Badger Meter, Inc. (BMI) Q4 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen. And welcome to the Badger Meter Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I'd now like to introduce your host for today's conference, Mr. Rick Johnson, Senior Vice President of Financial and Chief Financial Officer. Sir, please go ahead.

Thank you very much, Liz. Good morning, everyone and welcome to Badger Meter's fourth 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 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 results. Yesterday after the market closed, we released our fourth quarter and year-end 2015 results. We finished 2015 with the strong performance. We had record sales for any fourth quarter in our history and solid improvements in margins which resulted in a nearly 17% increase in operating earnings. Unfortunately, the fourth quarter is generally one where we have the lowest earnings, along with year-end tax adjustments that could be significant, that was the case this quarter, and as a result, fourth quarter earnings were lower than they were in the prior year, prior quarter. I'll get into the results of the quarter in more detail in a moment, but first I want to note that we here no longer going to talk separately about specialty products. We will be grouping them into flow instrumentation. For those who don’t know specialty products represented sales of radios into the natural gas market and sales of concrete vibrators. Sales of these products generally amounted to only 2% or 3% of sales. We began separating them when we thought there would be other products that would be added to this group, that didn’t necessarily meet the criteria for being in flow instrumentation. We have now concluded the amount is materially enough – immaterial enough that we will just include it in flow instrumentation. Now let's look at some of the details of the quarter. The fourth quarter was similar to previous, as there were higher sales of municipal water products and lower sales of flow instrumentation products. Municipal water sales represented 77% of sales in the fourth quarter and were up 13.1% over last year's fourth quarter. These sales were driven by higher sales of residential products and commercial meters. The fourth quarter sales included about $1.5 million of incremental revenue from United Utilities, the assets of which we purchased in August of 2015. The increased residential sales were primarily driven by higher ORION Cellular and E-Series meter sales. Commercial meter sales grew on higher volumes. Flow instrumentation sales represented 23% of sales and were down 8.7% over the last year's fourth quarter. This was primarily due to continued weakness in the oil and gas markets, the stronger U.S. dollar impact on sales in Euros and general economic softness in many of the markets we serve. The gross margin for the quarter was 36% versus 34.6% in last year's fourth quarter. You may recall that in last year's fourth quarter, we had just purchased National Meter and Automation. There were some accounting implications on the gross margin percentage that we dealt with at that time, which lowered the gross margin percentage. If we were to factor that out, the margin was up slightly due to the higher municipal water sales and lower brass costs compared to last year. These were offset by the margin impacts of having lower flow instrumentation sales. Our selling, marketing, engineering and general administration expenses were 9.7% higher in the fourth quarter of 2015 than in the fourth quarter of 2014. The increase was primarily due to higher software and intangible amortization expense, as we've upgraded systems within the company. The quarter also included expenses associated with United Utilities. As a result of all of this, pretax earnings increased 17% to $9.2 million, versus $7.9 million in the fourth quarter of 2014. This includes an approximately $760,000 or $0.03 per diluted share of a non-cash pension charge, settlement charge. We have incurred these charges a number of times in recent years and incurred this charge again in the fourth quarter. There was a similar amount charged in the fourth quarter of 2014. As I mentioned earlier, we had to make some adjustments to our estimates for taxes in the fourth quarter. You may recall at the end of the third quarter I reported that our estimated effective tax rate for the full year would be about 35.7%. There were a variety of assumptions made at that time to arrive at that number. As it turned out, the continuation of lower flow instrumentation sales, many of which are sold through our foreign entities resulted in lower earnings from our foreign subsidiaries. These foreign subsidiaries are generally taxed at lower rates in United States. Since we had a greater mix of domestic earnings this year, our effective tax rate rose. In addition, our state tax rates rose compared to 2014 because we sold more into higher tax states. Finally there is a credit that we take for items produced in the United States called the Production Tax Credit. Much of the production of our municipal water products is outside the United States or much of the production of flow instrumentation products is in the United States. By virtue of lower sales of those products, we have a lower production credit. Result of all these factors is that the effective tax rate for the full year is 37% compared to 33.9% in 2014. We recorded the catch-up for prior estimates in the fourth quarter, which was magnified by the lower earnings in the fourth quarter. Lower earnings meaning compared to the other quarters of the year. Therefore the effective tax rate in the fourth quarter was 40.6% versus 24% in the fourth quarter of 2014. Our net income for the fourth quarter was $5.5 million, versus $6 million in the fourth quarter of last year. On the diluted per share basis, earnings were $0.38 versus $0.42 in last year's fourth quarter. Let me also comment on the year as a whole. Sales increased $12.9 million to 3.5% to $377.7 million. The overall increase was the result of higher sales of municipal water meters and related products, offset somewhat by lower sales of flow instrumentation products as we've been discussing all year. Included in this increase as the incremental revenues associated with having National Meter for a full year versus only three months last year, and United Utilities since August. Our gross margin as a percent of sales for calendar 2015 was 35.9% versus 36% last year. The slight decrease was the net impact of lower material cost, particularly brass castings which was more than offset by higher warrantees, absolute inventory, health care expenses and the impact of lower flow instrumentation sales which generally carry higher gross margins. Selling, marketing, engineering and administration expenses were up year-over-year, again we had a full year of National Meter versus only the fourth quarter last year and we've had United Utilities in there beginning in August. Also I will remind you that the 2014 expenses included $1.7 million or $0.07 per diluted share associated with due diligence and other transaction cost related to a potential acquisition that was ultimately not pursued. To factor out the distributors and the 2014 charge, the increase was due to higher software and intangible amortization expenses as I've mentioned before and higher healthcare costs offset somewhat by lower employee incentive cost this year. For the year, earnings were $25.9 million compared to $29.7 million in 2014. On a diluted per share basis, earnings were $1.80 in 2015 compared to $2.06 in 2014. A balance sheet remains solid. We continue to generate cash from operations and is slightly reduced our debt. Our debt as a percent of total capitalization was 23.5% at the end of 2015. With that bit of background, I will now turn the call over to Rich Meeusen, Badger Meter's Chairman, President and CEO who will have some additional comments. Rich?

