few opportunities out there that in the competitive environment that are unique for us.

That’s great color and a simple update. Thank you, Rich. That’s it from me.

Thank you. [Operator Instructions] Your next question comes from the line of Kevin Bennett from Sterne, Agee. Thank you.

Thanks. Good morning, Rich and Rick.

Good morning.

I am sorry if I missed this, but did you guys give a breakdown of your resi, commercial, municipal sales in terms of year-over-year, I guess it would be a decline this quarter?

No, I mean, what we just said is, most of the increase is associated with National Meter and then any other remaining increase is really due to higher sales in the Middle East and in Mexico.

You are talking on municipal only?

Municipal only. But I mean, we didn’t split residential and commercial, I don’t have that in front me. I mean, they were both up a little bit.

But I’d like to clarify, Kevin, was your question about flow instrumentation versus utility or was it about--?

No, it was usually you guys breakout the residential meters were up x percent in a quarter and commercial meters were likewise, I don’t know, which is just in the municipal business.

They were up fairly consistently with each other. They pretty much…

Okay, got it. And then secondly, Rich, in terms of the Itron issues we are having, I guess what gives you confidence that we are finally past this? I mean, are you actually, I think last quarter you talked you weren’t even getting products from them, are you now getting products from them and so you feel good that we are going to start to recoup the sales?

Yes, our manufacturing people tell me that we are getting the products - where there were issues in the past with products that caused Itron to have to take some actions, we are now getting that product on a regular basis. So we no longer have that issue. There are still some products that have long lead times, but that’s common with any supplier, unique products that maybe require a little more attention. But generally where the issue was, that’s been resolved. We have the radios and we are now able to start shipping the meters again, but obviously we can’t just turn around and ship $6 million worth of product. The customers have to be ready to take them and they have installation crews that can only take so many meters a week to install and so you have to ship at that pace.

And in fact what happened is some of them had installation crews ready, let’s say, a month ago. They sensed a span in them, they got to get them back together. It’s little timing issues that really dictate when these sales get recognized.

Sure, that makes sense. Just good to hear that we are actually moving now and that’s kind of what I was looking for. And then last question on BEACON, I was wondering if you could provide an update. I think last quarter you did 35,000 units or something like that and how that was selling and progressing and if I guess there were any big kind of orders out in California this quarter.

Well, BEACON is the software that’s driving a lot of our products. What I was commenting on in the past was ORION cellular and on an ORION cellular and I am getting some information here. On an ORION cellular that’s where I said we are fourfold over last year. We are on track to, I would say, we’ve done - we are on track to do well over 100,000 units this year, which was kind of our target. We are hoping to do 100,000. We are going to blow past that and do very well on ORION cellular. So it’s going faster than what we thought. And when you consider we sell about 1 million radios, that’s about 10% for a product that was just introduced last year, that’s pretty good.

Got it. Okay, thank you guys.

Thank you for question. Your next question comes from Saidal Mohmand from GrizzlyRock Capital. Please proceed.

Yeah, thanks for taking the questions, guys. So I am more curious on the revenue opportunity that was pushed forward. I mean given that assuming that it is Badger that controls its relationships, I mean why not simply attach your radios to these meters if they are fairly comparable to Itron?

And that’s a real good question. You have to understand that most customers want to have their entire system with one type of radio or one type of meter. You don’t have very many customers that are interested in having a mixed system where they read half their city with one software and one reading device and the other half the city with the other. So generally if a customer had 40% of the city done with Itron, it’s very hard for us to convince them to suddenly start putting in ORION radios. So that’s not a real practical solution. It sounds like a nice idea and certainly with ORION cellular it’s a little bit easier, because you don’t have to worry about the collection device, you are using the pubic cell tower, but if they had already put up towers to read Itron radios, they are not interested in installing ORION radios underneath those towers and not being able to use the towers.

In addition, some customers are a combination of electric gas and water. And obviously if they have already selected Itron on the electric side, they just naturally follow suit, so they will wait to get the radios.