Thank you, Rick, and thank all of you for joining us today. I'll keep my comments brief because I want to get to the questions. As Rick walked through the details of fourth quarter, I'm sure that you can all see that there is a lot of noise around the after-tax numbers. I think it's important to focus on the fact that sales increased 7.2%, gross margins increased from 34.6% last year to 36% this year and pretax income increased 17%. By those measures this was a very good quarter. When we look at the full year of 2015, we know we had some weaker quarters, primarily due to a vendor issue, the stronger dollar and the continued weakness in the oil and gas markets. However, in spite of these factors, we still had strong growth during the year and ended the year with record sales. Also all of our net earnings were down 12.8%, we had record EBITDA for 2015, with a 2% increase in the EBITDA over 2014. As a result, we once again had very good cash flow for the year. We're also pleased with the performance of our newer product offerings in 2015. As mentioned in the earnings release, we saw an 85% increase in unit sales of our E-Series Ultrasonic meter and more than six fold increase in our unit sales of the ORION Cellular end points. We expect to see continued growth in these product lines, particularly as we have now released a version of our BEACON AMA software that allows for backward compatibility with our ORION mobile systems. Many of our existing ORION mobile customers will now be able to adopt the BEACON software platform and begin to introduce cellular end points into their system. We expect that 2016 sales will continue to benefit from these new products. We also expect to see additional sales from the recently announced three year contract with American Water, the largest publicly traded water and wastewater utility company in the United States. American Water serves an estimated 15 million people, representing a significant opportunity for Badger Meter's utility products. We're all very excited about this new relationship and the opportunity to help American Water continue to deliver safe, clean, reliable and affordable water to its customers. With those comments, we'll take your questions.

[Operator Instructions] Our first question comes from the line of Richard Eastman with Robert W. Baird. Your line is now open. Please go ahead.

Yes, good morning.

Good morning, Richard.

Just a couple of things, the gross margin on the muni water meter business, if you strip away the industrial flow impact on gross margin, how much improvement did we see on the water meter – gross margin improvement that we see on the water meter business? Can you…?

Are you asking for the quarter or the year?

Just – well, probably for the quarter but importantly for the year I guess.

So would you like me to go through the last two decades?

Well, I want to know what the trend is, how is that?

All right. So, clearly gross margin dollars are up and you can do the math, they were up $3.5 million. I would say that municipal water probably is driving a $6 million increase offset by a couple of million dollars bringing it down from flow instrumentation. Is that helps?

It does, it does. And in terms of the margin profile add industrial flow, how are we going to be able to kind of stabilize that as we run into 2016 because, everything were here on the oil and gas and the process industries – one would expect your industrial flow business to perhaps be down again in 2016, is that a reasonable assumption? And if it is, can we stabilize margins here?

We're not anticipating it being down again in 2016, we're not anticipating a big jump. In 2014 we were doing about a $1 million a month into oil and gas for example. When we go in – when we got into 2015 that dropped in half, we're down to about a half a million. We don’t see that going any lower, it's pretty much kind of a maintenance level right now and I think there is some potential for some increase but we're not anticipating a lot because I think oil and gas you're going to stay week for long time to come. So when you look at the other – when you strip away oil and gas which is now only $6 million a year, and you look at the other aspects of flow instrumentation, a lot of it is building automation and HVAC systems, irrigation systems, there is a lot of other things out there that are not necessarily going to deteriorate more. We think we can see at least, we'd hit bottom I think.

And Rick, this is Rick. The flow instrumentation business was also impacted by the dollar or the affects of the dollar on the Euro that – again I'm not going to sit here and predict what the dollars going to do but it obviously, there was probably $4 million, $5 million in calendar 2015 of impact on the top line in flow instrumentation, because probably half of those sales were outside of the U.S., and many of them in Euros.

And so our anticipation is that, flow instrumentation hits the bottom in 2015. We're not expecting a huge fast rebound but we don’t think it's going to go down anymore.

Okay, okay fair enough. And then just, Rich I know that it was clear in the press release that this American Water contract, no financial terms disclosed. It's also the case that Mueller threw some numbers around on their call yesterday, and just to put it in some context, they said their revenue on a trailing basis from that contract goes $26 million. And what I'm trying to get at is, they also made a comment that the radio portion of that contract has not been awarded yet. Can you just kind of maybe clarify from your perspective what that revenue number means, the radio pieces and also would we expect seasonality to look like it does in the Northeast, which is American Water is kind of concentrated in the Northeast, would we expect seasonality to whatever revenue flows through this contract? So that’s…

Okay, it was last year but it's a good question, Rick. And I have to first collect my money from the debt on how long it would take to somebody to ask this question. We knew this was coming because I did listen to the conference call yesterday with Mueller. First off, let's deal with the size of the American Water contract. American Water serves 15 million people. If you use the average in the United States of three people per meter, that would imply that they probably got about five million meters in the ground. And if you're using average life of about 17 years that would imply about 300,000 meters per year that they would buy for replacement. And that’s probably a pretty accurate number because when they did their RFP last summer, they had indicated that I think they were doing about 276,000 meters the prior 12 months with Mueller, to give all of the bidders a feel for how big the contract was. So, I do think around 300,000 meters per year is a reasonable expectation of that business. The problem we have Rick is that you correctly reported in a release that you did earlier this week, that when Neptune lost this American Water contract to Mueller, they had announced that it was worth over $50 million per year, is that correct Rick, do I remember that right?

That’s the number we adjusted out of Neptune's number, yes, that’s correct.

Right. And at the time, this was three years ago, at the time we felt that number was probably highly inflated. And in fact, yesterday Greg Hyland on the conference indicated that the contract was probably worth more like $26 million a year. And that does sound more reasonable to me when you figure 300,000 meters – and Greg had also indicated about 55% was meters and 45% was radios and with that mix in average unit price of about $80 or $90 is probably reasonable, not the $170 that the Neptune number would have applied. So I think the Mueller number is a little more accurate as to what this contract is worth. Now having said that, I think you should also bear in mind that on January 1 every subsidiary of American Water did not start placing orders with Badger Meter. We ever see some waters but there will be a ramp up period, this is not an exclusive contract that requires American Water to buy anything from us. This is the contract that they used to establish pricing and to provide an opportunity to their subsidiaries to buy at those prices. So there will be a ramp up period, I mean there will – they are indulged with the American Water subsidiaries that are in the middle of doing in the installation in meters and they're not going to suddenly switch over to new a brand, the meters, they're going to finish that. There are others who haven't started that will start up with us, but there will be a transition period in 2016, so we hit a normalized run rate. Could we hit a $26 million run rate in 2017, it's possible. So moving on to the last part of your question which was the comments that Mueller made that to the best of their knowledge radios have not been awarded. If you look at our press release, and that press release was betted and approved by American Water, very carefully betted. Our press release clearly states that the contract is for both meters and the technologies, the radio technologies. So we do believe that the radios have been awarded and they've been awarded to us as part of that contract, and in fact we are in conversations with many of the American Water subsidiaries about the possibility of adopting one of our technologies. So, so I do think – hopefully that puts some clarity around it. There was a lot of confusion over this $50 million from Neptune and $26 million from Mueller, it's probably closer at full run rate to a $27 million and it does indeed include both meters and radios.