Got it. Okay, that’s helpful. And then maybe addressing the inventory growth. I mean, what steps is management taking to rectify that issue? I mean should we expect I guess discounting or perhaps even further write-downs?

No, we don’t view the inventory as an issue for us. First off, I understand we did write off some old gas inventory and let me make a comment about that. We bought that inventory, we built all that inventory well about two years ago when we were very much into a large gas product with Duke Energy. At the time, we were told that Duke was going to continue to the project, continue to move forward. We had a long lead time on the parts, so we ordered the parts, got them in and then what happened was Duke made a large acquisition of another electric company, basically got involved in a lot of that and stopped the project. It’s possible they will start the project again. We just got to the point where we said, let’s write off that inventory. We write it down, because it’s just too much on our books for us to continue to carry. So that was one issue. The bulk of our other inventory, we feel very good about and it - our inventory turns about four times a year as a company, which isn’t bad and so generally we’ll find ourselves using it over the next quarter or two.

And one of the things Rich commented is the sheer number of offerings that we have to people. The fact that we offer mechanical meters in both in polymer and in metal and then we offer solid-state in polymer and metal. There are some additional - we have to carry more inventory because of those lines, but it also gives the customers more choice. It is - as a CFO, it is something I look at, but my carrying costs right now are relatively low. I mean, my all-in borrowing cost is less than 1.5% right now, so in our mind, it is worth carrying a little bit of that extra inventory for the potential sales that we’re going to get.

And this is Rich, again. One of the things that I always emphasize in talking to our shareholders is that Badger Meter has the largest product line offering, both in meters and in radios, tried by fixed network cellular as in our industry is compared to our competitors. In order to offer all those product lines, we carry a little more inventory. However, we feel as the market transitions in the future from metal to polymer, from mechanical meters to solid-state meters, from mobile to fixed network to cellular, as it transitions, we’re going to be in the strongest position to serve that transitioning market, whereas most of our competitors have made a choice and only offer one or the other on those types of things we offer them all. So to do that, yes, we have a little higher manufacturing cost, we have to have more capacity and production lines available and we have a little higher inventory carrying cost, but we think it’s worth it to capture those sales opportunities.

Got it. And then just one quick one. Inventory mix, is it predominantly more slated to radios or the actual meter itself?

Definitely, it’s slated to radios. Radios are a highest dollar item in inventory.

Have a good lead time.

And has - mainly because they have very long lead time. Our radios either come over from Europe or sometimes from Malaysia and they come mostly by boat, and so that adds to a lot of lead time.

So said differently, our castings tend to turn very fast because it’s located - the foundry is right here in Wisconsin, so we do tend to keep fairly lean inventory there.

Great. Thank you guys for your time.

Thank you for your question. We have another question from Richard Eastman from Robert W. Baird. Please proceed.

Yeah, thank you. Just a couple follow-ups. Rich, to be clear on this Itron business, this - basically, Itron ships you the radios, you guys assemble on to the meter and ship the meter out with the radio attached, correct?

Not - that isn’t the whole story.

Well, what I am kind of getting at here - I want to hear the whole story, but what I’m trying to get at is, your revenue recognition on those shipped meters, is that a meter sale price alone?

It’s - let me answer this first, because I know what he will answer, but the predominant - really predominantly what we’re looking at here is where Itron ships the radios to our factory, our sales price to the customer is the meter and the radio and then the cost of goods sold. Now, what Rich is also going to tell you is that, on occasion, Itron can order the meter from us, which gives and I just have a meter sale to them, they in turn will build the customer and that on occasion, the customer will simply buy the meter from us with the appropriate register, they’ll buy the radio from Itron and they’ll melt the tool out there. Those latter two are probably the smaller. Predominantly, if we sell Itron, it’s with the radio that we buy included in our revenue.

And that is exactly what I was going to say. Well, I knew Johnson. Mr. Johnson and I have worked together too long.