Great. All right, great. Thanks for the color. Much appreciated.

Okay.

Our next question comes from the line of John Quealy with Canaccord Genuity. Your line is now open.

Hey good morning, Richard. So I guess, do you want to go back to American Water now or later?

Let's do it.

So…

I knew it'd be – and I knew it'd be a big topic, so I'm obviously – I'd prepared for comments.

So I'm interested in your perspective. So this contract from Roeper to Mueller to you, from the outside of the industry it looks like American Water just like the shop price in every three years they get somebody new. Say, is that a true observation, does it helps you with absorption but it sounds like you get some radios out of it. Talk about why that observation may or may not be valid?

Yeah. And I don’t think that observation is valid at all, and I think American Water would be the first one to tell you. First off, again if you look at the press release, American Water really didn’t even talk about price, I don’t think this was a price driven decision. The fact of the matter is that three years ago the reasons for American Water of leaving Neptune and going to Mueller, I can't comment on, that was the decision they made and that’s fine. But the issue they had is that at the time they went to Mueller three years ago, Mueller was doing, to our best estimate above 300,000 meters. So this represented a doubling of Mueller's meter requirements. That required Mueller to go out and significantly increase capacity over the last few years, and in fact if you go back and look at Mueller's conference calls you will see them commenting repeatedly about the cost being incurred to increase capacity to handle this much larger contract. I think over that period of time, Mueller – and Mueller is a very good company but because any company that suddenly doubles their sales in a certain area they're going to have issues. And I think they had some capacity issues and I think they had some delivery issues and that was the concern. When you look at Badger Meter, we do two million meters a year. You add on 300,000, yeah that’s a nice increase, but it is not going to require us to go out and put up factories and by a lot of machinery, we have that capacity. We can handle the American Water contract, we can meet their delivery requirements on time and it'll be great. But that really wasn’t the driving for us either to the choice, when you look at the press release you talked to American Water, the breath of product offerings was very important too. American Water is not an northern utility and it's not an southern utility, it's not a small utility and it's not a large utility, it is all of those things. And therefore, they have a need in certain areas for different types of technologies. Over the last several years, Badger Meter has expanded our technology offerings at a time when most of our competitors have contracted their technology offerings. At this point Mueller sells almost exclusively polymer meters, they don’t sell very many brass meters. Meanwhile Neptune doesn’t sell polymer meters, they only sell brass meters, Badger sells both. Some companies offset mechanical meters, some offer electronic meters, we offer both. So, I think when American Water looked at Badger's product offerings they realized that for the great variety of utilities they have, our great variety of product offerings probably need the most sense. I will also say John that, this was not a low cost – a low price bid. The prices we bid to American were competitive and appropriate for contract of that size. So there was no big price scourging, I do not know if we were the low bidder, I don’t know what the other bids were, but I do know that the reasons American gave for awarding the contract to us were more about their need to serve their customers and make sure that their customers have a reliable consistent level of service.

All right, that’s helpful. So just two more for me. One, on the language in the release that says 2016 should look more like 2014, what do you mean by that? Is that revenues, EPS or what should we take from that?

Yeah I had a feeling I wouldn’t be able to wisp that one by you. I put that comment into on purpose because 2016 was a record – 2014 I'm sorry, was a record year for Badger Meter. And 2015 our sales dropped and there were a lot of things contributing to that, there were – so I'm sorry, not our sales, everybody is angry at me now. In 2015 our earnings dropped, not our sales. There were a lot of things contributing to that. There were vendors, there was the weaken dollar, there was the drop in the oil and gas business, there were lot of things going on. Although we feel some of these flow instrumentation things will still be a headwind, we feel growing up tail winds that really in 2016 we should be looking more like 2014 and building off with that.

Okay, I'm still a little confused.

Hey, are you asking me if I'm giving guidance and I'm telling you that our guidance for 2016…

I know you wouldn't tell, I'm just looking for like top or bottom, is it?

I'm not giving guidance John, and I wasn’t trying to give guidance. But all I'm saying is that, if you're building a model – if I were building a model for 2016 I would use 2014 as my starting my and not 2015.

Got you, okay that’s clear, thank you. And then my last question, so – and this is big picture macro stuff, so California generally speaking has conserved water pretty quickly. Part of that mandate was trying to get a lot more analytics around where the water usages from etcetera. Have you had any experience in California around, municipalities looking for that more in California, has that bled to other municipalities, you know push versus pull versus your – the software products that you have. Thanks again guys.

And John, to answer that question is definitely. We are in many of the California utilities that we hadn't been in the past. And a lot of it is driven by our BEACON analytics system and the ION Water application, and just for those who aren't familiar with it, BEACON is the analytics system that is used at the utility for not only gathering the building data but also for looking at water usage trends and looking at managing their whole system. ION Water is an optic, can be downloaded free from the Apps store and if the utility gives you the code for your meter, you can actually read your own water usage and see how you are doing on a daily basis. Those two products are in very big demand in California. We have a lot of utilities that are pilot testing them, we have some utilities that have fully adopted and are moving over to them. So the drought system in California is causing a lot of utilities to do whatever they can to encourage their people conserve and those products are right in that sweet spot. I think we can go on to the next call or I think.

I think John was done.

Our next question comes from the line of Kevin Bennett with Sterne Agee. Your line is now open.

Hey guys, good morning. How are you all?

Good. Good morning, Kevin.

First question I'm curious Rich on the Itron catch-up that we've talked about for the last couple of quarters. I know last quarter you said we couldn’t do it at once. I'm wondering what we saw in the fourth quarter and how much I guess is left to go of that business?

We saw lot of the catch-up in the fourth quarter and some will still into the first quarter but a lot of it did happen in the fourth quarter. There were two impacts, one was the ability of us to get products from Itron and Itron is caught up, they have given us the product that we need. Of course the other impact is that there are a lot of our customers out there who are busy changing out the Itron product that was a problem, and therefore they're not doing their normal meter replacement program because they're busy doing that change up. So I think that’s still having a little bit of an impact and will into the first quarter.

Got you, okay. So mostly complete but a little spill over in the first quarter, that’s perfect.

Exactly.

Secondly on the fourth quarter, in terms of the weather I know it's been warm everywhere. I'm wondering if you think that pull forward some demand from the first quarter given that people could probably change up meters a little bit longer into the year than normal, or what you think about that?

This is Rick, I don’t think so because the reality is, the lead times on a lot of resource. We talk – when we talk about our backlog, we have visibility of half a quarter. I mean you're talking 6 to 8 to12 weeks lead time sometimes in getting this product and they don’t know the weather that fast. So, it could impact the first quarter, who knows, it all depends on the mix of customers at that time. Over the past three, four years we've had a couple of first quarters where weather is really impacted. We've had a third quarter and they were the first quarter the weather was miserable but we had a mix of customers in the Southwest where the weather was relatively nice. So it all depends on the mix of customers at that time.

Got it Rick, that makes perfect sense. And then last question from me guys, Rich, I'm wondering if you could give us an update on your expansion into the distribution channel, I know we've left National Meter now and we have United Utilities going on, should we expect more roll up in that or what do you think there?

Yeah, as it reminds, as a little background for everybody we did announced a strategy a couple of years ago where we wanted to start doing some acquisitions of our distribution channel and rolling it up into Badger. We felt that that strategy was very appropriate, given the changing nature of our business. And what I mean by that is the technologies in the water industry are requiring the technology providers to have more boots on the street, to have more people out there doing installation, training, technical support all of that. And so we felt that when you're working with distribution there is always a risk of inconsistent levels of service, if we own some of our distributors, most of our distributors we can control that level of service better. This was not the sort of thing where we were going to go out and put guns in anybody's head and force sales of their businesses. We have very good relationships with our distributors, they've been with us for a long time, but we do have distributors that are looking for a transition in their business, maybe they're getting older and they want to transition out, are they looking for way to monetize their investment. So we did a couple of years ago buy our largest distributor, National Meter Automation in Denver and we did last year buy the assets of United Utilities which is a distributor in Tennessee area.

And have expanded the territory for United Utilities.

And National Meter, we've also taken territory that was either served by other distributors or served by us directly and we put those territories under. So, the process is still going on, we are in talks with a third distributor and we do have the pipeline heat up, so we do expect to continue see activity along here.

Got you. Perfect. Well thank you for that, gentlemen and have a great afternoon.

Thank you.

Our next question comes from the line of Richard Verdi with Ladenburg. Your line is now open.

Good morning, Rich and Rick and thanks for taking my call and congrats on the American Water deal. We just have a few quick questions here primarily geared toward gross profit, gross margin, you answered pretty much everything else I needed to know. First, we're wondering is there still the potential for any pricing impact on margin stemming from the work that went without the customers. I understand any potential pricing...

You're breaking up.

I'm sorry. Can you hear me better now?