But what I’m getting at is the $6 million that’s essentially in backlog that’s now are shipping, is that going out with a local read meter profit margin and sale price or was that going out with a full AMR endpoint sale price and profit margin?

Going over the full AMR.

Okay. And that margin -

And that is the higher margin. That is the higher margin product.

Okay, I understand. And then also, there was mention in the press release about healthcare costs as they applied to, I believe to the COGS line.

Well, COGS sans me [ph] the reality is our healthcare is up pretty significantly this year. I think we’re up probably - I am going to say, about 18% over last year, simply because we are self-incurred to a said point and we’ve had a lot of significant cases this year versus last year, for some reason, we had none.

And was that - but I guess, if we have an inventory charge of $850,000 in the COGS line, is the healthcare cost variance anywhere near that, is it six figures or - in the COGS line?

It’s six figures.

Definitely six figures.

Definitely six figures, I am just trying to figure out, if it’s seven, okay, it’s pushing seven. Overall, for the -

In the quarter or year-to-date.

Year-to-date.

Year-to-date.

Or even on an annualized basis, it will be pushing seven, on an annualized basis.

Yeah, okay. All right. I am just trying to get at the impact in the quarter on the gross profit margin line from the healthcare cost number, so again I guess with that kind of annualized number I should think 200 or 250 or something like that in the quarter.

At least.

Okay, all right. And then just one last question. Rich, could you kind of speak to - I am curious a little bit on kind of an Elster update here, we had this goal of taking half of that share, both in terms of meters and sales, we are two years past that agreement now. And I am curious have we accomplished that goal? And then secondly, has Zenner kind of stepped into this discounting mode and basically have been a substitute here for Elster when it comes to discounting on bids in the marketplace on the meter side?

Yeah, so let me answer that in the pieces that was asked. First, when Elster pulled out of North America, we had made an agreement with them where we would do joint sales calls and try to work with - take over whatever contracts they were walking away from or ending. And we hit our target. We did over - we did pick up over 50%. Some of them had very low margin. Then over the course of the last three years and that’s got to be at least three years ago that that happened, I think. Over the last three years as those contracts have all come up, we renewed them with some very good success on raising the margins, so we’ve been very pleased with that. In fact, there was one large account where we thought we were kind of bidding off by putting a large - a high margin and we won it. So we’ve been fairly pleased with how those contracts are working out. There is another piece here though that Elster Electric and Gas, which is still operating in North America and is a major player in North America, they now do not have a water offering and so we are working with them on quite a few accounts where when they sell to an electric/gas water combination or electric/water combination, and they need a water meter, they bring us in as the bidder. So we’ve had some very good success there and that’s been a very positive relationship. Finally, the question is about, well, if Elster isn’t out there low-balling on the water side, is anybody? And the answer is yes. Zenner is a company that owns a lot of small water meter companies around the world, doesn’t really consolidate them into one, they kind of operate always independent entities. They came in and picked up a small water meter company here and I think they are - I am not sure, where they are making their meters, but they have come in with a very low-ball bid on some contracts and still we’re seeing them kind of take the place of Elster at the low-end of that market.

Got it. Okay. All right, thanks again. Appreciate it.

Thank you very much. Now, I would like to turn the call over to Rich Meeusen, Chairman, President and CEO for closing remarks.

Well, I want to thank everybody for joining us. This was a very noisy quarter, in that there were - the tax rate moved around and nobody wanted to grow, Rick on that, so I think he is happy. And we had some other issues, the supplier issues and things like that. But generally, I think we are very well positioned. We are looking now, we are focusing on 2016 and beyond. We think we’re going to have some strong growth and we’re going to create some good shareholder value going forward. So I want to thank everybody for taking the time to join us and we’ll talk to you soon. Thank you.

Thank you, Rich. Thank you for your participation in today’s conference ladies and gentlemen. This concludes the presentation. You may now disconnect and have a good day.