Yeah, we can hear you better now. You were fading out there. Can you repeat the question please?

Yeah. Sure. So we know that we – I was just wondering, if there was still any potential for any pricing impacts on margins coming from the work performed with Elster customers? I know that the potential pricing issues were expected to be resolved in 2014, but I just kind of want to confirm, they aren't still lingering around?

I don't think they're lingering. I think for the most part, we've – the Elster – the customers that we took from Elster when they left the market, for most part we've renegotiated most of those contracts, the pricing is – you've seen some of that in 2014, clearly through 2015, you saw and I think we're just moving forward from there. That issue is pretty much behind us at this point.

One of the larger customers, I think was New York City. We've got a three-year contract with them renegotiated. So, I think Rick is right, most of them have been switched over.

Okay. Super. Thank you. And a question for you Rich, in the past you've mentioned there was a three month to five month lag between the purchase price of copper and when that price is realized in the P&L, and I don't remember if it was last call or a couple of calls back, I brought this up, and you'd indicated that it looks more like a three-month delay now. Is that still the case, or we'll be moving back to a three to five months range?

No, I still thinks figure, it's around three months from the time, and bear in mind we don't buy copper, we buy brass, and we – and a lot of our brass is made from scrap. And so, from the time it goes from the scrap dealer to the smelter to our phones, way to us, and it ends up going through inventory and getting it across to goods sold, it's about three months.

Okay, okay. Super. And then just a last question. Can you just talk a little bit about the trend you're seeing in the market for brass and plastic meters? I know sensors moved away from brass back with their iPro. Just kind of wondering, if there's an opportunity to pick up share or if there's maybe an industry shift away from brass meter production and possibly plastic as well.

Yeah. And there is – I mean, there is no question that plastic – the polymer meters, which are performing much better than the original polymer meters that were introduced back in the 1970s and 1980s because obviously polymers have improved over time. Those meters are becoming more popular, in fact in 2000 – just to give you some numbers, in 2015, our brass meters unit sales actually dropped about 14% and our polymer meter unit sales actually went up about 13%. Now the difference there is, that we are also selling stainless steel meters, which are our E-Series meters, and so they made up – they more than made up the difference. But we are slowly over time seeing a shift. With that being said, we're still probably and I'm just looking at the numbers....

We're still predominant in the brass...

We're still about 70% brass...

Let's make that clear.

70% to 80% brass. So, it is shifting, but it's very slow.

Perfect. Good. Great. Thank you, guys very much and congrats again on the American Water deal.

Thank you.

Our next question comes from the line of Saidal Mohmand from GrizzlyRock Capital. Your line is now open.

Hi, guys. I just wanted to get a little clarification on the American Water Works contract – contract agreement. So, just for to my understanding and just wanted to confirm this, that they were already a customer of Badger? And then, trying to understand the actual economics around the deal? I mean, if ASP is under a $100, then, [indiscernible] exclusive 60% to 70% share that would kind of get me to around $15 million or so of revenues. I mean, am I in the ballpark, am I thinking about it correctly or its anymore color on that would be greatly appreciated?

Sure, well first-off, they were not already a Badger customer. They were a Neptune customer for – they were primarily a Neptune host for decades. Then three years ago, they switched over to Mueller for three years and now they have switched to Badger and we fully intend to do everything we can to make sure they are a Badger customer for decades. So we are viewing this as a start of a beautiful and long relationship. Having said that, the other part of your question was a about..

About model...

Oh, about the size of the contract. I do believe that if the American Water contract for Mueller was about $26 million, which is what our Greg Hyland said yesterday. I do believe that there is no reason we wouldn't get to that level. I just don't believe we'll get there in 2016 because there is a transition time. So perhaps 2016 is some lower number, I'm not in a position to say how much that is. I will say it's somewhere between zero and $26 million, how is that?

Got it. Hey that works. I guess, the only question I bring about the actual Badger Meter and the customer mix wallet, it was just kind of conflicted with what they told us, but maybe that's just a misunderstanding, but I do appreciate the clarity on the modeling side. Thanks a lot and great. Best of luck.

Okay. Thanks.

And I'm not showing any further questions in queue at this time. I'd like to turn the call back to Mr. Meeusen for closing remarks.

Yeah. Thank you and I want to thank everybody for joining us. The fourth quarter like I said, we viewed it as a positive quarter with a 17% increase in operating income. I think we're seeing our business continue to benefit from the new products and we're very optimistic about 2016. So with that, I want to thank everybody for joining us.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone have a great day.